A new paper from economists at the European Central Bank titled "The distributional consequences of Bitcoin" argues that even under a scenario in which bitcoin's price continues to rise, early adopters would be the only ones to benefit, while latecomers and non-holders suffer significant consequences, even without a "bursting bubble" scenario.
The economists argue that Satoshi Nakamoto's original vision for bitcoin as a global payment system has largely failed, with the narrative shifting to view bitcoin as a perpetually-increasing investment asset. Bitcoin, economists Ulrich Bindseil and Jürgen Schaaf argue, "...does not generate any cash flow (like real estate), interest (like bonds) or dividends (like stocks), cannot be used productively (like commodities).
As a result, "...most established ways of calculating or estimating the fair value of an asset fail when applied to Bitcoin," the authors argue in the paper, published on Oct. 12. Rather than viewing bitcoin as a traditional asset, the paper argues celebrities and thought leaders from BlackRock CEO Larry Fink and Galaxy Digital founder Mike Novogratz to athlete Tom Brady and actors Gwenyth Paltrow and Ashton Kutcher have promoted bitcoin as an investment asset with the potential to perpetually increase.
Yet even under a scenario in which bitcoin's price continues to rise, without the possibility of a "burst bubble" scenario impacting holders, the paper's authors argue that latecomers and non-holders would suffer greatly at the expense of early adopters, who either sell their coins to latecomers or cash out into material assets—"the often-cited 'Lambo,'" the paper states. Because bitcoin doesn't increase the productive potential of the economy, the authors argue, it can be viewed as a zero-sum game, meaning early adopters benefit exclusively at the expense of late-adopters or non-holders.
"The new Lamborghini, Rolex, villa, and equity portfolios by early Bitcoin investors do not stem from an increase in the economy’s production potential; rather, they are financed by diminishing consumption and wealth of those who initially do not hold Bitcoin," the paper states. "Thus, 'missing out' on Bitcoin is not merely a lost opportunity for wealth accumulation, but means real impoverishment compared to a world without Bitcoin. This redistribution of wealth and purchasing power is unlikely to occur without detrimental consequences for society."
Those detrimental consequences include "...a corresponding impoverishment of the rest of society, endangering cohesion, stability and ultimately democracy," the paper argues.
The paper also analyzes the attitude towards bitcoin of the two current presidential candidates, noting that although former President Trump has promoted bitcoin, most notably in a speech to the Bitcoin 2024 conference, Trump "...does not explain in his speech what services of Bitcoin to society would justify its current and future ever higher valuation."
"...Current nonholders should realise that they have compelling reasons to oppose Bitcoin and advocate for legislation against it, aiming to prevent Bitcoin prices from rising or to see Bitcoin disappear altogether," the paper states. "Latecomers and non-holders and their political representatives should emphasize that the idea of Bitcoin as an investment relies on redistribution at their expense."
The paper has already prompted fierce criticism from some crypto investors. "In all the years I've been monitoring the bitcoin space, this is by far the most aggressive paper to come from authorities. The gloves are off. It's clear that these central bank economists now see bitcoin as an existential threat, to be attacked with any means possible," bitcoin analyst Tuur Demeester wrote on X in response to the paper.
Though the paper evaluates several means by which central banks could intervene to affect bitcoin's price action, it also identifies drawbacks with several proposed interventions. "In the case of Bitcoin, [central banks] would presumably also avoid a specific judgement but simply take into account the positive aggregate demand effects of a significant Bitcoin price increase by tightening policies further, i.e. imposing higher policy interest rates to bring back aggregate demand to a noninflationary level," the paper states.
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