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Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market

Games, 7, 16, July 2016

21 Pages Posted: 2 Sep 2016 Last revised: 23 Nov 2016

Neil Gandal

Berglas School of Economics; Centre for Economic Policy Research (CEPR)

Hanna Halaburda

Bank of Canada; New York University (NYU); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 27, 2016

Abstract

We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining early dynamics of exchange rates among different cryptocurrencies. While Bitcoin eventually dominates this market, our data suggest no evidence of a winner-take-all effect early in the market. Indeed, for a relatively long period, a few other cryptocurrencies competing with Bitcoin (the early industry leader) appreciated much more quickly than Bitcoin. The data in this period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with winner-take-all dynamics. Toward the end of our sample, however, things change dramatically. Bitcoin appreciates against the USD, while other currencies depreciate against the USD. The data in this period are consistent with strong network effects and winner-take-all dynamics. This trend continues as at the time of writing.

Keywords: Bitcoin, cryptocurrency, network effects

JEL Classification: L17, L86

Suggested Citation

Gandal, Neil and Halaburda, Hanna, Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market (June 27, 2016). Games, 7, 16, July 2016. Available at SSRN: https://ssrn.com/abstract=2832836 or http://dx.doi.org/10.2139/ssrn.2832836

Neil Gandal

Berglas School of Economics ( email )

Tel Aviv University
Tel Aviv 69978
Israel
+972 3 640 9907 (Phone)
+972 3 640 9908 (Fax)

HOME PAGE: http://www.tau.ac.il/~gandal/default.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Hanna Halaburda (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

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