Peter Zimmerman, a senior economist at the Bank of England (BoE), has voiced his opinion on Bitcoin and the limitation its volatility poses. In a staff working paper published earlier this week, the Economist explained that several limitations of the inherent blockchain technology seem to be causing a conflict between users who are trying to use Bitcoin and those who simply want to speculate on the top cryptocurrency.
Bitcoin’s Perfect Catch-22
The paper, which doesn’t reflect the official views of the BoE concerning Bitcoin or any of the other cryptocurrencies, explained that several people have looked at Bitcoin’s mechanics and are now treating it like digital gold. Due to this, many are hoarding the asset rather than spending it- a phenomenon which, amongst other things, has led to the price volatility that we all associate with the digital asset today.
“When cryptocurrency is more valuable, households become reluctant to spend it on fees. Instead, they prefer to hoard it and endure slower settlement times. I call this a ‘digital gold’ effect: when cryptocurrency is more valuable, agents view it as an asset to store, rather than money to spend,” Zimmerman explained in the working paper.
The Economist made it abundant that Bitcoin is essentially stuck in a catch-22, a situation where mutually conflicting or dependent situations make it difficult to find a way out of a challenging circumstance.
He explained that the fact that the Bitcoin blockchain has a limited transaction range and that its value is governed by its usage in making payments are responsible for this challenge. As speculation continues to rise, he explained, Bitcoin’s use as a means of payment becomes more stifled. Investors who see this and start to send Bitcoin’s price surging to congest the Bitcoin blockchain, leading to difficulties in payment efficiency and a reduction in Bitcoin’s real value.
However, he offered a possible solution for escaping this self-jinx. “My results suggest that price volatility may fall and payments usage increase if, in the future, a greater volume of speculation could be carried out outside the blockchain. Recent developments such as the evolution of cash-settled derivatives markets or the introduction of the Lightning Network could have profound consequences,” he explained in the post.
Digital Gold Arguments Can be Spun
Of course, Zimmerman’s definition of digital gold seems to differ from those of several others in the digital asset space. Most recently, Coinbase published a blog post explaining the link between the top crypto asset and the digital gold moniker, pointing out that the halving- and the subsequent reduction in Bitcoin’s supply rate- will make Bitcoin more comparable to gold.
In its blog post, Coinbase explained that since the gold standard breaking in 1971, the asset has risen by over 4,000 percent in value and has become more valuable than other assets due to its scarcity. The exchange argued that Bitcoin fits this description due to its Proof-of-Work makeup, adding that it also has the advantage of being transferred faster and more effectively than gold.