A Cost of Production Model for Bitcoin
WORKING PAPER
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As bitcoin becomes more important as a worldwide financial phenomenon, it also becomes important to understand its sources of value formation.
Mining employs computational effort which requires electrical consumption for operation. The cost of electricity per kWh, the efficiency of mining as measured by watts per unit of mining effort, the market price of bitcoin, and the difficulty of mining all matter in making the decision to produce. Bitcoin production seems to resemble a competitive market, so in theory miners will produce until their marginal costs equal their marginal product.