Bank of England economist: Bitcoin's "digital gold" effect puts it in the embarrassment of "Article 22 military regulations"

Peter Zimmerman, senior economist at the Bank of England (BoE) published a working paper on the price of bitcoin and other cryptocurrencies, which examined the "digital gold" effect of bitcoin, and It is proposed that Bitcoin has fallen into a "Catch-22" -like dilemma.


Image source: pixabay

The paper states that the limitations of blockchain technology have created conflicts between those who try to use this cryptocurrency and those who speculate on its price. As a result, price volatility has increased, and people have hoarded bitcoin like gold.

Bitcoin's "digital gold" effect

Zimmerman said in the paper that Bitcoin's mechanism has led people to think of it as gold. He said:

"When the price of cryptocurrencies rises, ordinary holders are reluctant to spend it. Instead, they are more willing to hoard cryptocurrencies and tolerate slower settlement times. I call this the" digital gold "effect: When it comes to value, the holder sees it as a storable asset, not money to be spent. "

He was not the first to make this point. New York Times reporter Nathaniel Popper used the term to describe his knowledge of Bitcoin history, and someone who has a Twitter account @Bitcoin has added the term to In his account description. Even Nick Szabo, who is considered to be the inventor of Bitcoin, had previously proposed similar ideas. He proposed the idea of ​​BitGold precisely because of its scarcity.

Bitcoin falls into "Article 22 military regulations"

Zimmerman's main argument is that Bitcoin has fallen into the "No. 22 Military Rule": a dilemma that cannot be shaken out, and all possible ways forward can produce the same negative results.


Catch 22 is the name of a book written by Joseph Heller. Image source: Shutterstock

He pointed out two decisive characteristics of Bitcoin: Bitcoin's value depends on its use as a means of payment, and at the same time it has limited space for transactions on the blockchain.

Zimmerman wrote that the more speculation, the more difficult Bitcoin is as a means of payment. When investors flock in and push the price of Bitcoin to new highs, the blockchain will become more crowded and payments will become more difficult, thereby reducing its functionality and value. This is the real reason why he believes that Bitcoin has fallen into "Article 22 military regulations." He said:

"Speculation has blocked the blockchain, lowered the monetary attributes of cryptocurrencies, and in turn affected their prices.

This shows that there is a new relationship between speculative and transactional use of cryptocurrencies: an increase in speculative demand may reduce the price of the asset, rather than increasing the price of the asset as predicted by standard economic models. " Why does he think so? the reason is simple. When the price of Bitcoin soared to $ 20,000 at the end of 2017, its blockchain became quite crowded, transactions became more difficult, and fees rose accordingly. Although developers have introduced SegWit, a technology designed to help Bitcoin adapt to growing usage, the technology still has its own limitations.

Explaining the high volatility of Bitcoin

Zimmerman draws further conclusions from it. He believes that this internal conflict is the reason for the sharp fluctuations in the price of Bitcoin.

When the price of Bitcoin rises, its value as a means of payment decreases, which causes the price to fall. He believes that when the price drops, Bitcoin becomes more available again, which in turn provides a reason for the price to rise.

Zimmerman pointed out that it is clear that the problem gets worse when the market is illiquid. (A report by Bitwise shows that 95% of Bitcoin's transaction volume is fake). He said:

"The cryptocurrency market is characterized by low liquidity and transactions scattered across a large number of unregulated exchanges, so this effect can further explain why high price fluctuations occur."

How Bitcoin got rid of "Article 22 military regulations"

However, the economist did provide a solution. He said:

"My research results show that if more speculative activities are conducted outside the blockchain in the future, the price volatility of Bitcoin may decrease and payment usage may increase. Recent developments such as the cash settlement derivatives market or the Lightning Network The introduction of (Lightning Network) could have a profound effect. "

Major stock exchanges, including the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE), have begun offering cash-settled Bitcoin-traded futures, allowing traders to trade their prices without holding Bitcoin On gambling. The Lightning Network is a scalable solution that allows daily bitcoin transactions without slowing down the network.

But he acknowledged that despite these developments, some transactions still need to be made on the Bitcoin main blockchain.

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