Last week, Ulrich Bindseil and Jürgen Schaaf of the European Central Bank (ECB) published a paper titled “The Distributional Consequences of bitcoin” in which they made a series of dubious claims about bitcoin.
The authors' central arguments are the notion that those who invest late in bitcoin are impoverished by those who invested early in it and that bitcoin has failed as a payments technology.
bitcoin analyst Tuur Demeester raised the alarm over the report on x.
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1/ This new document is a true declaration of war: the ECB affirms that the first twitter.com/hashtag/bitcoin?src=hash&ref_src=twsrc%5Etfw”>#bitcoin adopters steal economic value from newcomers. I firmly believe that the authorities will use this Luddite argument to enact harsh taxes or bans. Check why: pic.twitter.com/qg31YenTSC
– Tuur Demeester (@TuurDemeester) twitter.com/TuurDemeester/status/1847512241173582058?ref_src=twsrc%5Etfw”>October 19, 2024
like a former academicI was horrified by how vague the arguments in this article were. Therefore, I have taken the time to reject 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 “late birds.” While this is true Yeah Early birds hold all their coins endlessly, the dynamic is no different with any other publicly traded asset. However, the most important point that researchers miss is that some of us are both “early birds” and “late birds.” I first bought bitcoins in January 2018 and also bought some last week. Did I become poorer in this scenario? No, I didn't. Neither has anyone who has dollar cost averaged against bitcoin over a period of time. Also, I bought some gold earlier this year. After doing so, I didn't shake my fist at the sky shouting “Damn everyone who has led me to gold for the last 5,000 years!” I simply made the purchase in an effort to preserve my wealth in a highly inflationary environment (one for which the ECB itself is partially responsible) and went about my day.
- One of the article's other main arguments is that bitcoin has failed as a payment technology. In making this claim, the authors do not even mention the Lightning Network, a layer built on top of bitcoin that enables fast and cheap bitcoin payments. In recent years, the Lightning Network has grown exponentially. From August 2021 to August 2023, the network grew by 1212% – which primarily occurred during a bitcoin bear market. Major players in the traditional payments world are also taking advantage of Lightning. A prominent example of this is David Marcus, former president of PayPal, who is the current CEO of spark of lightwhich is building enterprise-ready payments infrastructure through the Lightning Network. Beyond Lightning, bitcoin is still quite young and will probably need to become more fully monetized (less volatile in terms of fiat money) before people start using it more frequently as money.
- Throughout the article, the authors discuss how bitcoin and other cryptocurrencies are the preferred currencies of criminals and bad actors around the world. While there is little evidence to prove this is the case, the methodology of Chainanalysis (the blockchain analysis firm often employed to investigate crypto and criminal activities) is questionable at best. Terrorist organizations like Hamas have stopped relying on cryptocurrency donations due to their crypto-but-raises-money-in-other-ways/”>traceability. That said, TD Bank just received a $3 billion fine to enable money laundering, while Wells Fargo is currently in the crosshairs of regulators for doing the same. And the data shows that Criminals prefer cash above all else. when committing crimes. Lastly, I made two purchases last week with bitcoin and I can assure you that neither was illegal. And I'm not the only one who recently made perfectly legal purchases with bitcoin.
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$900 million in non-crypto (fiat currency) money laundering vs. $900,000 in crypto money laundering.
Clearly, cryptocurrencies are not the problem. Criminals and bad actors are.
It would be a historic mistake to crush an entire emerging industry based on incorrect data. https://t.co/TEFEdvGG0o
— Senator Cynthia Lummis (@SenLummis) twitter.com/SenLummis/status/1749835395385176366?ref_src=twsrc%5Etfw”>January 23, 2024
- The authors also claim that bitcoin is a threat to democracy because crypto PACs now donate to politicians. This presupposes that every other pressure group out there is not a threat to democracy, which is ridiculous. What the authors also overlooked is that bitcoin is often a bitcoin-can-be-a-tool-for-human-rights-activists/”>last resort money for pro-democracy activists that have been debanked by authoritarian regimes. One of the first measures in the modern dictator's manual is isolate dissidents from the traditional financial system. In these cases, pro-democracy activists have to rely on bitcoin and other cryptocurrencies. Alexei Navalny, former opponent of Vladimir Putin, popularized using cryptocurrencies for donations when the Putin regime limited its access to traditional financial avenues.
- The authors also suggest that central banks can simply tighten monetary policy to counter the “bubble” that is forming in the price of bitcoin. The last two years have proven this to be untrue, with rates near the highest in over a decade and a half, yet the price of bitcoin is still on the verge of approaching an all-time high in US dollars. terms. Furthermore, 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, highlighting the fact that the adjustment makes the traditional financial system more fragile. This only makes a stronger argument for people to store their wealth outside of the traditional system in an asset like bitcoin.
Beyond these points, the tone of this ECB document is paternalistic in the sense that it suggests that all retail investors are incapable of learning more about how markets work and why bitcoin is important.
Toward the end of the report, Bindseil and Schaaf cite a source who claims that “unsophisticated investors are being drawn into the market” as the bitcoin bubble grows, apparently suggesting that each of these retail investors is only buying in the top and sells at the bottom. of a reduction.
I was once one of those unsophisticated retail investors, and while I first bought bitcoin near its 2017 high, I also bought it on dozens of other occasions, including as its price fell to local lows in 2018 and 2020. I did. because by studying bitcoin and learning the problems it solves, I came to have more faith in it than in traditional monetary and financial systems.
There are many others like me, and I imagine they too are offended that the ECB diminishes their intellectual capabilities and writes deeply biased reports that misrepresent what bitcoin is and the reasons why people invest in and adopt it.
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