Predictability, innovation, and competition in Bitcoin's mining market

Robert PARHAM    Robert Parham, Einar Kjenstad
05 Oct 2018
Categories: Industry/Sector Analysis, FinTech / RegTech, Currency, Corporate Finance

Country or region: Singapore, China, Hong Kong SAR

Bitcoin mining has developed into an industry in its own right. But specialized equipment manufacturers (ASICs) now control the market, deriving most of the profits from it. Parham and Kjenstad analyse the economics of the Bitcoin mining market, showing that their model is able to predict energy consumption by miners and R&D expenditure by manufacturers. They then use the economics of this market to test whether more competitive industries invest more in R&D.
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We construct and estimate a dynamic oligopoly model of the Bitcoin mining market. Mining equipment manufacturers produce differentiated durable capital goods and endogenously choose optimal investments in R&D. Miners make dynamic purchase decisions based partly on beliefs regarding manufacturers' future choices. We show that policy-relevant values, such as aggregate R&D investment by manufacturers and network energy consumption, are predictable given only a Bitcoin price-path. We further show the industry is uniquely suited to test the impact of product market competition on innovation, a much-debated subject in the economics of R&D literature.

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