An Equilibrium Model of the Market for Bitcoin Mining, by Julien Prat & Benjamin Walter, published in the Journal of Economical Economy, Vol. 129(8), pp. 2415-1452.
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We propose a model that uses the exchange rate of Bitcoin against the US dollar to predict the computing power of Bitcoin’s network. We show that free entry places an upper bound on mining revenues and explain how it can be identified. Calibrating the model’s parameters allows us to accurately forecast the evolution of the network computing power over time. We find that a significant share of mining rewards was invested in mining equipment and that the seigniorage income of miners was limited.