Bounded pool mining and the bounded Bitcoin price

• Published in: Finance research letters 2023-03, Vol.52, p.103529, Article 103529
• Main Authors: Jia, Dun, Li, Yifan
• Format: Article
• Language: English
• Subjects: Bitcoin; Market structure; Price variability
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2022.103529

We present a simple model featuring the supply side of the Bitcoin ecosystem, i.e. the market structure of “mining”, to rationalize the relationship between the Bitcoin price volatility and the market concentration in pool mining. An individual miner optimally chooses to operate individually or to delegate the mining capacity in hashrates to a mining pool. The mining pool entertains the trade-off between compromising the network derived from its market power and maintaining sufficient hashrate delegations from dispersed miners. We show that a mining pool finds it optimal to be self-constrained in size while maintaining a positive probability of compromising the network in equilibrium. As a result, the bounded market concentration in pooled mining caps the Bitcoin price fluctuations. We also document important empirical evidence which is consistent with our model predictions. •The hashrate market concentration in Bitcoin’s pooled mining has both upper and lower bounds.•Bounded market concentration in pooled mining caps the Bitcoin price fluctuations.•A mining pool is self-constrained in size and maintains a positive probability of compromising the network.•Evidence suggests that the supply side also shifts the Bitcoin price variability.