Bitcoin mining pools and income smoothing

Year 2015
Author James P. Howard, II
Publisher SSRN: University of Maryland University College
Link View Research Paper

Bitcoin / Cryptocurrencies / Mining

Cryptocurrencies, such as Bitcoin, have received much press and some research from both a technical and economic perspective. Bitcoin mining pools provide an inexpensive and reliable mechanism for certain Bitcoin participants to move in and out of participation without requiring a large dedicated investment. These pools provide income smoothing for risk averse participants.

The finds of this research reveal that Bitcoin mining pools are income smoothing tools. With a Bitcoin mining pools, a risk-averse participant will join the pool to smooth income and provide current income against current expenses. Others who are risk-seeking will choose to mine independently. Further, it should be possible to establish a willingness-to-pay for the steady income stream by evaluating different pools, establishing their payment parameters, and modelling the demand curve.

But what are the arguments for using a mining pool over mining independently? The authors argue that In the case of Bitcoin, the mining pool participant is betting their expected gains are greater than the amount they would pay in independent mining during the mining lifetime. An independent miner is betting expected gains more than the gains from joining the bitcoin mining pool. In both situations, neither party knows the outcome a priority but both have the opportunity to evaluate the relative risk.