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

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Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Neil Gandal & Hanna Halaburda, 2016. "Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market," Games, MDPI, vol. 7(3), pages 1-21, July.
  • Handle: RePEc:gam:jgames:v:7:y:2016:i:3:p:16-:d:73475
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    References listed on IDEAS

    as
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    6. Halaburda, Hanna & Jullien, Bruno & Yehezkel, Yaron, 2016. "Dynamic Competition with Network Externalities: Why History Matters," CEPR Discussion Papers 11205, C.E.P.R. Discussion Papers.
    7. 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.
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