The Cost & Sustainability of Bitcoin— Part III —Bitcoin Macroeconomics
Organizational decision-makers set their strategies in line with their firm’s microeconomic, macroeconomic, and global competitive contexts. In the case of a Bitcoin mining firm, the context is as follows:
- Global-Macroeconomy: All other digital and non-digital assets and global fiat monetary systems
- Macroeconomy: All other Bitcoin ecosystem members
- Microeconomy: All other Bitcoin mining firms
The next 3 parts in this series define the nature of competition within these three contexts and will assert that the nature of competition in the Bitcoin mining industry is perfectly competitive in the long term. This will lead into discussion on the strategic machinations of bitcoin mining firms, through comparison of empirical data and academic theory on firms in perfect competition.
Bitcoin Mining in the Global Monetary Macroeconomic Context
The Global Macroeconomy (GM) is the all-encompassing sum of all monetary systems, from traditional “analogue” financial systems, to digital ones like Bitcoin. All exchanges of value, legitimate or not, occur within it. Firms within the Bitcoin mining market service the Bitcoin ecosystem and depend on it being healthy and diverse in order to prosper[i].
“[Accelerated] globalization [has] yielded conditions of considerable oligopoly in the world economy”[ii]. Some criticize the legacy system as the inadvertent/deliberate proprietor of global inequality[iii], [iv], with ever-mounting barriers to entry deterring the emergence of competing monetary systems.
History shows that Schumpeterian gales of creative destruction eventually blow these barriers away[v]. In the case of the Global Macroeconomy (GM), this was the invention of The Blockchain, of which Bitcoin[vi] is the first and largest implementation[vii]. At that moment in history, the GM effectively split into the pre-2009 “analogue” GM, and the parallel digital one. Due to AGE, COMPLEXITY, AND NATIONALISTIC NECESSITY, the legacy GM can only experience bursts of improvement[viii] and remain a “closed ecosystem”[ix],[x]. In the highly competitive-yet-collaborative open-sourced decentralized digital ecosystem, anyone in the world can collaborate with others or create new or copycat ecosystems through the open-source software movement[xi], ensuring evolution and adaption to changing market needs.
To that end, Bitcoin mining firms operate almost exclusively within the digital GM, and the Bitcoin Mining Market in particular. They have an eye towards alternative digital ecosystems that are gaining traction in the wider free market, and whether their mining equipment can also mine these alternative digital currencies. The competitive cycle between them and their peers resets roughly every fortnight[xii].
Bitcoin Mining in the Bitcoin Macroeconomic Context
The Oxford Dictionary defines an economy as “the state of a country or region in terms of the production and consumption of goods and services, and the supply of money”. Since “country” or “region” do not apply to digital ecosystems, it is difficult to use traditional macroeconomics, which rely exclusively on the concept of an influential controlling body, to analyse them.
Bitcoin’s monetary policy is highly predictable and based on a consensus-based, cryptographically secure, self-managing algorithm[xiii]. Bitcoin firms can move to the physical jurisdictions that provide the best incentives (i.e. low power, favourable business and tax laws, etc.). In the legacy global financial system, this option is only available to large multinational corporations[xiv], with most consumer-level participants lacking the mobility to move to the jurisdiction of their choosing[xv]. This is inherently different in a permissionless, online, jurisdiction-agnostic environment.
Bitcoin’s ecosystem is still small and fragile, but its incentive structure becomes more robust as more participants are attracted to the ecosystem1. Rational Bitcoin miners want to see the demand for their commodity grow organically and sustainably, but this is difficult. Miners mine an intangible digital commodity whose fundamental value relies on a consensus-based economic protocol and network. Its market price is based on the whim of the market.
Every shock to the ecosystem, such as failure of wallet services and product providers[xvi], at least 36 exchanges[xvii] including the disastrous MtGox collapse[xviii]; online drug markets[xix], Government crackdowns[xx] and auctions[xxi]; scam-coins[xxii], developers[xxiii], even miners themselves[xxiv], and everything else in a long list of Bitcoin disasters, has in several cases caused dramatic and sudden movements in the price of the commodity[xxv]. Considering the evidence, Bitcoin is an example of an anti-fragile[xxvi] system, with bitcoin achieving year-on-year growth in most key metrics[xxvii],[xxviii]despite the numerous aforementioned setbacks. When and if the market becomes large enough to be less vulnerable to shocks, consolidation through means of integration and merger-and-acquisition activity amongst firms will be witnessed[xxix], as will be discussed in the next part of this series.
