Working Paper: CEPR ID: DP10157
Authors: Neil Gandal; Hanna Halaburda
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.
Keywords: Bitcoin; Cryptocurrency; Network Effects
JEL Codes: L17; L86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Network effects (D85) | winnertakeall dynamic (D72) |
| Bitcoin's increasing value against USD (F31) | Bitcoin's value against other cryptocurrencies (F31) |
| Increasing perception of cryptocurrencies as financial assets (G19) | shift away from winnertakeall dynamics (D79) |
| Bitcoin strengthens against USD (F31) | Bitcoin weakens against other cryptocurrencies (E42) |
| Some cryptocurrencies retain their value (E42) | Others decline (D81) |