The Economics of Bitcoin Mining
Halvening is coming up and there seems to be a lot of confusing around what this will be doing to Bitcoin, and in particular the hash rate. On first sight this indeed looks like a complex problem, because the bitcoin mining community is a complex system, and the difficulty adjustment introduces a feedback loop the impact of which can be somewhat hard to understand. Fortunaly microeconomics has just the toolkit we need, in the form of the supply/demand analysis, to cut through all this complexity and to understand what will be going on.
This Short STOry Academy session introduces the supply/demand analysis in microeconomics, and in particular the concept of the cost curve, and then applies the same concepts to the economics of the Bitcoin mining space. It turns out the cost curve is exactly the same, which is unsurprising as Hash power is just another commodity like oil or gas. In fact, even though it is a commodity service as opposed to a commodity product, it is the ultimate fungible commodity: a hash produced in China is exactly the same as a hash produced in the US is exactly the same as a hash produced in Europe. The difference is the demand function, but if anything it is easier because the exact form of the demand function – the reward curve – is exactly known.
This session stops once we have established the concept of the Supply/Demand chart – or rather, the Reward/Cost chart – with respect to Bitcoin mining. In the next session we will then discuss how to use this chart to analyse how the system reacts to external shocks such as a changes in prices, or indeed the halvening of the mining reward.