Bitcoin Blackout: Proof-of-Work and the Centralization of Mining

Electricity constitutes the main input factor for miners of proof-of-work cryptocurrencies like Bitcoin, so they gravitate towards countries with cheap energy. We analyze risks associated with this geographical centralization of mining by exploiting an exogenous shock to electricity supply in a relatively small region with heavy Bitcoin mining activity. We first document a drop of about 25% in the total computing power of the Bitcoin network during a blackout that lasts several days. Compared to a control group consisting of a proof-of-stake cryptocurrency, we find evidence of blockchain congestion as fees increase substantially while the number and value of transactions decrease. We also document an impact on exchange trading activity. Trading volume and especially exchange rate volatility increase while liquidity deteriorates during the blackout, even though returns are mostly unaffected. Additionally, market integration drops as price differences between exchanges increase considerably.