Last week, Ulrich Bindseil and Jürgen Schaaf of the European Central Bank published a report paper Entitled “The Distributional Consequences of Bitcoin” they make a set of questionable claims about Bitcoin.
The ideas that those who were late to invest in Bitcoin have been made impoverished by those who were early to invest in it and that Bitcoin has failed as a payments technology are the authors’ central arguments.
Bitcoin analyst Tuur Demeester raised the alarm over the report on X.
1/ This new document constitutes a real declaration of war: the European Central Bank claims this early on #Bitcoin Adopters steal economic value from latecomers. I strongly believe that the authorities will use this bizarre argument to enact strict taxes or bans. Check 🧵 why: pic.twitter.com/qg31YenTSC
– Tuur Demeester (@TuurDemeester) October 19, 2024
your Former academicI am appalled at how lazy the arguments in this paper are. Therefore, I took the time to answer some of them.
- The main hypothesis of this paper is that if the price of Bitcoin continues to rise, early investors in Bitcoin – “early investors” (the authors’ term) – will gain wealth at the expense of “latecomers”. While this is true if Early people held all their coins indefinitely, and the dynamic was no different from any other publicly traded asset. However, the bigger point that researchers miss is that some of us are both “early birds” and “late bloomers.” I first bought Bitcoin in January 2018, and also bought some last week. Have I impoverished myself in this scenario? No, I didn’t. The dollar cost of Bitcoin over any time period has not been averaged. I also bought some gold earlier this year. After doing so, I didn’t shake my fist at the sky while shouting, “Damn all of you who beat me to gold over the past five thousand years!” I simply bought in an attempt to preserve my wealth in a highly inflationary environment – one that the European Central Bank itself is partly responsible for causing – and went on with my day.
- One of the other core arguments in the paper is that Bitcoin has failed as a payment technology. In making this claim, the authors fail to even mention the Accelerator Network, a layer built on top of Bitcoin that enables fast and cheap Bitcoin payments. In recent years, the accelerator network has grown significantly. From August 2021 to August 2023, Network growth by 1212% – which mostly happened during the Bitcoin bear market. Major players in the world of traditional payments also rely on Lightning. A prime example of this is David Marcus, the former president of PayPal, who is the current CEO of PayPal Light Sparkwhich creates enterprise-ready payments infrastructure via the Lightning Network. After Lightning, Bitcoin is still very new and will likely need to be fully monetized (less volatile in terms of fiat money) before people start using it frequently as money.
- Throughout the article, the authors bring up how Bitcoin and other cryptocurrencies are the currencies of choice for criminals and bad actors around the world. While there is little evidence to prove that this is the case, the methodology of Chainana Analysis – a blockchain analysis firm often used to look into cryptocurrencies and criminal activity – is questionable at best. Terrorist organizations like Hamas stopped relying on cryptocurrency donations because of it Traceability. However he said TD Bank was just fined $3 billion To enable money laundering, while Wells Fargo is currently in the crosshairs of regulators To do the same. And the data shows that Criminals prefer cash above all else When committing crimes. Finally, I made two purchases last week using Bitcoin, and I can assure you that neither of them were illegal. And I’m not the only one who has recently made completely legal purchases using Bitcoin.
- The authors also claim that Bitcoin poses a threat to democracy because crypto political action committees now donate to politicians. This assumes that every other lobby group poses no threat to democracy, which is laughable. What the authors also missed is that Bitcoin is often a currency Money of last resort for pro-democracy activists Who have been bankrupted by authoritarian regimes. One of the first steps in the modern dictator’s playbook is: Isolating dissidents from the traditional financial system. In these cases, pro-democracy activists have to rely on Bitcoin and other cryptocurrencies. Alexei Navalny, a former opponent of Vladimir Putin, has gained great popularity Use cryptocurrencies for donations When Putin’s regime restricted his access to traditional financial tracks.
- The authors also suggest that central banks can only tighten monetary policy to counter the “bubble” forming in the price of Bitcoin. The past two years have proven this to be untrue, as interest rates are almost the highest they have been in over a decade and a half, yet the price of Bitcoin is still on the cusp of approaching an all-time high in US dollar terms. conditions. In addition, the tightening by the US Federal Reserve, the central bank of the United States, Leading to the collapse of Silicon Valley Bank (SVB) So will other banks in 2023, highlighting the fact that tightening is making the traditional financial system more fragile. This increases the case for people to store their wealth outside the traditional system in assets like Bitcoin.
Beyond these points, the tone of this ECB paper is paternalistic in that it suggests that not all retail investors are able to learn more about how markets work and why Bitcoin is important.
At the end of the report, Bendsil and Schaaf cite a source who claims that “inexperienced investors are being drawn into the market” as the Bitcoin bubble grows, seemingly suggesting that each of these retail investors is only buying at the top and selling at the bottom of the cloud.
I was once a rather unsophisticated retail investor, and while I first bought Bitcoin near its highs in 2017, I have also bought it on dozens of other occasions, including when its price fell to local lows in 2018 and 2020. I did this because while studying and learning about the problems Bitcoin solves, I came to trust it more than I trust traditional monetary and financial systems.
There are many others like me, who I imagine also take offense at the ECB diminishing their intellectual capacity and writing extremely biased reports that misrepresent Bitcoin and the reasons people should invest in and adopt it.