Entrepreneurship and Bitcoin: Breaking the Network Effect
23 Pages Posted: 23 Jun 2016 Last revised: 2 Nov 2018
Date Written: March 1, 2016
This paper explores the question of whether the market process is capable of bringing about a spontaneous monetary switch to a new currency in the presence of strong network effects of the incumbent currency. It does so by examining current happenings around Bitcoin. It finds that two mechanisms stand out: the coordinative efforts of the profit-maximizing entrepreneur as well as the ability to use the old and the new currency simultaneously. It finds that marginal decisions made by rational agents seeking to maximize net private benefit in their choice of currency, be it entrepreneurs or buyers and sellers of currency, are capable of setting in motion a switch to a new currency, even in the absence of contingencies such as extreme inflation or political instability. Whether or not these mechanisms play out fully in the case of Bitcoin still remains to be seen.
Keywords: Bitcoin, Network Effects, Entrepreneurship
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