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Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market

Listed author(s):
  • Neil Gandal

    ()

    (Department of Economics, Tel Aviv University, Tel Aviv 6997801, Israel
    CEPR, London EC1V 0DX, UK)

  • Hanna Halaburda

    ()

    (Bank of Canada, Ottawa, ON K1A 0G9, Canada
    Stern School of Business, New York University, NY 10012, USA
    Views presented in this paper are those of authors, and do not represent Bank of Canada’s position)

We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining early dynamics of exchange rates among different cryptocurrencies. While Bitcoin essentially dominates this market, our data suggest no evidence of a winner-take-all effect early in the market. Indeed, for a relatively long period, a few other cryptocurrencies competing with Bitcoin (the early industry leader) appreciated much more quickly than Bitcoin. The data in this period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with winner-take-all dynamics. Toward the end of our sample, however, things change dramatically. Bitcoin appreciates against the USD, while other currencies depreciate against the USD. The data in this period are consistent with strong network effects and winner-take-all dynamics. This trend continues at the time of writing.

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Article provided by MDPI, Open Access Journal in its journal Games.

Volume (Year): 7 (2016)
Issue (Month): 3 (July)
Pages: 1-21

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Handle: RePEc:gam:jgames:v:7:y:2016:i:3:p:16-:d:73475
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  1. Joshua S. Gans & Hanna Halaburda, 2015. "Some Economics of Private Digital Currency," NBER Chapters,in: Economic Analysis of the Digital Economy, pages 257-276 National Bureau of Economic Research, Inc.
  2. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
  3. Christian Catalini & Catherine Tucker, 2016. "Seeding the S-Curve? The Role of Early Adopters in Diffusion," NBER Working Papers 22596, National Bureau of Economic Research, Inc.
  4. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-143, Summer.
  5. Halaburda, Hanna & Jullien, Bruno & Yehezkel, Yaron, 2016. "Dynamic Competition with Network Externalities: Why History Matters," TSE Working Papers 16-636, Toulouse School of Economics (TSE).
  6. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
  7. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-337, May.
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