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Understanding Consumer and Producer Surplus in Bitcoin

Consumer surplus for Bitcoin is more complex than for fixed-price goods, as consumers can purchase any amount and the price fluctuates. It is difficult to calculate based on willingness to pay versus price, as that could result in a negative surplus. Instead, consumer surplus with Bitcoin should be viewed over the long term, assuming consumers purchase with the expectation that the price will rise. Producer surplus for Bitcoin miners equals total revenue minus total costs. Revenue comes from block rewards and transaction fees, while costs include equipment, electricity, and mining pool fees. The block rewards decrease over time but their value increases as the price of Bitcoin rises. Producer surplus fluctuates with the price of Bitcoin and changes in electricity costs.

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68 views2 pages

Understanding Consumer and Producer Surplus in Bitcoin

Consumer surplus for Bitcoin is more complex than for fixed-price goods, as consumers can purchase any amount and the price fluctuates. It is difficult to calculate based on willingness to pay versus price, as that could result in a negative surplus. Instead, consumer surplus with Bitcoin should be viewed over the long term, assuming consumers purchase with the expectation that the price will rise. Producer surplus for Bitcoin miners equals total revenue minus total costs. Revenue comes from block rewards and transaction fees, while costs include equipment, electricity, and mining pool fees. The block rewards decrease over time but their value increases as the price of Bitcoin rises. Producer surplus fluctuates with the price of Bitcoin and changes in electricity costs.

Uploaded by

maito
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Consumer Surplus

Consumer surplus consists of looking at the positive difference between the price
someone is willing to buy an item at, and the price they actually pay. The formula
reads as follows:

Willingness to buy - Price

Consumer surplus calculations for goods with fixed prices is relatively easy to do,
however consumer surplus in terms of Bitcoin is slightly more complex as consumers
can purchase any amount of Bitcoin they wish.

Statistics from February 2021 suggest the average person holds 0.12 Bitcoin
(18,640,000 supply divided by 152,000,000 active wallets), (Howarth, 2022). The
figure is likely lower as many other wallets like cold or offline wallets aren’t counted
and the figure has grown in one year. Therefore it is difficult to conduct consumer
surplus by calculating willingness to buy ($5000 or 0.12) divided by price ($43,000 as
of Feb 11 2022) as it would be a negative figure, and a negative consumer surplus
indicates consumers are forced to buy a good, which isn't the case.

Consumer surplus can therefore be looked at by assuming investors purchase


Bitcoin with the mindset it will increase in price. This means that they value Bitcoin at
a higher price than it currently is. For example if someone was to purchase $1,000 in
Bitcoin, and it was to rise by 50%, their consumer surplus would be $500 as the new
amount they hold would be $1,500. Consumer surplus should therefore be looked at
in a more long-term manner.

Producer Surplus

To simplify the situation for welfare analysis, we have decided to limit the definition of
producers to only consider bitcoin miners. Besides producing new bitcoin, they also
provide the bitcoin service platform by confirming all the transactions (Huberman,
Leshno and Moallemi, 2021). The producer surplus equals all the profits made by
miners reducing the total cost.

Producer surplus = TR-TC

The revenue consists of:


1) Block rewards (also known as subsidies) This is the new bitcoin added to the
blockchain with each new block. Block rewards are halved every 210 000
blocks. In the beginning the amount was 50BTC, and currently it is at
6.25BTC for each block. Even though the amount has decreased, the value of
the reward is higher now, since the value of bitcoin has risen. (Hertig, 2020)
2) Transaction fees that are paid by bitcoin users. Their proportion is relatively
small.
Since the rewards are paid with BTC, their value depends on the price fluctuations of
bitcoin.

The costs consist of:


1) Equipment. The cost of one ASIC-miner ranges from a few hundred dollars
up to about $10,000 (Zucchi, 2020).
2) Electricity. Required for computing but also to prevent overheating. Changes
in prices affect the total cost.
3) Mining pool fees. Rewards are only paid to the miners who manage to get
the computations done first. Winning this “competition” depends on the
amount of computing power. Mining pools are platforms where individual
miners can combine their powers. These pools charge fees (1-3%) from their
members. (Zucchi, 2020).

The graph is in next page

(Blockchain.com, 2022)

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