Cryptocurrency Market Structure and Concentration in the Presence of Network Effects

6 Ledger 81 (2021)

21 Pages Posted: 10 Mar 2021 Last revised: 9 Sep 2021

See all articles by Konstantinos Stylianou

Konstantinos Stylianou

University of Leeds - School of Law

Leonhard Spiegelberg

Brown University

Maurice Herlihy

Brown University

Nic Carter

Castle Island VC

Date Written: September 8, 2021

Abstract

When network products and services become more valuable as their userbase grows (network effects), this tendency can become a major determinant of how they compete with each other in the market and how the market is structured. Network effects are traditionally linked to high market concentration, early-mover advantages, and entry barriers, and in the market they have also been used as a valuation tool. The recent resurgence of Bitcoin has been partly attributed to network effects, too. We study the existence of network effects in six cryptocurrencies from their inception to obtain a high-level overview of the application of network effects in the cryptocurrency market. We show that, contrary to the usual implications of network effects, they do not serve to concentrate the cryptocurrency market, nor do they accord any one cryptocurrency a definitive competitive advantage, nor are they consistent enough to be reliable valuation tools. Therefore, while network effects do occur in cryptocurrency networks, they are not (yet) a defining feature of the cryptocurrency market as a whole.

Keywords: network effects, cryptoasset, cryptocurrency, bitcoin, metcalfe, metcalfe's law, concentration, monopolization

Suggested Citation

Stylianou, Konstantinos and Spiegelberg, Leonhard and Herlihy, Maurice and Carter, Nic, Cryptocurrency Market Structure and Concentration in the Presence of Network Effects (September 8, 2021). 6 Ledger 81 (2021), Available at SSRN: https://ssrn.com/abstract=3756480 or http://dx.doi.org/10.2139/ssrn.3756480

Konstantinos Stylianou (Contact Author)

University of Leeds - School of Law ( email )

Leeds LS2 9JT
United Kingdom

Leonhard Spiegelberg

Brown University ( email )

Box 1860
Providence, RI 02912
United States

Maurice Herlihy

Brown University ( email )

Box 1860
Providence, RI 02912
United States

Nic Carter

Castle Island VC ( email )

One Broadway
Cambridge, MA 02142
United States

HOME PAGE: http://castleisland.vc

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