Bitcoin non-dilemmas

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Blockchain / Finance

Two recent papers published in Finance Research Letters on the effect of Bitcoin’s popularity on Bitcoin price and value: in the media and as a method of trade.

Media attention and Bitcoin prices, Dionisis Philippas, Hatem Rjiba, Khaled Guesmi, Stephane Goutte, Finance Research Letters, 30, 37 (2019).

We present a dual process diffusion model to examine whether Bitcoin prices behave with jumps attributed to informative signals derived from Twitter and Google Trends. The empirical results indicate that Bitcoin prices are partially driven by a momentum on media attention in social networks, justifying a sentimental appetite for information demand.

I am usually very skeptical of such studies and would expect the short-term horizon trading not to be reflected on Google Trends at all. Searches for “bitcoin” and “btc” may reflect interest from people to learn more about Bitcoin. The same keywords as Twitter hashtags are included in tweets that already mention bitcoin or trading. The authors discuss this briefly. I don’t think however that tweet and searches would have “overlapping expected influence”. These results are therefore a bit puzzling.

Bitcoin dilemma: Is popularity destroying value? S Thomas Kim, Finance Research Letters, (2019), forthcoming.

I measure the amount of congestion in the Bitcoin network by the time to execute a trade and find that congestion is harming Bitcoin’s ability to function as a method of trade. The average time to execute a Bitcoin transaction increased from 30 min in 2016 to 413 min in 2018. I find that the congestion is associated with higher transaction fees and reduced volume. The congestion is also creating a distortion in Bitcoin price. The relationship between congestion and price is strongest during the business hours of East Asia.

The data and analysis in the paper may be correct but the premise and conclusions are not.

There is no dilemma. There is hardly any real debate on whether Bitcoin can be scaled to become a worldwide system for payments. The answer is “NO”. Recent Bitcoin forks happened partly due to disagreements about this. Indeed, high fees and long confirmation times are considered now features. This may come as a surprise to many who are not following Bitcoin development closely. High volume trade will happen on Bitcoin’s Layer 2 (L2), such as the Lightning network. On L2, trades are executed almost instantaneously and the transaction fees are much lower than the main layer transaction fees. Additionally, it may be confusing that many people, including myself, advocate for decreasing the 1 megabyte block size limit on L1. This would clearly increase congestion and transaction fees on the Bitcoin main layer but provide the network with higher security. And security is the primary source of network value. Bitcoin traders should not “pay higher transaction fees to expedite their trades” but acquaint themselves with existing L2 solutions and use Bitcoin nodes that have implemented them.

The Author

Knowledge architect, futurist, enthusiast of new technologies and innovations, avid reader

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