Does mining fuel bubbles? An experimental study on cryptocurrency markets

Lambrecht, Marco; Sofianos, Andis; Xu, Yilong

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

Citation

Lambrecht, M., Sofianos, A., & Xu, Y. (2024). Does mining fuel bubbles? An experimental study on cryptocurrency markets. Management Science, https://doi.org/10.1287/mnsc.2022.01238

• Journal Article Type: Article
• Acceptance Date: Nov 20, 2023
• Online Publication Date: May 30, 2024
• Publication Date: May 30, 2024
• Deposit Date: Nov 21, 2023
• Publicly Available Date: Jun 10, 2024
• Journal: Management Science
• Print ISSN: 0025-1909
• Electronic ISSN: 1526-5501
• Publisher: Institute for Operations Research and Management Sciences
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1287/mnsc.2022.01238
• Public URL: https://durham-repository.worktribe.com/output/1945899