Principles of Natural Resource Economics for Bitcoin

To assess claims such as Bitcoin is ‘digital gold’ it makes sense to examine whether Bitcoin exhibits features common to other exhaustible natural resources that are the concern of natural resource economists. We therefore present some foundational ideas in the economics of exhaustible resources and examine their relevance to Bitcoin. There are several useful similarities but also some key differences, chiefly with respect to how miners manage inventories, or their ‘inventory policy’. Therefore, to highlight this aspect, we use a simple model for any physical natural resource and introduce sensitivity to a capital-to-energy ratio. The resulting policy for Bitcoin miner over a halving cycle is not unlike a traditional miner in that optimal inventories are determined by optimal capital investments over the entire duration of the cycle.