Cryptocurrency Adoption with Speculative Price Bubbles

Abstract

Abstract We study product adoption in the context of a cryptocurrency market. Cryptocurrencies are subject to network effects and speculative investments, which are not part of standard models of product diffusion. To explore this unique setting, we marry models of stochastic bubbles and the standard model of product diffusion. A rational bubble is raised due to speculative investors seeking short-term gains. We find that a bubble accelerates the adoption, which can help explain the fast diffusion of bitcoin. There are reinforcing interactions between the speculative investors and regular users of currency, which can make it easier to form a bubble (compared to a setting without regular users). Our findings suggest how bubbles may help to market products. We also provide conditions under which bubbles may unravel.

Keywords: Product Adoption, Diffusion, Currency Marketing, Speculative Bubbles, Cryptocurrency