Bounded Pool Mining and the Bounded Bitcoin Price

We present a simple model featuring the supply side of the Bitcoin ecosystem, i.e. the market structure of "mining". Our model suggests that a large mining pool entertains the trade-off between compromising the network given its market power and attracting sufficient hashrate delegations from the dispersed miners. We show that a mining pool therefore finds it optimal to be self-constrained in size, though it maintains a positive probability of compromising the network in equilibrium. As a result, the bounded market concentration in pooled mining leads to a bounded range of the Bitcoin price fluctuations. Our results suggest that the risk of having large mining pools for the well-functioning of the Bitcoin network is less of a concern. We show a range of other supply side factors shift the Bitcoin price bandwidth and document important empirical evidence that is consistent with our model predictions