Cryptoasset Competition and Market Concentration in the Presence of Network Effects

TL;DR

This paper investigates the role of network effects in the cryptoasset market, finding that unlike traditional markets, they do not lead to high concentration or confer clear competitive advantages.

Contribution

It provides an empirical analysis of network effects across six cryptoassets, challenging assumptions about their impact on market structure and valuation.

Findings

Network effects are present but do not concentrate the market.

No cryptoasset gains a definitive competitive advantage from network effects.

Network effects are inconsistent and unreliable for valuation in crypto markets.

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 cryptoasset market they have been used as a valuation tool too. The recent resurgence of Bitcoin has been partly attributed to network effects too. We study the existence of network effects in six cryptoassets from their inception to obtain a high-level overview of the application of network effects in the cryptoasset market. We show that contrary to the usual implications of network effects, they do not serve to concentrate the cryptoasset market, nor do they accord any one cryptoasset a definitive competitive advantage, nor are they consistent enough to be reliable valuation tools. Therefore, while network effects do occur in cryptoasset networks, they are not a defining feature of the cryptoasset market as a whole.