CRYPTOCURRENCIES, NETWORK EFFECTS, AND SWITCHING COSTS.
Cryptocurrencies are digital alternatives to traditional government-issued paper monies. Given the current state of technology and skepticism regarding the future purchasing power of existing monies, why have cryptocurrencies failed to gain widespread acceptance? I offer an explanation based on netw...
| Published in: | Contemporary Economic Policy Vol. 34; no. 3; pp. 553 - 572 |
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| Format: | Article |
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Wiley-Blackwell
Jul2016
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| Online Access: | View this record in EBSCOhost |
| fields | @attributes: recordID: 1 pdfLink: plink: https://search.ebscohost.com/login.aspx?direct=true&db=ssf&AN=115757785&site=ehost-live header: @attributes: shortDbName: ssf uiTerm: 115757785 longDbName: Social Sciences Full Text (H.W. Wilson) uiTag: AN controlInfo: bkinfo: jinfo: jid: 10743529 CEY jtl: Contemporary Economic Policy issn: 10743529 maglogo: Y pubinfo: dt: Jul2016 vid: 34 iid: 3 pid: 480 pub: Wiley-Blackwell artinfo: ui: 115757785 10.1111/coep.12151 ppf: 553 ppct: 19 formats: fmt: – @attributes: type: T – @attributes: type: P size: 796KB tig: atl: CRYPTOCURRENCIES, NETWORK EFFECTS, AND SWITCHING COSTS. aug: au: Luther, William J. affil: Assistant Professor, Department of Economics, Kenyon College, Gambier OH, 43022 su: Technological innovations Online banking Bitcoin Payment Financial management Management sug: subj: Technological innovations Personal and commercial banking industry Commercial Banking Portfolio Management Online banking Bitcoin Payment Financial management Management ab: Cryptocurrencies are digital alternatives to traditional government-issued paper monies. Given the current state of technology and skepticism regarding the future purchasing power of existing monies, why have cryptocurrencies failed to gain widespread acceptance? I offer an explanation based on network effects and switching costs. In order to articulate the problem that agents considering cryptocurrencies face, I employ a simple model developed by Dowd and Greenaway (1993) (Dowd, K., and D. Greenaway. "Currency Competition, Network Externalities, and Switching Costs: Towards an Alternative View of Optimum Currency Areas." The Economic Journal, 103(420), 1993, 1180–89). The model demonstrates that agents may fail to adopt an alternative currency when network effects and switching costs are present, even if all agents agree that the prevailing currency is inferior. The limited success of bitcoin—almost certainly the most popular cryptocurrency to date—serves to illustrate. After briefly surveying episodes of successful monetary transition, I conclude that cryptocurrencies like bit-coin are unlikely to generate widespread acceptance in the absence of either significant monetary instability or government support. (JEL E40, E41, E42, E49) pubtype: Academic Journal doctype: Article src: R language: English refInfo: copyright: @attributes: flag: N holdings: @attributes: islocal: N |
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