Cryptocurrency Mining: Asymmetric Response to Price Movement

Abstract

I model the entry and exit decisions of cryptocurrency miners. I argue that miners using Application Specific Integrated Circuit (ASIC) equipment, with a lower salvage value, have asymmetric reactions to price shocks, while miners using Graphics Processing Unit (GPU) equipment, with a higher salvage value, have more symmetric reactions to price shocks. Estimating the long-run equilibrium relationship between cryptocurrency price and hashrate (the aggregate computing power of miners), I show that Bitcoin miners, who use ASIC equipment, respond only to negative disequilibria (when hashrate is relatively low compared to price). Meanwhile, Ether miners, when using GPU equipment, respond symmetrically to disequilibria. These results have both practical and theoretical implications for cryptocurrency pricing and applications of blockchain technology.