Recently, Ulrich Bindseil and Jürgen Schaaf from the European Central Bank (ECB) released a study titled “The distributional consequences of Bitcoin,” making a series of questionable assertions regarding Bitcoin.
The primary claims hinge on the idea that latecomers in Bitcoin investment suffer due to the gains of earlier investors, and that Bitcoin has not succeeded as a method of payment.
Bitcoin analyst Tuur Demeester raised concerns about the findings on X.
As a former academic, I was taken aback by the paper’s lack of rigor. Thus, I’ve decided to address some of its shortcomings.
- The essential argument of the paper proposes that if Bitcoin prices keep increasing, early investors—the “early birds” as termed by the authors—will amass wealth at the detriment of “latecomers.” While this holds true if early birds never sell their coins, it applies to all publicly-traded assets. The authors overlook that some individuals are both “early birds” and “latecomers.” I purchased Bitcoin first in January 2018 and again last week. Did I diminish my own wealth in this scenario? Absolutely not. Nor has anyone who has dollar-cost averaged into Bitcoin over time. Additionally, after buying gold earlier this year, I didn’t lament, “Damn those who bought gold before me over the past 5,000 years!” I simply aimed to safeguard my wealth in a highly inflationary environment—one partly instigated by the ECB itself—and continued with my day.
- Another significant claim from the paper asserts that Bitcoin has failed as a payment solution. In stating this, the authors neglect to mention the Lightning Network, an additional layer built on Bitcoin that facilitates quick, inexpensive transactions. Recently, the Lightning Network has expanded dramatically, experiencing a growth of 1212% from August 2021 to August 2023, predominantly during a bear market. Additionally, major players from traditional payment sectors are adopting Lightning. A notable instance is David Marcus, the former President of PayPal, who heads Lightspark, which is developing payment solutions leveraging the Lightning Network. Moreover, Bitcoin is still in its early stages and may need to stabilize (be less volatile in fiat terms) before it gains broader adoption as a currency.
- The authors repeatedly mention that Bitcoin and other cryptocurrencies predominately serve as vehicles for illicit activities. However, there is scant evidence to support this claim, and the methodology of Chainalysis— the blockchain analysis firm frequently employed to investigate crypto-related crimes— is questionable at best. Notably, terrorist organizations like Hamas have ceased relying on crypto donations due to their traceability. Furthermore, TD Bank was fined $3 billion for facilitating money laundering, and Wells Fargo is currently under investigation for similar reasons. Data indicates that criminals prefer cash overall as their primary medium for crimes. Lastly, I recently used Bitcoin for two legal purchases, and I can assure you none of them were illicitly acquired. Many others are also conducting completely lawful transactions using Bitcoin.
- The authors claim Bitcoin poses a threat to democracy due to crypto PACs making political donations. This suggests that other lobbying groups are not considered threats to democracy, which is quite ludicrous. Moreover, the authors overlook that Bitcoin is often a last resort for pro-democracy activists who have been excluded from the traditional financial system by authoritarian regimes. A classic strategy for modern dictators is to cut off dissidents from standardized banking. In these circumstances, activists must depend on Bitcoin and other cryptocurrencies. Alexei Navalny, a notable figure opposing Vladimir Putin, advocated for cryptocurrency use for donations when the regime restricted access to traditional financial channels.
- The authors further propose that central banks can simply tighten monetary policies to counter the “bubble” in Bitcoin prices. The past two years have demonstrated this is not the case, as interest rates are at their highest in over 15 years, yet Bitcoin’s price remains on the verge of achieving an all-time high in US dollar value. Furthermore, tightening implemented by the US Federal Reserve has led to the downfall of Silicon Valley Bank (SVB) and other banks in 2023, illustrating how increased restrictions can weaken the traditional financial system. This only reinforces the argument for individuals to safeguard their wealth in alternative assets like Bitcoin, away from conventional financial systems.
In addition to these points, the ECB paper’s tone is condescending, implying that retail investors lack the capability to gain a deeper understanding of market mechanisms and the significance of Bitcoin.
Near the conclusion, Bindseil and Schaaf cite a source indicating that “unsophisticated investors are drawn into the market” as Bitcoin’s bubble inflates, insinuating that such investors invariably buy at highs and sell at lows.
I was once an unsophisticated retail investor; although I initially bought Bitcoin near its 2017 peak, I continued investing during dips in 2018 and 2020. My choices stemmed from a comprehensive understanding of Bitcoin’s value propositions and a growing distrust of traditional monetary systems.
Many individuals share this perspective, and I believe they too would find the ECB’s dismissal of their analytical abilities and the overly biased reporting offensive, which ultimately misrepresents Bitcoin and the motives behind its adoption.
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