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Why Does the Inefficient and Energy-intensive Bitcoin Remain Highly Valued?

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Lashkaripour, Mohammadhossein. 2023. “Why Does the Inefficient and Energy-Intensive Bitcoin Remain Highly Valued?” Rochester, NY: Social Science Reseach Network (SSRN).

Despite energy-efficient alternatives, why does energy-intensive Bitcoin still lead the crypto market? This paper introduces a feedback loop between Bitcoin production and its valuation as a plausible explanation. Higher investor emphasis on network security increases Bitcoin's price elasticity with respect to network security. This increased elasticity motivates Bitcoin miners to enhance network security, given that a higher Bitcoin value amplifies mining profitability. Consequently, more computational power joins the mining competition which fuels a feedback loop that further bolsters network security and Bitcoin's price. However, external factors like high energy prices or regulatory restrictions on Bitcoin mining can disrupt this momentum.

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