References
[i] Shapiro, C., Varian, H. (1999) “Information Rules — a strategic guide to the network economy” Boston, Harvard Business School Press 184
[ii] Scholte, J. “Global Capitalism and the State”, International Affairs 73.3 427–452 (1997) doi: 10.2307/2624266
[iii] Stiglitz, J (2006) “The Price of Inequality”, New York, W.W. Norton & Company 157–170 (accessed 26 February 2016) http://resistir.info/livros/stiglitz_the_price_of_inequality.pdf (21:24)
[iv] Stiglitz, J. (2010) “Freefall — America, Free Markets, and the Sinking of the World Economy”, New York, W. W. Norton & Company 74–86
[v] Schumpeter, J A. (2003) [1943] “Capitalism, Socialism and Democracy”, London, Routledge 83
[vi] Nakamoto, S. “Bitcoin: A Peer-to-Peer Electronic Cash System.” No Publisher (2008) https://bitcoin.org/bitcoin.pdf, 1–9
[vii] McKinsey & Co (2015) “Global Payments 2015: A Healthy Industry Confronts Disruption” (accessed 26 February 2016) http://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/Financial%20Services/Latest%20thinking/Payments/Global_payments_2015_A_healthy_industry_confronts_disruption.ashx (22:44)
[viii] Utterback, J. M. (1994) “Managing the Dynamics of Innovation. 1st edition” Cambridge: Harvard Business School Press 145–166
[ix] Berners-Lee, T. “Long Live the Web”, Scientific American 303 80–85 (2010) doi: 10.1038/scientificamerican1210–80
[x] Müller, R., Kiji, B., Martens, J. “A Comparison of Inter-Organizational Business Models of Mobile App Stores: There is more than Open vs. Closed”, Journal of theoretical and applied electronic commerce research 6.2 63–76 (2011) doi: 10.4067/50718–18762011000200007
[xi] Lerner, J., Tirole, J. “The open source movement: Key research questions”, European Economic Review 45.4–6 819–826 (2001) doi: 10.1016/S0014–2921(01)00124–6
[xii] Bitcoin Wiki, “Difficulty”, (accessed 27 February) (accessed 27 February 2016) https://en.bitcoin.it/wiki/Difficulty (21:33)
[xiii] Bitcoin Wiki, “Controlled Supply”, (accessed 27 February) https://en.bitcoin.it/wiki/Controlled_supply (21:33)
[xiv] Hines, J., Rice, E. “Fiscal Paradise: Foreign Tax Havens and American Business”, The Quarterly Journal of Economics 109.1 149–182 (1994) doi: 10.2307/2118431
[xv] United Nations (2009), “Human Development Report 2009 — Overcoming barriers: Human mobility and development”, New York, UNDP 2–3
[xvi] Plamer, D. (2015) “11 Bitcoin Startups That Went Bust in 2015”, (accessed 26 February 2016) http://www.coindesk.com/bitcoin-startup-shut-down-2015/ (20:25)
[xvii] Parker, L. (2015) “36 bitcoin exchanges that are no longer with us”, (accessed 26 February 2016) http://bravenewcoin.com/news/36-bitcoin-exchanges-that-are-no-longer-with-us/ (20:26)
[xviii] Perez, Y. (2015) “Mt Gox: The History of a Failed Bitcoin Exchange” (accessed 26 February 2016) http://www.coindesk.com/mt-gox-the-history-of-a-failed-bitcoin-exchange/ (20:27)
[xix] Greenberg, A. (2013) “End of The Silk Road: FBI Says It’s Busted The Web’s Biggest Anonymous Drug Black Market”, Forbes, (accessed 26 February 2016) http://www.forbes.com/sites/andygreenberg/2013/10/02/end-of-the-silk-road-fbi-busts-the-webs-biggest-anonymous-drug-black-market/#103e7805347d (20:28)
[xx] Urquhart, J. (2014), “Russian authorities say Bitcoin illegal”, Reuters, (accessed 26 February 2016) http://www.reuters.com/article/us-russia-bitcoin-idUSBREA1806620140209 (20:29)
[xxi] US Marshalls Service (2015), “USMS Asset Forfeiture Sale”, (accessed 26 February 2016) http://www.usmarshals.gov/assets/2015/dpr-bitcoins/ (20:30)
[xxii] Higgins, S. (2015), “SEC Charges GAW Miners CEO Josh Garza With Securities Fraud”, (accessed 26 February 2016) http://www.coindesk.com/gaw-faces-ponzi-scheme-charges-from-sec/ (20:31)
[xxiii] Rizzo, P (2016), “Making Sense of Bitcoin’s Divisive Block Size Debate” (accessed 26 February 2016) http://www.coindesk.com/making-sense-block-size-debate-bitcoin/ (20:32)
[xxiv] Hajdarbegovic, N. (2014) “Bitcoin Miners Ditch GHash.io Pool Over Fears of 51% Attack” (accessed 26 February 2016) http://www.coindesk.com/bitcoin-miners-ditch-ghash-io-pool-51-attack/ (20:33)
[xxv] Pseudonymous (Bitcoin Brother), Pseudonymous (sapiophile) (2015) “Bitcoin Price Chart with Historic Events” (accessed 26 February 2016) https://bitcoinhelp.net/know/more/price-chart-history (20:34)
[xxvi] Nassim Taleb, N., 2012, “Anti-fragile: Things that gain from disorder”, New York, Random House
[xxvii] Blockchain.info, Bitcoin Market Price (USD), (accessed 26 February 2016) https://blockchain.info/charts/market-price?timespan=all&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address= (20:35)
[xxviii] Blockchain.info, “Blockchain charts — Various bitcoin charts and currency statistics” (accessed 26 February 2016) https://blockchain.info/charts (20:36)
[xxix] Henderson, B. (1976) “The Rule of Three and Four”, s.l.: Boston Consulting Group.
