Cryptocurrency Adoption: The Role of Speculative Price Bubbles in Product Diffusion
49 Pages Posted: 6 Jun 2019 Last revised: 26 Dec 2019
Date Written: June 1, 2019
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. The participation of investors helps establish the value of the currency (as a medium of exchange). 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). We also provide conditions under which bubbles may unravel.
Keywords: Product Adoption, Currency Marketing, Speculative Bubbles, Cryptocurrencies
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