Cryptocurrency Competition and Market Concentration in the Presence of Network Effects

  • Konstantinos Stylianou Centre for Business Law and Practice, University of Leeds School of Law
  • Leonhard Spiegelberg Brown University
  • Maurice Herlihy Brown University
  • Nic Carter Coin Metrics
Keywords: network effects, metcalfe, metcalfe's law, monopolization, concentration


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 market
as a whole.

Author Biography

Konstantinos Stylianou, Centre for Business Law and Practice, University of Leeds School of Law

Konstantinos is an Associate Professor in Competition Law and Regulation, and the Deputy Director of the Centre for Business Law and Practice at the University of Leeds School of Law. His areas of focus are the law and policy of digital markets, blockchain and communications networks. He has worked on numerous projects funded by the European Union, the Swedish Competition Authority, Google, Facebook, Thailand’s National Broadcasting and Telecommunications Commission and others. He holds an S.J.D. from the University of Pennsylvania, where he studied as an Onassis Scholar, an LL.M. from Harvard University, where he studied as a Fulbright Scholar, and an LL.M. and LL.B. from Aristotle University. He has also been Visiting Scientist at Brown University Computer Science Department and a Visiting Scholar at Oxford University and TU Delft.


Alabi, K. “Digital Blockchain Networks Appear to Be Following Metcalfe’s Law.” Electronic Commerce Research and Applications 24 23–29 (2017)

Arnosti, N., Weinberg, S. M. “Bitcoin: A Natural Oligopoly.” In A. Blum (Ed.), 10th Innovations in Theoretical Computer Science Conference. 124 5 (2018)

Birke, D., Swann, G. P. “Network Effects and the Choice of Mobile Phone Operator.” Journal of Evolutionary Economics 16 65–84 (2004)

Böhme, R., Christin, N., Edelman, B. “Bitcoin: Economics, Technology, and Governance.” Journal of Economic Perspectives 29.2 213–238

Briscoe, B., Odlyzko, A., Tilly, B. “Metcalfe’s Law Is Wrong - Communications Networks Increase in Value as They Add Members but by How Much?” IEEE Spectrum 43.7 34–39 (2006)

Buterin, V. “On Bitcoin Maximalism, and Currency and Platform Network Effects.” (2014) (accessed 30 August 2021)

Catalini, C., Gans, J. “Some Simple Economics of the Blockchain.” NBER W22952

Church, J., Gandal, N. “Platform Competition in Telecommunications.” In M. Cave, S. K. Majumdar, I. Vogelsang (Eds.), The Handbook of Telecommunications Economics (Volume 2) North-Holland 119 (2005).

Church, J., Gandal, N., Krause, D. “Indirect Network Effects and Adoption Externalities.” Review of Network Economics 7.3

Civitarese, J. “Does Metcalfe’s Law Explain Bitcoin Prices? A Time Series Analysis.” SSRN (2018) (accessed 30 August 2021)

Coin Metrics “Coin Metrics Hourly Reference Rates Methodology.” (2020) (accessed 30 August 2021)

Commission of the European Communities. “Commission Decision of 3.10.2007 Relating to a Proceeding Under Article 81 of the EC Treaty and Article 53 of the EEA Agreement in Case COMP/D1/37860, Morgan Stanley / Visa International and Visa Europe.” (2007) (accessed 30 August 2021)

Cong, L. W., Li, Y., Wang, N. “Tokenomics: Dynamic Adoption and Valuation.” The Review of Financial Studies 34.3 1105–1155 (2020)

Cruickshank, D. Competition in UK Banking – A Report to the Chancellor of the Exchequer. London: The Stationery Office (2000).

Cyphers, B. “Visa Wants to Buy Plaid, and With It, Transaction Data for Millions of People.” Electronic Frontier Foundation (2020) (accessed 30 August 2021)

Economides, N. “The Economics of Networks.” International Journal of Industrial Organization 14 673 (1996)

Economides, N., Salop, S. C. “Competition and Integration Among Complements, and Network Market Structure.” The Journal of Industrial Economics 40.1 105–123 (1992)

ElBahrawy, A., Alessandretti, L., Kandler, A., Pastor-Satorras, R., Baronchelli, A. “Evolutionary Dynamics of the Cryptocurrency Market.” Royal Society Open Science 4.11 170623 (2017)

Farrell, J., Klemperer, P. “Coordination and Lock-In: Competition with Switching Costs and Network Effects.” In M. Armstrong, R. Porter (Eds.), Handbook of Industrial Organization Volume III North-Holland (2007).

