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Cryptocurrencies, Network Effects, and Switching Costs
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Cryptocurrencies, Network Effects, and Switching Costs

William J. Luther
Mercatus Center, 2013
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7

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Recommendation

When a former chairman of the Federal Reserve writes that virtual currencies “may hold long-term promise,” it’s time to think seriously about Bitcoin. While it’s difficult to imagine buying a cup of coffee using a currency that can fluctuate wildly in the course of a day, a time may come when bitcoins become a more useful measure of value and better suited to daily use. getAbstract highly recommends professor William J. Luther’s thoughtful exploration of the utility and adoption of “cryptocurrencies.” Despite some mathematical abstractions, his study offers both a quick introduction to Bitcoin and a learned assessment of its prospects for acceptance.

Summary

“Cryptocurrencies” like Bitcoin are fiat money that use cryptography to ensure their integrity. Unlike more well-known currencies such as the dollar, yen or euro, cryptocurrencies don’t have the backing of governments and central banks but rely on the security of underlying software algorithms to prevent counterfeiting and double-spending. The existence of cryptocurrencies poses two significant questions: First, why wouldn’t everyone adopt a cryptocurrency? And second, why would anyone adopt one?

A sizable part of the value of a currency is the extent to which others use it. Clearly a currency with ...

About the Author

William J. Luther is an assistant professor of economics at Kenyon College in Ohio.

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