# Want to publish a paper about Bitcoin?

(Warning: This time it was a couple of beers.)

If you are a post-doc in Economics, here is an idea for a paper: The economics of Bitcoin mining.

You can open with a little summary of the Bitcoin network, SHA-256 hashing, etc., just to show you did your homework.

Here is the deal. There is a bit of an arms race for mining Bitcoins. (As with any good gold rush, those most likely to profit are selling shovels. But I digress.) For a nice background, read this Business Insider article. Apart from the awful analogy of searching for primes and the author’s plagiarization of my tulip bulb example, it is a pretty good piece.

But briefly…

In the beginning, you could mine Bitcoins profitably on any workstation running simple software. You might find a new block in a few hours or days. Then software appeared that used multiple cores, vector instructions, etc., so the Bitcoin system adapted by increasing the difficulty. Then you had to have that new software, too, or it would take you months or years to find a block. And the cost of electricity alone makes that uneconomical.

Then implementations on graphics processing units (GPUs) appeared, and you had to get one of those to mine profitably. Then FPGA implementations supplanted GPUs. In the past month or two, custom ASICs have come on-line, and they are starting to supplant the FPGAs.

As a reminder, all of this hardware is devoted to one thing: Computing meaningless SHA-256 hashes over and over. Burn, baby, burn.

So, Dr. Econ, here is what I suggest. Build a mathematical model of this phenomenon and solve for the equilibrium state. That is what you people do, isn’t it?

Here is why it is interesting. A key assumption in Bitcoin’s design is that no one entity will control more than 50% of the computational power devoted to mining. But if it is cheaper for me to mine than for you, it seems to me my logical course of action is to scale up my mining operation until it is just barely profitable for me… Thus making it unprofitable for you. The stable state might be one entity controlling not 50% of the mining power, but 100% of the mining power. Lowest-cost Bitcoin producer wins? Show that any system like Bitcoin does (or does not) reach such an equilibrium state.

For extra credit, include some stochastic model for the price of electricity in Bitcoins, the probability that a SHA-256 break is discovered, and so forth.

Maybe somebody has already written such a paper. If so let me know so I can read it.