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Competition in the Cryptocurrency Market

Author

Listed:
  • Gandal, Neil
  • Halaburda, Hanna

Abstract

We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining the changes over time in exchange rate data among cryptocurrencies. Specifically, we look at two aspects: (1) competition among different currencies, and (2) competition among exchanges where those currencies are traded. Our data suggest that the winner-take-all effect is dominant early in the market. During this period, when Bitcoin becomes more valuable against the U.S. dollar, it also becomes more valuable against other cryptocurrencies. This trend is reversed in the later period. The data in the later period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with "winner-take-all" dynamics.

Suggested Citation

  • Gandal, Neil & Halaburda, Hanna, 2014. "Competition in the Cryptocurrency Market," CEPR Discussion Papers 10157, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10157
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    References listed on IDEAS

    as
    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. Hanna Halaburda & Mikolaj Jan Piskorski, 2010. "Competing by Restricting Choice: The Case of Search Platforms," Harvard Business School Working Papers 10-098, Harvard Business School, revised Jan 2013.
    3. Glenn Ellison & Drew Fudenberg, 2003. "Knife-Edge or Plateau: When Do Market Models Tip?," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1249-1278.
    4. Ben Fung & Hanna Halaburda, 2014. "Understanding Platform-Based Digital Currencies," Bank of Canada Review, Bank of Canada, vol. 2014(Spring), pages 12-20.
    5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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    Cited by:

    1. repec:eco:journ4:2018-02-2 is not listed on IDEAS
    2. Huberman, Gur & Leshno, Jacob D. & Moallemi, Ciamac, 2017. "Monopoly without a monopolist : An economic analysis of the bitcoin payment system," Research Discussion Papers 27/2017, Bank of Finland.
    3. Pieters, Gina & Vivanco, Sofia, 2017. "Financial regulations and price inconsistencies across Bitcoin markets," Information Economics and Policy, Elsevier, vol. 39(C), pages 1-14.
    4. Fry, John & Cheah, Eng-Tuck, 2016. "Negative bubbles and shocks in cryptocurrency markets," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 343-352.
    5. Guglielmo Maria Caporale & Alex Plastun, 2017. "The Day of the Week Effect in the Crypto Currency Market," Discussion Papers of DIW Berlin 1694, DIW Berlin, German Institute for Economic Research.
    6. Abeer ElBahrawy & Laura Alessandretti & Anne Kandler & Romualdo Pastor-Satorras & Andrea Baronchelli, 2017. "Evolutionary dynamics of the cryptocurrency market," Papers 1705.05334, arXiv.org, revised Nov 2017.
    7. Andreas Hanl, 2018. "Some Insights into the Development of Cryptocurrencies," MAGKS Papers on Economics 201804, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. Brandvold, Morten & Molnár, Peter & Vagstad, Kristian & Andreas Valstad, Ole Christian, 2015. "Price discovery on Bitcoin exchanges," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 18-35.
    9. Wilko Bolt & Maarten van Oordt, 2016. "On the Value of Virtual Currencies," Staff Working Papers 16-42, Bank of Canada.
    10. Anne Haubo Dyhrberg, 2015. "Hedging Capabilities of Bitcoin. Is it the virtual gold?," Working Papers 201521, School of Economics, University College Dublin.
    11. Chengyi Tu & Paolo DOdorico & Samir Suweis, 2018. "Critical slowing down associated with critical transition and risk of collapse in cryptocurrency," Papers 1806.08386, arXiv.org.
    12. repec:eee:finlet:v:23:y:2017:i:c:p:87-95 is not listed on IDEAS
    13. Bouri, Elie & Gupta, Rangan & Tiwari, Aviral Kumar & Roubaud, David, 2017. "Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions," Finance Research Letters, Elsevier, vol. 23(C), pages 87-95.
    14. Jonathan Chiu & Thorsten Koeppl, 2017. "The Economics of Cryptocurrencies - Bitcoin and Beyond," Working Papers 1389, Queen's University, Department of Economics.
    15. Christopher S. Henry & Kim P. Huynh & Gradon Nicholls, 2017. "Bitcoin Awareness and Usage in Canada," Staff Working Papers 17-56, Bank of Canada.
    16. Adam Hayes, 2015. "The Decision to Produce Altcoins: Miners' Arbitrage in Cryptocurrency Markets," Working Papers 1504, New School for Social Research, Department of Economics.
    17. Lim, Siok Jin & Masih, Mansur, 2017. "Exploring portfolio diversification opportunities in Islamic capital markets through bitcoin: evidence from MGARCH-DCC and Wavelet approaches," MPRA Paper 79752, University Library of Munich, Germany.

    More about this item

    Keywords

    Bitcoin; cryptocurrency; network effects;

    JEL classification:

    • L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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