From chaining blocks to breaking even: A study on the profitability of bitcoin mining from 2012 to 2016
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RESEARCH PAPER
From chaining blocks to breaking even: A study on the profitability of bitcoin mining from 2012 to 2016 Jona Derks
1
&
Jaap Gordijn 1 & Arjen Siegmann 2
Received: 20 November 2016 / Accepted: 16 July 2018 / Published online: 23 August 2018 # The Author(s) 2018
Abstract Bitcoin is a widely-spread payment instrument, but it is doubtful whether the proof-of-work (PoW) nature of the system is financially sustainable on the long term. To assess sustainability, we focus on the bitcoin miners as they play an important role in the proof-of-work consensus mechanism of bitcoin to create trust in the currency. Miners offer their services against a reward while recurring expenses. Our results show that bitcoin mining has become less profitable over time to the extent that profits seem to converge to zero. This is what economic theory predicts for a competitive market that has a single homogenous good. We analyze the actors involved in the bitcoin system as well as the value flows between these actors using the e3value methodology. The value flows are quantified using publicly available data about the bitcoin network. However, two important value flows for the miners, namely hardware investments and expenses for electricity power, are not available from public sources. Therefore, we contribute an approach to estimate the installed base of bitcoin hardware equipment over time. Using this estimate, we can calculate the expenses miner should have. At the end of our analysis period, the marginal profit of mining a bitcoin becomes negative, i.e., to a loss for the miners. This loss is caused by the consensus mechanism of the bitcoin protocol, which requires a substantial investment in hardware and significant recurring daily expenses for energy. Therefore, a sustainable crypto currency needs higher payments for miners or more energy efficient algorithms to achieve consensus in a network about the truth of the distributed ledger. Keywords Bitcoin . Business model . Financial sustainability . Mining . POW JEL Classifications O16 . O39
Introduction Since bitcoin emerged in 2009, individuals and companies invested billions of dollars in the digital currency and the underlying blockchain technology. The bitcoin is an unregulated digital peer-to-peer currency with a finite supply of 21 million units that is not backed by debt obligations and governments (Grinberg 2012) and does not need third parties such as banks
Responsible Editors: Martin Smits and Rainer Alt * Arjen Siegmann [email protected] 1
Department of Computer Science, Vrije Universiteit, De Boelelaan 1105, 1081 HV , Amsterdam, The Netherlands
2
Department of Finance, Vrije Universiteit, De Boelelaan 1105, 1081 HV , Amsterdam, The Netherlands
(Courtois and Bahack 2014). Although the bitcoin firstly is a payment instrument, it also serves as an incentive given to blockchain providers, referred to as ‘miners’, who provide the computing power needed for clearing transactions in the bitcoin network (Nakamoto 2008). The bitcoin currency provides a certain d
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