Abstract
Digital currencies have flourished in recent years, buoyed by the tremendous success of Bitcoin. These blockchain-based currencies, called altcoins, are associated with a few thousand to millions of dollars of market capitalization. Altcoins have attracted enthusiasts who enter the market by mining or buying them, but the risks and rewards could potentially be significant, especially when the market is volatile. In this work, we estimate the potential profitability of mining and speculating 18 altcoins using real-world blockchain and trade data. Using opportunity cost as a metric, we estimate the mining cost for an altcoin with respect to a more popular but stable coin. For every dollar invested in mining or buying a coin, we compute the potential returns under various conditions, such as time of market entry and hold positions. While some coins offer the potential for spectacular returns, many follow a simple bubble-and-crash scenario, which highlights the extreme risks—and potential gains—in altcoin markets.
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Notes
- 1.
We are aware that there are many ways to profit from altcoins, including gaming the mining protocol [2, 3] or trading altcoins as if they were penny stocks [4, 5]. It is beyond the scope of this paper to discuss all these ways. Furthermore, there may be other participants in the altcoin ecosystem that are not necessarily profit-driven; again, these participants are beyond the our scope.
- 2.
Throughout this paper, we use “altcoin” or “coin” interchangeably to refer to the cryptocurrency. In contrast, we use “units” to refer to individual units of reward as a result of mining an altcoin.
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© 2018 International Financial Cryptography Association
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Huang, D.Y., Levchenko, K., Snoeren, A.C. (2018). Estimating Profitability of Alternative Cryptocurrencies (Short Paper). In: Meiklejohn, S., Sako, K. (eds) Financial Cryptography and Data Security. FC 2018. Lecture Notes in Computer Science(), vol 10957. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-58387-6_22
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DOI: https://doi.org/10.1007/978-3-662-58387-6_22
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