The aim of this paper is to study the profitability of Bitcoin mining, using the real options theory. The main factors driving the marginal Bitcoin mining profitability are the Bitcoin price, the hashrate, the predictability of mining difficulty and the hardware efficiency. We propose a real options model that simulates the fundamental mining reward and measures the likelihood of breakeven on initial investment and explores also the relationship between the Bitcoin price and the mining difficulty in different economic cycles. Some of our findings questions the rationality of miner’s decisions and attempts to measure their impact on the economics of Bitcoin. Our results show that after the 2017 bubble Bitcoin, miners had an irrational behavior and did not adjust their strategy based on the price levels.
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