Does mining fuel bubbles? An experimental study on cryptocurrency markets

Marco Lambrecht, Andis Sofianos, Yilong Xu*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We investigate how key features associated with the Proof-of-Work consensus mechanism of Bitcoin (commonly referred to as mining) affect pricing. In a controlled laboratory experiment, we observe that price bubble formation can be attributed to mining. Moreover, overpricing is more pronounced if the mining capacity is centralized to a small group of individuals. The order book data reveal that miners seem to play a crucial role in bubble formation. Further probing the mechanism in a second study, we find that both mining costs and decisions jointly with the sluggish rate of supply of the asset contribute to the bubble formation. Our results demonstrate that erratic pricing is an inherent feature of cryptocurrencies based on a mining protocol, thus seriously limiting any prospects for such assets becoming a medium of exchange.
Original languageEnglish
Peer-reviewed scientific journalManagement Science
ISSN0025-1909
DOIs
Publication statusPublished - 30.05.2024
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • bitcoin
  • bubbles
  • cryptocurrency
  • financial market experiment

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