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.
Highlights
The rapid appreciation and popularization of cryptocurrencies over the past few years has led to a large body of scholarship on understanding their behavior and their positioning in the market, financial markets
|Token Price - Addresses with Non-Zero Balance|: This pair demonstrates network effects expressed as the change of monetary value of a relative to the users that hold any amount of that cryptocurrency
|Transaction Value - Addresses with Non-Zero Balance|: This pair demonstrates network effects expressed as the change of transaction value of a relative to the users that hold any amount of that cryptocurrency
Summary
The rapid appreciation and popularization of cryptocurrencies over the past few years has led to a large body of scholarship on understanding their behavior and their positioning in the market, financial markets. As cryptoassets gradually became a household investment and transaction medium, they began to invite greater regulatory and investor scrutiny, which created the need to better understand their function as a market of their own and as market that forms part of the greater economy. Since cryptocurrencies are based on blockchain networks and are network markets, one important parameter that reflects and determines their behaviour is the relationship between their userbase and their value. This relationship has a long history in network markets under the theory of network effects. Network effects theory states that the value of a product or service V is co-determined by its userbase u, so that for products or services that obey network effects, one LEDGER VOL 6 (2021) 81-101 can derive the value of the network for a given userbase assuming that the relationship between V and u is known, for example V ∝ nlog(u), V ∝ u2, V ∝ 2u etc
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