From Chaining Blocks to Breaking Even: A Study on the Profitability of Bitcoin Mining from 2012 to 2016

Abstract

Bitcoin is an increasingly popular payment instrument and currency on the Internet. An important characteristic of the bitcoin is that it is a self-regulating system; there is no centrally controlled governing system such a central bank, which is the case for traditional currencies as the euro or the dollar. The Bitcoin is a rather unstable currency, which can be seen by the fluctuations in the value of bitcoins over time. Moreover, it is also unclear whether the bitcoin system itself is sustainable on the long term. To reach long term sustainability, it is required that the actors running the bitcoin system have a net positive cash flow, similar to banks who also should be profitable. To assess sustainability, we analyze the actors involved in the Bitcoin system as well as the value flows between these actors using the e3value methodology. Then we quantify these value flows for the period January 2012 – December 2015. Since definite figures about the size of the bitcoin mining industry are lacking, we reverse engineer the expenses and revenues of the participating actors by deducting these from the bitcoin value, computing power of the network and available mining hardware specifications. Our analysis shows that the sustainability of Bitcoin system heavily depends on the miners, who are actors generating bitcoins and clearing transactions. Our findings are the following: The improvements in hardware, as operated by the miners, have not kept pace with the decreasing value of bitcoins, so that an average total daily profit of $ 206,352.47 of the miners in 2013 dropped to an average daily loss of $ 435,983.00 in 2015. Additionally, at the end of our time period, the marginal profit of mining a bitcoin has converged to the marginal cost of production, as economic theory predicts. Before that, miners have achieved high profits mainly in the years 2012 and 2013.