European Central Bank's Ignorant Report on Bitcoin

They now agree that Bitcoin's price cannot be suppressed

The ECB has released a report on Bitcoin. You can download it here. Here’s the summary of the report. This report sheds a negative light on Bitcoin. But any normal personal who has studied Bitcoin for a while will see the flaws in the argument. (My additional comments are in brackets.)

Bitcoin, originally envisioned by Nakamoto (2008) as a decentralized digital currency for global payments, has shifted its focus from payments to investment, promising high capital gains. (Lol, what is real estate or high-growth stocks then).

While Bitcoin was intended to reduce the reliance on trusted third parties, its practical use for legal transactions remains limited due to its volatile value and complex infrastructure. (Every currency goes through four stages. Collectible, Store of value, medium of exchange, unit of account. Given enough time, Bitcoin won’t be volatile when there is no exchange rate with the dollar).

The rise in Bitcoin’s price has been mostly attributed to speculative investment rather than a legitimate economic function. This paper by Ulrich Bindseil and Jürgen Schaaf explores the implications of a future scenario where Bitcoin’s price continues to rise over time. (Finally, they are accepting that Bitcoin won’t die. Until now they said it was a bubble. Now they accept that the price will keep going up for ever).

Bitcoin as an Investment and the Redistribution of Wealth

The increasing price of Bitcoin, without an increase in the productive potential of the economy, leads to a significant redistribution of wealth. (This is also true for the current monetary system where asset holders are getting rich while daily wage workers are becoming poor).

Early Bitcoin holders (those who purchased Bitcoin when its price was relatively low) gained considerable wealth, leading to increased consumption at the expense of latecomers and non-holders. (That’s why everyone should own some Bitcoin, right? Every Bitcoiner feels uncomfortable buying Bitcoin early and holding on to it with conviction. They will be rewarded and there is nothing anyone can do about it.)

This redistribution is not just relative but absolute. Latecomers or those who never held Bitcoin are effectively impoverished by the wealth effects of early Bitcoin holders. (No, people who earn in Bitcoin can save in Bitcoin which will remove the monetary premium from houses and make housing affordable for Gen Z and Gen Alpha).

This argument challenges the common narrative that poorly timed trades are necessary for financial losses. The authors argue that under a Bitcoin-positive scenario (where Bitcoin’s price continually rises), neither poor timing of trades nor holding Bitcoin is necessary for impoverishment. The continuous increase in Bitcoin prices would result in consumption gains for early Bitcoin holders, but this gain comes at the direct expense of the rest of society. (That’s why all Bitcoiners recommend other people to buy Bitcoin. Instead of learning about Bitcoin and accumulating Bitcoin, they criticize Bitcoin and Bitcoiners but it will be their loss in the future.)

Use Case and Valuation Issues

Bitcoin lacks the fundamental traits of other financial assets like real estate, stocks, or bonds, which generate income streams (rent, dividends, interest). Economists struggle to calculate a fair value for Bitcoin due to its lack of inherent utility. (Everything should only be sold on utility value, except a store of value. Housing has gained a monetary premium because of the lack of channels to protect your money against inflation. Most stocks are over-valued. No one buys stocks for dividends, they buy it so that someone else will pay more to buy it in the future. Bitcoin is much purer than any class of asset because it boasts of no utility other than holding your savings safely for the long term.)

Traditional valuation methods such as Discounted Cash Flow (DCF) models, relative valuation, and technical analysis fall short when applied to Bitcoin. Additionally, Bitcoin’s speculative bubble nature makes its valuation unpredictable and highly dependent on future demand rather than any productive use. (Duh, the use is to save your money from debasement. What productive use does the inflationary dollar have anyway?)

The paper also compares Bitcoin to assets like gold, often promoted by its advocates as “digital gold” due to its fixed supply. However, Bitcoin differs fundamentally from gold, which has a long history of industrial use and jewelry value. Moreover, Bitcoin’s reliance on belief-driven demand makes its future price highly uncertain. (Only 10-20% of gold has any industrial use. If gold stops being a store of value, the price of gold as the utility will drop 80% overnight).

Redistributive Impact in a Bitcoin-Positive Scenario

The paper further examines the broader macroeconomic implications of Bitcoin price increases. Under a Bitcoin-positive scenario, the rising price of Bitcoin results in wealth redistribution from latecomers and non-holders to early adopters.

Early Bitcoin holders benefit from the rise in Bitcoin prices, allowing them to increase their consumption and accumulate wealth in other assets. (No, Bitcoiners don’t want to change their store of value from the strongest one: Bitcoin to other weak assets.)

In contrast, latecomers and non-holders experience diminished consumption, which can lead to societal divisions. (We already have societal division because of FIAT money. People with access to cheap debt can overtake people who work hard for money).

The redistributive effects of Bitcoin are akin to a zero-sum game. Since Bitcoin does not contribute to the economy’s productive capacity, the wealth effects it creates must come at the expense of others.

The wealth of early Bitcoin holders increases due to rising prices, while the rest of society bears the cost in reduced consumption and potential investment losses. In a Bitcoin-positive scenario, the gap between early adopters and latecomers grows, resulting in a permanent shift in wealth distribution.

Conclusion: Bitcoin’s Long-Term Risks

The paper concludes that even under a scenario where Bitcoin’s price continues to rise indefinitely (so they admit this), this creates significant social and economic risks.

The wealth gains of early Bitcoin holders come at a direct cost to latecomers and non-holders, resulting in absolute impoverishment for the latter. This wealth redistribution has the potential to undermine societal cohesion, stability, and even democracy.

Moreover, the lack of any intrinsic value for Bitcoin means its continued price rise relies purely on speculation and collective belief. While Bitcoin’s proponents emphasize its investment potential, the authors argue that society must recognize the significant redistributive harm it causes. Policymakers and regulators should be aware of the social costs of Bitcoin and consider interventions to mitigate the risks of wealth concentration and societal inequality driven by its speculative nature.

In summary, while Bitcoin continues to attract attention as a high-risk, high-reward investment (no, it’s a low-risk, highly volatile, high-reward investment), the broader economic implications of its price rises are concerning (Concerning to no coiners lol). The authors suggest that Bitcoin’s redistributive effects are harmful to society as a whole, and the consequences of ignoring these risks could be severe. (But no one can stop Bitcoin so you might as well get on the winning team).