Bitcoin's Limited Adoption Problem

We demonstrate theoretically that Bitcoin's limited adoption arises as an equilibrium outcome rather than as a short-lived property. Our results are driven by negative network effects which arise due to Bitcoin's need for consensus and the existence of network delay. As the Bitcoin network expands, network delay grows thereby prolonging the time needed for generating consensus. In turn, transaction settlement becomes prolonged, and users abandon the system, yielding limited adoption. Increasing transaction rates fails to solve this problem because increasing transaction rates increases fork probabilities which prolongs the consensus process and generates limited adoption.

Keywords: Bitcoin, Limited Adoption, Consensus, Network Delay, Blockchain, Payment Systems, FinTech

JEL Classification: E42, G00, G29

Suggested Citation: Suggested Citation

Hinzen, Franz J. and John, Kose and Saleh, Fahad, Bitcoin's Limited Adoption Problem (January 26, 2022). Journal of Financial Economics, Volume 144, May 2022, Pages 347-369, Available at SSRN: https://ssrn.com/abstract=3334262 or http://dx.doi.org/10.2139/ssrn.3334262