Abstract
Bitcoin mining can be a difficult process to understand much less model. It is confounded by currency exchange rates and jurisdictional taxes along with rapid historical technological development. We present a framework for simplifying the economic modeling process for bitcoin. To account for historical and potential future technological changes, we model trends in bitcoin miner performance showing that further gains in efficiency have plateaued. Then, we derive the marginal value of bitcoin treating the process of the block reward in a quantum mechanical framework and show that the measure of bitcoin’s value is the energy used to mine it. Finally, we use the energy value of bitcoin to model the dollar price of bitcoin with a power law relationship over bitcoin’s entire price history.
The author thanks Roman Pavlov for inviting him to write this paper.
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Notes
- 1.
For the code and data used to analyze the models see https://github.com/crabel99/BTC-Mining-Economics.
- 2.
This is based on private communication from Upstream Data, “2x 0.5 HP (0.745 kW) fans every 180 kW of PDU” (17 Nov 2021) and for an Antminer S19XP which has 4 fans (assuming 2.7A @ 12V) 130 W for 3.25 kW of 29.5 J/Th.
- 3.
There is an off-by-one bug in the source code where the target computation uses 2015 blocks instead of the 2016 blocks of a difficulty epoch.
- 4.
For processes with infinitesimally small transition rates, \(1 - e^{-h} = h - \frac{h^2}{2!} + \frac{h^3}{3!} + \ldots = h + O(h^2)\) as \(h \rightarrow 0\) [18].
- 5.
We use the convention of geological time to define periods of time associated with the bitcoin network. Era like the Cenozoic, Mesozoic are equivalent concepts to currency eras: metallic era, fiat era, bitcoin era. Period like Quaternary or Tertiary within the bitcoin era are defined by the coin issuance or as they are colloquially known as “halvenings” and are \(210\,000\) blocks long. Epoch like the Holocene or Pleistocene are equivalent to the difficulty adjustments done every \(2\,016\) blocks.
- 6.
The additional 12-h is so that the daily moving average represents the daily average.
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Abel, C. (2023). Integrated Power Plant and Bitcoin Mining Economics. In: Matsuo, S., et al. Financial Cryptography and Data Security. FC 2022 International Workshops. FC 2022. Lecture Notes in Computer Science, vol 13412. Springer, Cham. https://doi.org/10.1007/978-3-031-32415-4_3
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