Last week, Ulrich Bindseil and Jürgen Schaaf of the European Central Bank (ECB) published a paper titled “The Distributive Consequences of Bitcoin,” in which they made a host of dubious claims about Bitcoin.
The notions that those who are late to invest in Bitcoin are impoverished by those who invested in it early and that Bitcoin has failed as a payment technology are the authors’ central arguments.
Bitcoin analyst Tuur Demeester sounded the alarm about the report on X.
Like one former academicI was shocked at how lazy the arguments in this article were. That’s why I took the time to push back on some of them.
- The main premise of the article is that if the price of bitcoin continues to rise, early bitcoin investors – the ‘early birds’ (the authors’ term) – will gain wealth at the expense of the ‘latecomers’. While this is true as the early birds hold all their coins indefinitely, the dynamics are no different with other listed assets. The bigger point that researchers miss, however, is that some of us are both “early birds” and “latecomers.” I first bought bitcoin in January 2018, and last week too. Have I impoverished myself in this scenario? No, I didn’t. Also, no one has converted dollar costs into bitcoin over a period of time. I also bought some gold earlier this year. After I did that, I stopped shaking my fist at the sky while shouting, “Damn all of you who led me to gold for the past 5,000 years!” I simply made the purchase in an attempt to preserve my wealth in a highly inflationary environment – an environment for which the ECB itself is partly responsible – and went about my day.
- One of the other primary arguments in the article is that Bitcoin has failed as a payment technology. In fact, in making this claim, the authors omit the Lightning networka layer on top of Bitcoin that enables fast, cheap Bitcoin payments. In recent years, the Lightning Network has grown exponentially. From August 2021 to August 2023, the network grew by 1212% – which mainly took place during a bitcoin bear market. Major players from the world of traditional payment transactions are also building on Lightning. A prominent example of this is David Marcus, former president of PayPal, and current CEO of PayPal Light Parkthat builds an enterprise-ready payment infrastructure via the Lightning Network. Aside from Lightning, Bitcoin is still quite young and will likely need to be more fully converted into income (less volatile in terms of fiat money) before people start using it as money more often.
- Throughout the piece, the authors bring up how bitcoin and other cryptocurrencies are the currency of choice for criminals and bad actors around the world. While there is little evidence that this is the case, the methodology of Chainanalysis – the blockchain analysis company often used to investigate crypto and criminal activity – questionable at best. Terrorist organizations such as Hamas are no longer dependent on crypto donations for their activities traceability. That said, TD Bank just got fined $3 billion for facilitating money laundering, while Wells Fargo is currently in the crosshairs of regulators because you do the same thing. And the data shows that criminals prefer cash above all else when committing crimes. Finally, I made two purchases with Bitcoin last week and I can assure you that neither was illegal. And I’m not the only one who has recently made perfectly legal purchases with bitcoin.
- The authors also claim that Bitcoin is a threat to democracy because crypto PACs are now donating to politicians. They assume that all other lobby groups are not a threat to democracy, which is laughable. What the authors also missed is that bitcoin is often a money as a last resort for pro-democracy activists that have been debanked by authoritarian regimes. One of the first steps in the modern dictator’s playbook is: dissidents cut off from the traditional financial system. In these cases, pro-democracy activists must rely on bitcoin and other cryptocurrencies. Alexei Navalny, Vladimir Putin’s former opposition party, became popular the use of cryptocurrencies for donations when the Putin regime limited his access to traditional financial rails.
- The authors also suggest that central banks could simply tighten monetary policy to prevent the formation of a bubble in the price of bitcoin. The past two years have proven this not to be true, as prices are just about the highest they’ve been in over a decade and a half, but Bitcoin’s price is still on the verge of approaching an all-time high in US dollars. conditions. Plus the tightening of the US Federal Reserve, the US central bank, led to the collapse of Silicon Valley Bank (SVB) as well as other banks in 2023, underlining that the tightening makes the traditional financial system more vulnerable. This only makes it more likely for people to store their wealth outside the traditional system in assets like bitcoin.
Beyond these points, the tone of this ECB document is paternalistic, in that it suggests that all retail investors are incapable of learning more about how markets work and why Bitcoin is important.
Towards the end of the report, Bindseil and Schaaf quote a source who claims that “inexperienced investors are being drawn into the market” as the Bitcoin bubble grows, which seems to indicate that all these retail investors are only buying at the top and buying at the bottom to sell. of a downturn.
I was once one of those unsophisticated retail investors, and although I first bought bitcoin near the 2017 high, I also bought it on dozens of other occasions, including when the price fell to local lows in 2018 and 2020 . I did that because while studying Bitcoin and learning the problems it solves, I came to trust it more than traditional monetary and financial systems.
There are many more people like me, and I imagine they too are offended by the ECB diminishing its intellectual capabilities and writing deeply biased reports that misrepresent what Bitcoin is and the reasons why people invest in it and adopting it.