Hotelling Meets Crypto-Currency: Do Bitcoin Rents Follow Hotelling's Rule?

Abstract

Hotelling's Rule of non-renewable resource extraction was first proposed in 1931, but strong empirical evidence supporting Hotelling's predictions has been elusive. Recognizing the complications in natural resource markets, we test Hotelling's Rule using bitcoin rents. Bitcoin is similar to natural resources in that new coins enter the market solely through the efforts of individual agents expending computer resources to attain bitcoins, which can then be sold on exchanges for profit. Bitcoin has a fixed and known resource stock, can be accessed by anyone with a computer, exhibits a fairly homogeneous and easily modeled "mining'' technology, and extraction rates follow restricted and pre-determined patterns. Aspects of capital investment and mining returns are observable and can be tracked over time, making bitcoin an ideal test bed for Hotelling's Rule. We calculate the growth rate of the net asset price of Bitcoin, and compare it to the growth rate of several market indicies (GSPC, HYG) over the same time period. We test for and find evidence of a co-integrating relationship, providing support for Hotelling's rule in that any deviations from the theoretical price path bring economic forces to bear that restore the proper pricing relationship.