Advertisement

The Review of Austrian Economics

, Volume 30, Issue 3, pp 263–275 | Cite as

Bitcoin and entrepreneurship: breaking the network effect

  • Malavika Nair
  • Nicolás Cachanosky
Article

Abstract

This paper explores the question of whether the market process is capable of bringing about a spontaneous monetary switch to a new currency in the presence of strong network effects of the incumbent currency as well as the absence of contingencies such as extreme inflation or political instability. It does so by examining current happenings around Bitcoin. It finds that two mechanisms stand out: the coordinating efforts of the profit-maximizing entrepreneur as well as the ability to use the old and the new currency simultaneously. Specifically, it finds that marginal decisions made by rational agents merely seeking to maximize net private benefit irrespective of the network effect, be it entrepreneurs or users of the new currency, are capable of setting in motion a switch to a new currency. Whether or not these mechanisms play out fully in the case of Bitcoin still remains to be seen.

Keywords

Bitcoin Network effects Entrepreneurship Market process Institutional change 

Notes

Acknowledgements

The authors would like to thank Thomas Hogan, GP Manish and attendees of APEE conference 2014 for helpful comments and suggestions.

References

  1. Antonopoulos, A. M. (2014). Mastering bitcoin. Sebastopol: O’Reilly Media.Google Scholar
  2. Boettke, P. J. (2014). Entrepreneurship, and the entrepreneurial market process: Israel M. Kirzner and the two levels of analysis in spontaneous order studies. The Review of Austrian Economics. doi: 10.1007/s11138-014-0252-1.Google Scholar
  3. Cheah, E.-T., & Fry, J. (2015). Speculative bubbles in bitcoin markets? An empirical investigation into the fundamental value of Bitcoin. Economics Letters. doi: 10.1016/j.econlet.2015.02.029.Google Scholar
  4. David, P. A. (1985). Clio and the economics of QWERTY. American Economic Review, 75, 332–337.Google Scholar
  5. David, P. A. (1986). Understanding the economics of QWERTY: the necessity of history. In W. N. Parker (Ed.), Economic history and the modern economist. New York: Basil Blackwell.Google Scholar
  6. Dowd, K. (2014). New Private Monies: A Bit-Part Player? (Vol. Vol. 174). London: Hobart Paper.Google Scholar
  7. Dowd, K., & Greenaway, D. (1993). Currency competition, network externalities and switching costs: towards an alternative view of optimum currency areas. The Economic Journal, 103(420), 1180–1189.CrossRefGoogle Scholar
  8. Dowd, K., & Hutchinson, M. (2015). Bitcoin will bite the dust. Cato Journal, 35(2), 357–382.Google Scholar
  9. Dwyer, G. P. J. (2015). The economics of bitcoin and similar private digital currencies. Journal of Financial Stability, 17, 81–91. doi: 10.1016/j.jfs.2014.11.006.CrossRefGoogle Scholar
  10. Hendrickson, J. R., Hogan, T. L., & Luther, W. J. (2016). The political economy of bitcoin. Economic Inquiry, 54(2), 925–939. doi: 10.1111/ecin.12291.CrossRefGoogle Scholar
  11. Katz, M., & Shapiro, C. (1985). Network externalities, competition, and compatibility. American Economic Review, 75(3), 424–440.Google Scholar
  12. Katz, M., & Shapiro, C. (1994). System competition and network effects. Journal of Economic Perspectives, 8(2), 93–115.CrossRefGoogle Scholar
  13. Kirzner, I. M. (1992). The meaning of market process (1996th ed.). New York: Routledge.CrossRefGoogle Scholar
  14. Klein, P., & Selgin, G. (2000). Menger’s Theory of Money: Some Experimental Evidence. In J. Smithin (Ed.),What is Money? (pp. 217–34). London: Routledge. Google Scholar
  15. Lewin, Peter. (2001). The market process and the economics of QWERTY: two views. Review of Austrian Economics Google Scholar
  16. Liebowitz, S. J., & Margolis, S. E. (1990). The fable of the keys. Journal of Law and Economics, 33, 1–25.CrossRefGoogle Scholar
  17. Liebowitz, S. J., & Margolis, S. E. (1994). Network externality: an uncommon tragedy. Journal of Economic Perspectives, 8, 133–150.CrossRefGoogle Scholar
  18. Liebowitz, S. J., & Margolis, S. E. (1995a). Are Network Externalities a New Source of Market Failure? Research in Law and Economics, 17, 1–22.Google Scholar
  19. Liebowitz, S. J., & Margolis, S. E. (1995b). Path dependence, lock-in, and history. Journal of Law, Economics, and Organization, 11, 205–226.Google Scholar
  20. Lo, S., & Wang, C. (2014). Bitcoin as Money? (Vol. No. 14–4). Boston: Current Policy Perspectives.Google Scholar
  21. Luther, W. J. (2015). Cryptocurrencies, network effects, and switching costs. Contemporary Economic Policy Google Scholar
  22. Luther, W. J., & Olson, J. (2015). Bitcoin is memory. Journal of Prices & Markets, 3(3), 22–33.Google Scholar
  23. Menger, C. (1892). On the origins of money. The Economic Journal, 2, 239–255.CrossRefGoogle Scholar
  24. Nakamoto, S. (2010). Bitcoin: A Peer-to-Peer Electronic Cash System. www.bitcoin.org.
  25. Selgin, G. A. (2015). Synthetic commodity money. Journal of Financial Stability, 17, 92–99. doi: 10.1016/j.jfs.2014.07.002.CrossRefGoogle Scholar
  26. Stenkula, M. (2003). Carl Menger and the network theory of money. The European Journal of the History of Economic Thought. doi: 10.1080/0967256032000137737.Google Scholar
  27. White, L. H. (2002). Does a superior monetary standard spontaneously emerge? Journal Des Economistes et Des Etudes Humaines, 12(2), 269–281. doi: 10.2202/1145-6396.1062.CrossRefGoogle Scholar
  28. White, L. H. (2015). The market for cryptocurrencies. Cato Journal, 35(2), 383–402.Google Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Manuel H. Johnson Center of Political EconomyTroy UniversityTroyUSA
  2. 2.Department of EconomicsMetropolitan State University of DenverDenverUSA

Personalised recommendations