Farrell, J., Saloner, G. “Standardization, Compatibility, and Innovation.” The RAND Journal of Economics 16.1 70 (1985)

Gallaugher, J. M.,Wang, Y.-M. “Understanding Network Effects in Software Markets: Evidence from Web Server Pricing.” MIS Quarterly 26.4 303 (2002)

Gandal, N. “Competing Compatibility Standards and Network Externalities in the PC Software Market.” The Review of Economics and Statistics 77.4 599–608 (1995)

Gandal, N., Halaburda, H. “Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market.” Games 7.3 16 (2016)

Garcia-Swartz, D. D., Garcia-Vicente, F. “Network Effects on the iPhone Platform: An Empirical Examination.” Telecommunications Policy 39.10 877–895 (2015)

Hagiu, A., Rothman, S. “Network Effects Aren’t Enough.” Harvard Business Review 64–71

House of Commons Treasury Committee. “Competition and Choice in Retail Banking - Ninth Report of Session 2010–11.” House of Commons (2011) HC 612-I (accessed 30 August 2021)

Irresberger, F., John, K., Saleh, F. “The Public Blockchain Ecosystem: An Empirical Analysis.” SSRN (2020) (accessed 30 August 2021)

Katz, M. L., Shapiro, C. “Network Externalities, Competition, and Compatibility.” The American Economic Review 75.3 424–440 (1985)

Marella, V., Upreti, B., Merikivi, J., Tuunainen, V. K. “Understanding the Creation of Trust in Cryptocurrencies: The Case of Bitcoin.” Electronic Markets 30.2 259–271 (2020)

Metcalfe, R. “Metcalfe’s Law After 40 Years of Ethernet.” Computer 46.12 26–31 (2013)

Perez, D., Xu, J., Livshits, B. “Revisiting Transactional Statistics of High-scalability Blockchains.” In IMC ’20: Proceedings of the ACM Internet Measurement Conference 535–550 (2020)

Peterson, T. “Bitcoin Spreads Like a Virus.” SSRN (2019) (accessed 30 August 2021)

Peterson, T. “Metcalfe’s Law as a Model for Bitcoin’s Value.” Alternative Investment Analyst Review 7.2 9–18 (2018)

Reed, D. P. “That Sneaky Exponential—Beyond Metcalfe’s Law to the Power of Community Building.” (1999) (accessed 30 August 2021)

Rehman, M. H. u., Salah, K., Damiani, E., Svetinovic, D. “Trust in Blockchain Cryptocurrency Ecosystem.” IEEE Transactions on Engineering Management 67.4 1196–1212 (2020)

Rohlfs, J. “A Theory of Interdependent Demand for a Communications Service.” The Bell Journal of Economics and Management Science 5.1 16–37 (1974)

Schmalensee, R. “Jeffrey Rohlfs’ 1974 Model of Facebook: An Introduction.” SSRN (2011) (accessed 30 August 2021)

Schultze-Kraft, R. “Bitcoin On-Chain Exchange Metrics: The Good, The Bad, The Ugly.” Glassnode Insights (2021) (accessed 30 August 2021)

Shanaev, S., Sharma, S., Shuraeva, A., Ghimire, B. “The Marginal Cost of Mining, Metcalfe’s Law and Cryptocurrency Value Formation: Causal Inferences from the Instrumental Variable Approach.” SSRN (2019) (accessed 30 August 2021)

Shankar, V., Bayus, B. L. “Network Effects and Competition: An Empirical Analysis of the Home Video Game Industry.” Strategic Management Journal 24.4 375–384 (2003)

Swann, G. M. P. “The Functional Form of Network Effects.” Information Economics and Policy 14.3 417–429 (2002)

Van Vliet, B. “An Alternative Model of Metcalfe’s Law for Valuing Bitcoin.” Economics Letters 165 70–72 (2018)

Victor, F. “Address Clustering Heuristics for Ethereum.” In J. Bonneau, N. Heninger (Eds.), Financial Cryptography and Data Security. 12059 Cham: Springer International Publishing 617–633 (2020)

Wang, J., Ngene, G. M. “Does Bitcoin Still Own the Dominant Power? An Intraday Analysis.” International Review of Financial Analysis 71 101551 (2020)

How to Cite
Stylianou, K., Spiegelberg, L., Herlihy, M., & Carter, N. (2021). Cryptocurrency Competition and Market Concentration in the Presence of Network Effects. Ledger, 6.
Research Articles