The Bitcoin Catch-22 (The Price-User Imbalance)

The Bitcoin Catch-22 (The Price-User Imbalance)

By RowanSkie | Rowan Skye Blog | 2 Feb 2021

This is an extended version of my Reddit post: Bitcoin has a catch-22.

Bitcoin has a catch-22.

It took me this current bull run to finally notice, but it is a dangerous catch-22, and it is one of the reasons why Bitcoin hasn't spiraled down to death and why it still exists as a speculative asset instead of its original goal of electronic peer-to-peer cash without a middleman.

Before we begin, we first must learn what is a catch-22.

Catch-22 is a phrase coined from the name war novel with the name phrase, in which it is about a government loophole. In essence, a catch-22 is a type of paradoxical situation where once you are in, you cannot find a way to get out. This is something that can naturally happen, especially when you have entered a point of no return in your lives.

The first and original example of a catch-22 is from the novel, and it is this statement:

Anyone who wants to get out of combat duty isn't really crazy.

Where is the catch-22 in the situation? If one wants to get out, they must be sane, but they need to keep fighting because they are serving the country as a soldier. If one doesn't want to get out, they still need to keep fighting.

I've noticed Bitcoin has a catch-22 that affects its price and its usage, and it's not even a normal catch-22 in my assessment. I'm calling the idea the Price-User Imbalance, and it is the following:

Keep the transaction fees low enough while making the price high to get users.

Why is this, exactly, a catch-22? That's because of three things:

  1. The 1-megabyte block size.

  2. The evidence of peer-to-peer cash use case.

  3. The monetary growth of Bitcoin.

Here is how I found this catch-22 in full detail.

Keep the transaction fees low enough

Multiple cryptocurrencies currently employ low network fees, and it's not just because of the block size. Satoshi Nakamoto's brought this up as a way to incentivize miners to keep mining the blockchain especially when the block reward is now 0. Other cryptocurrencies solve this problem by using a tail emission, which would increase the total number of coins circulation.

Bitcoin, the current implementation, caused this on itself by keeping block sizes to 1 megabyte and pushing for it, creating Bitcoin Cash as a response.

However, this causes users of Bitcoin to create a fee market and this market would be a way for a user to get their transaction to a block. The highest known transaction fee was back in December 2017 where it had risen to $100, which meant that people who wanted to transact with less than $100 will no longer get their transactions to the next block.

Because of high fees, Bitcoin dominance dropped significantly, and Ethereum grew.

In the Reddit post, I had explained that actions such as selling off when the price is high can cause transaction fees to stack, especially when the price rises due to a bull run. This discourages any users, and those that can do get through the high fees can sell their Bitcoin. The surge of Bitcoin being sold off can create a bear signal, dropping prices significantly.

while making the price high to get users.

Money attracts everyone, and this is no exception in Bitcoin. Due to Bitcoin's "store of value" and "digital gold" narrative, making Bitcoin very profitable when a bear signal has been given. These newcomers would buy Bitcoin for the "store of value", causing a bull signal.

But then, conflicting information will arrive when they try to do anything with their Bitcoins, starting with one particular phrase:

"Not your keys, not your coins."

Newcomers who get past this stage will contribute to this catch-22 because that sentence, along with the store of value narratives, gives newcomers a reason to get private keys so they keep their own value.

However, when people try to cash out, they will soon see the fees and it will either make them spend more than what they need to spend or exchange the coin with another functional coin, before moving it to a multi-coin wallet and exchanging it back to Bitcoin.

(Yes, I just told you a possible reason why there are altcoin bull runs.)

What's the main catch?

The 1-megabyte block size.

This thing, alongside other Blockstream contributing to the scalability problems of Bitcoin, stops everything from going one way or the other.

With high fees, user adoption stops, and users start to sell off their Bitcoin so they can move it somewhere as Bitcoin unless they can spend enough transactional fees.

With low fees yet high prices, user adoption begins again which contributes to fees as they try to use Bitcoin as a "store of value". This would lower the price as the fees increase once again, and the above situation now happens.

This catch-22 is a price-user imbalance, as when the price rises, usage increases which would then make the price of transacting get higher, which pushes user usage down again.

I shouldn't have explained this further, my head hurts now. But yeah, essentially the catch-22 boils down to this:

"Number go up, users go up; users go up, fees go up; fees go up, users go down; users go down, number goes down; number go up, users go up."

A very complicated not-really catch-22, right?

This is Rowan, signing off.

How do you rate this article?



Rowan Skye Blog
Rowan Skye Blog

Rowan Skye's Main Blog, all blogs primarily head here. Special blog posts get special blogs for it.

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.