Competition in the Cryptocurrency Market

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 Classification: L17, L86

Suggested Citation: Suggested Citation

Halaburda, Hanna and Gandal, Neil, Competition in the Cryptocurrency Market (June 27, 2016). updated version published as "Can we predict the winner in a market with network effects? Competition in cryptocurrency market," in Games 7 (3), 16, NET Institute Working Paper No. 14-17, Available at SSRN: https://ssrn.com/abstract=2506463 or http://dx.doi.org/10.2139/ssrn.2506463