Abstract
This paper studies the asset pricing implications of mining pools' concentration. We incorporate two features specific to cryptocurrencies into a traditional dynamic asset pricing model. First, we introduce the technological arms race between mining pools, and second, the interdependency between the cryptocurrency price and its transactional benefits, which we call services. Our continuous-time setup admits precise closed-form expressions. We find that an increase in mining pools' concentration decreases cryptocurrency price and increases its volatility, and the effects are amplified when there is more interdependency between the cryptocurrency price and its services. Empirical evidence from Bitcoin supports our model's predictions.
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