Cryptocurrency Competition and Market Concentration in the Presence of Network Effects

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 marketas a whole.

Network effects in blockchain and supply chain: a theoretical research synthesis

“…Extant literature has been limited in scope in the exploring of NE theory as it pertains to BC, primarily focusing on network and asset valuation (Alabi, 2017, 2020; Zalan, 2018; Catalini and Gans, 2020; Stylianou et al. , 2021).…”

“…Extant literature has been limited in scope in the exploring of NE theory as it pertains to BC, primarily focusing on network and asset valuation (Alabi, 2017(Alabi, , 2020Zalan, 2018;Catalini and Gans, 2020;Stylianou et al, 2021). NE are a multidimensional phenomenon and framework for better understanding how novel BC ecosystems of platforms, applications and users develop and mature.…”

Novel Cryptocurrency Investment Approaches: Risk Reduction and Diversification through Index Based Strategies

“…Among proposed strategies and approaches, index-based CAI emerged as one of the safest and less volatile options for long-term investors who are attracted by the potentially high returns associated with cryptographic assets, without the excessive exposure to risks associated with the traditionally high volatility of cryptocurrency markets [11][12][13]. In addition, index-based CAI (ibCAI) provides a degree of protection against any one component of the index itself becoming non-viable as an "investment vehicle," either due to hacking or other factors, such as a numerically dwindling cryptocurrency community or lack of project-specific infrastructure/support [14][15][16][17]. There are multiple intersecting concepts involved within the overall cryptographic investment space, reflected in Figure 1 pictogram.…”