Statistical Methods in Finance 2023

December 19 to 23, 2023



Cryptocurrency, Mining Pools' Concentration, and Asset Prices

By Bikramaditya Datta
Indian Institute of Technology, Kanpur

This paper introduces mining pools' concentration into a dynamic asset pricing setup. Our theory builds on the intuitive yet novel insight that modeling competition requires that mining pools clear markets separately from their competitors in equilibrium. Our model predicts that as concentration increases, the cryptocurrency price falls, and its volatility spikes-in line with our empirical analysis of Bitcoin. We further reveal that the entry and exit of mining pools affect prices only through their effect on concentration. Lastly, equilibrium shows that mining pools' revenues determine the cryptocurrency's value, and if a pricing bubble exists, it amplifies the concentration effects.