An Equilibrium Model of the Market for Bitcoin Mining

We propose a model which uses the exchange rate of Bitcoin against the US dollar to predict the computing power of Bitcoin network. We show that free entry places an upper-bound on mining revenues and we devise a structural framework to measure its value. Calibrating the model’s parameters allows us to accurately forecast the evolution of the network computing power over time. We find that at most one third of seigniorage income was dissipated in electricity consumption. The model indicates that a slowdown in the rate of technological progress will significantly increase Bitcoin’s carbon footprint.