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Bitcoin Volatility Is Net Positive for BTC Miners, Claims Study

Academics claim volatility is good for Bitcoin miners, but the market doesn't see it.

Bitcoin is abandoned, investors are getting bored

Key Takeaways

  • Like an option contract, ASIC miners' downside is limited to the upfront investment and upside is unlimited due to capital appreciation of the underlying asset.
  • Volatility makes mining more attractive due to the asymmetry in profits and losses.
  • A portfolio of risk-free bonds and the underlying crypto outperforms mining operations due to lower costs.
  • Smaller networks have a higher risk of losing miners due to a lack of volatility.

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There’s a prevailing notion that miners aren’t fans of Bitcoin’s volatility because it makes their revenue streams unpredictable. Two researchers from The Hebrew University of Jerusalem, Aviv Yaish and Aviv Zohar suggest quite the opposite, however.

Implications of Bitcoin Mining

According to the duo’s research, volatility actually makes mining more attractive.

And companies like Bitmain that produce ASICs have inefficient pricing mechanisms because they undermine this effect of volatility.

Yaish and Zohar use European options pricing theory to deduce the effect of this volatility on Bitcoin miners.

Further, they built a portfolio that mimics the revenue miners earn through simple investment exposure to the underlying cryptocurrency.

Volatility is inseparable from today’s Bitcoin market. Over the last decade, the digital asset has attracted rampant speculation thanks to its volatility.

But many believe Bitcoin will soon be rid of this volatility, fortifying BTC’s role as a medium of exchange. Yaish and Zohar’s study concludes that eradicating volatility could even threaten Bitcoin’s security model.

They liken mining operations to a European option contract.

When one buys a financial option, their downside is limited to the premium they paid for the option, but their upside is unlimited. The upfront investment of purchasing an ASIC is likened to the option premium. In contrast, the upside is unlimited as mining revenue is correlated to the price of BTC, which has no ceiling.

But how does a mining operation have limited downside? After all, Bitcoin miners are sometimes forced to mine at a loss.

Miners can choose not to run their ASICs when doing so is unprofitable. They would not incur a loss beyond their initial investment. Albeit, this theory doesn’t hold for large operations as property costs, staff expenses, and other overheads inevitably creep up.

This study focuses on the rational, profit-seeking miner; rather than the altruistic miner with the network’s best interests at heart.

In the long-run, all Bitcoin miners fall into the first category as profits are essential for a business interest’s survival.

Since these “rational” miners have limited downside and unlimited upside, volatility is actually a good thing. In times of low volatility, miners can turn off their ASICs, possibly using previous profits to buy more ASICs. Then when volatility returns, they can connect to the Bitcoin network and take advantage of the situation.

Reality does align with this notion at times.

Towards the end of 2018, BTC volatility hit record lows as the macro trend was downward. With the price plummeting, some Bitcoin miners were forced offline, as it was just not lucrative for them to stay on the network.

Once the bottom hit in early 2019, volatility returned, and along with it, so did miners.


The bottom line: volatility is a net positive for miners.

Yet, ASICs tend to be underpriced in terms of high volatility and vice versa, leading Yaish and Zohar to conclude that their ASICs are mispriced.

The price of ASICs was underpriced during times of high volatility and overpriced during times of low volatility.
Source: Aviv Yaish and Aviv Zohar

But what’s even better than volatility is a constant price appreciation, as miner revenue would consistently increase.

Profits Without Mining

In another section of the paper, the authors aim to build a portfolio that mimics the profitability of running an ASIC Bitcoin miner. They succeeded in doing so with a mix of crypto and risk-free bonds.

The risk-free bonds presumably represent the constant cash flow from mining Bitcoin. In contrast, the allocation to crypto (BTC or whichever coin is being mined) helps recreate the surge in revenue due to capital appreciation of the underlying cryptocurrency.

It turns out the portfolio mimics the direction of mining revenues with higher profitability and lower costs. This means a retail investor with both crypto and sovereign Treasury bills has a higher ROI than a miner running an ASIC.

The cost of investing in the mimic portfolio is lower, resulting in higher profitability.
Source: Aviv Yaish and Aviv Zohar

Ironically, if all existing Bitcoin miners decided to improve their profitability by just investing in BTC instead, the asset would be worthless as the network would grind to a halt.

Thus, the higher profitability of investing directly in BTC, the asset, is only possible because of miners.

This study has important implications for smaller networks, as these miners would be more willing to migrate to other, more profitable networks.

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