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Bitcoin’s limited adoption problem

Author

Listed:
  • Hinzen, Franz J.
  • John, Kose
  • Saleh, Fahad

Abstract

We demonstrate theoretically that Bitcoin’s limited adoption arises as an equilibrium outcome rather than as a short-lived property. Our results are driven by negative network effects which arise due to Bitcoin’s need for consensus and the existence of network delay. As the Bitcoin network expands, network delay grows thereby prolonging the time needed for generating consensus. In turn, transaction settlement becomes prolonged, and users abandon the system, yielding limited adoption. Increasing transaction rates fails to solve this problem because increasing transaction rates increases fork probabilities which prolongs the consensus process and generates limited adoption.

Suggested Citation

  • Hinzen, Franz J. & John, Kose & Saleh, Fahad, 2022. "Bitcoin’s limited adoption problem," Journal of Financial Economics, Elsevier, vol. 144(2), pages 347-369.
    • Handle: RePEc:eee:jfinec:v:144:y:2022:i:2:p:347-369
    DOI: 10.1016/j.jfineco.2022.01.003
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    References listed on IDEAS

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • G00 - Financial Economics - - General - - - General
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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