An Equilibrium Model of the Market for Bitcoin Mining

We propose a model which uses the exchange rate of Bitcoin against the US dollar to predict the computing power of Bitcoin network. We show that free entry places an upper-bound on mining revenues and we devise a structural framework to measure its value. Calibrating the model's parameters allows us to accurately forecast the evolution of the network computing power over time. We find that at most one-third of seigniorage income was dissipated in electricity consumption. The model indicates that a slowdown in the rate of technological progress will significantly increase Bitcoin’s carbon footprint.