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

Jiding Zhang, NYU Shanghai; Bowen Lou, University of Connecticut; and Chen Jin, National University of Singapore

Abstract: 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. 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. 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.

Read the working paper here.