To Mine or to Trade? An Empirical Study of Bitcoin Exchange and Mining Markets

Abstract

Problem Definition: The recent upsurge in Bitcoin prices has raised interest in the investment of Bitcoin. However, faced with the investment options of mining and trading, the behavior of investors is not clear and requires a closer scrutiny of both the Bitcoin exchange market and the mining market. Specifically, little is known about the pattern of the interaction of the two markets. As mining significantly determines the reliability and security of the operation of the Bitcoin system, it’s important to understand whether the trading market can influence the investment in mining. Academic/Practical Relevance: Our research bridges the gap between operation management, finance and information technology, and makes contribution to studies in the operations and economics of cryptocurrency systems. Methodology: Using a variety of datasets at a large scale, our empirical study uncovers the causal impact of the exchange market on the mining market. Specifically, we formulate an empirical framework that encompasses key dimensions of the Bitcoin exchange market, exchange rate and liquidity, and also jointly models the entry and exit of the mining market characterized by supply and demand of Bitcoin mining rigs. The framework also accounts for a holistic set of demand and supply shifters that exogenously alter the investment behavior in the Bitcoin mining market. Results: We empirically show people tend to associate a higher valuation of Bitcoin with a higher Bitcoin exchange rate, and such exchange rate has significant impacts on both the supply and demand of the mining rigs. Furthermore, we demonstrate that the Bitcoin exchange market serves as a substitute for the Bitcoin mining market for investment. This substitution effect is particularly pronounced to those investors as potential entrants to the Bitcoin mining market. Managerial Implications: Our study sheds light on the impact of the Bitcoin exchanges on the Bitcoin mining activities which contribute to the operation of the Bitcoin system.