Bitcoin Mining Concept – BitMonopoly
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Peter Thiel, a well-known early investor in Facebook, once suggested that startup founders should strive to dominate their respective markets and investors should target these dominant players. The core idea of a monopoly involves controlling the market: limiting supply and increasing prices. However, the nature of Bitcoin mining is built on competition. This raises a compelling question: Could a Bitcoin miner ever achieve a true monopoly, economically speaking, even with a significant technological advantage?
Monopolies often arise when a company introduces groundbreaking innovation that allows them to seize a significant portion of the market and achieve substantial profits. Consider examples like Google in search engines, Apple with the iPhone, Microsoft in office software, and NVIDIA in graphics processing units (GPUs). These companies paired innovation with substantial competitive advantages, commanding large market shares and generating impressive profitability, thus becoming excellent investments. But true monopolies are rare. Duopolies (like UPS and FedEx), oligopolies (like Bank of America, Wells Fargo, and JPMorgan Chase), or fully competitive industries (like airlines and restaurants) are more prevalent. Nevertheless, innovation can potentially lead to a monopoly in nearly any industry. So, what if a new Bitcoin mining operation invented equipment that was ten times faster than anything currently available? Would that company become a monopolist? Let’s explore the possibilities using game theory.
Imagine this hypothetical miner – we’ll call it BitMonopoly – integrating this revolutionary hardware into its entire operation. The power of a mining system is easily gauged: it’s measured by its speed in solving complex calculations, measured in terahashes per second. With a genuine 10x increase in processing power, BitMonopoly would start securing a large number of blocks in the Bitcoin mining process. Even with the current mining difficulty, other miners would still successfully mine some blocks. The frequency of new block creation would increase. In the beginning, BitMonopoly would capture a major share of the block rewards. Currently, each successfully mined block provides a reward of 3.125 BTC, in addition to transaction fees.
However, after approximately two weeks, the Bitcoin system would automatically adjust the mining difficulty upwards. This adjustment is capped at a 4x change in either direction, meaning BitMonopoly would still be the primary block producer. Following another two-week period, the difficulty would adjust again. At this point, the difficulty would be so high that only BitMonopoly could mine profitably. Older mining operations would essentially be forced to shut down. With this heightened mining difficulty, the Bitcoin system would then re-establish block creation times to the established ten-minute average, and BitMonopoly would control 100% of the market share and all block rewards.
What is the total income for BitMonopoly? At 3.125 BTC per block, plus transaction fees, multiplied by 2016 blocks every two weeks, which translates to 52,416 blocks per year, the annual gross revenue would amount to 163,800 BTC. At today’s Bitcoin valuation of $115,000, that equals approximately $18.9 billion annually. A very good return.
By many measures, BitMonopoly would be a monopoly, controlling all profits in the mining market. But its profit potential is limited. The Bitcoin protocol manages both the supply of Bitcoin and the mining difficulty to maintain consistent block times, setting a maximum limit on yearly block rewards. This maximum decreases every four years as part of the halving event. In contrast, the market capitalization of corporations is theoretically limitless. For instance, NVIDIA – possibly the best current instance of a tech-driven monopoly – has a market capitalization of $4.5 trillion and generated $130 billion in revenue in 2024. And Apple’s revenue was almost $400 billion last year, far surpassing the highest possible revenue for BitMonopoly.
An important question remains: If the maximum potential income from monopolizing Bitcoin mining is limited to $19 billion per year, does this limit the incentive to create such a powerful mining system in the first place? The economic answer is likely yes. Individuals respond to incentives, and capped upside is a disincentive compared to opportunities in other markets where growth is not restricted. Though $19 billion annually is significant, it seems small when compared with the potential rewards from innovating the next mobile phone or GPU. So, from an antitrust standpoint, Bitcoin mining raises very few concerns.