Speculation Undermines Crypto Prices and Utility, Says Bank of England Senior Economist

Speculation creates congestion on the blockchain that harms a cryptocurrency's utility and overall value, a senior economist at the Bank of England has said.

Peter Zimmerman, who has been a senior economist at the U.K. central bank since 2007, argued in a working paper published Friday that speculation undermines the effectiveness of cryptocurrencies to function as a means of payment.

Because blockchains have a limited processing capacity, periods of high usage make transactions slower and more expensive, the paper observes.

Assuming a cryptocurrency's value derives from its utility as a payment tool, on-chain congestion makes transactions slower and more expensive, making it less useful and therefore less valuable to holders.

"Speculation congests the blockchain, reducing the moneyness of cryptocurrency, and impacting its price."

Rampant speculation might have actually impeded mainstream adoption of cryptocurrencies, Zimmerman's working paper suggests.

Zimmerman assumes that the main value driver of cryptocurrencies is their utility as a means of payment, although he does suggest that the model may not apply in the same degree to initial coin offering tokens, where multiple versions work on the same blockchain at the same time.

Speaking to CoinDesk, Zimmerman said that the model applies to any circumstance where speculative activity "Makes it harder to use the token for its intended purpose." That can include peer-to-peer trading for security tokens as well as platform tokens, like ether, where "Conflict between demand for blockchain space from dapps, and demand for blockchain space from speculation" can impede utility.

The BoE formed a working group in January with five other central banks to share research and ideas surrounding central bank digital currencies.

CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.