Two economists from the European Central Bank (ECB), Ulrich Bindseil and Jürgen Schaaf, have issued a critical analysis of Bitcoin, warning that even in a scenario where Bitcoin prices continue to rise, the cryptocurrency poses significant risks to society.
The economists in a paper titled “The Distributional Consequences of Bitcoin’, argue that Bitcoin’s wealth redistribution effects, which benefit early adopters, come at the direct expense of latecomers and non-holders, leading to social and economic inequality.
According to Bindseil and Schaaf, the rapid rise in Bitcoin prices enriches early adopters but impoverishes those who enter the market later or do not invest at all.
They describe this as a “zero-sum game,” where the wealth and consumption increases of early Bitcoin investors are funded by the diminishing consumption and financial losses of non-holders.
Early adopters vs late comers
They emphasize that this redistribution is a serious societal concern, as it leads to frustration and malaise among those left behind, potentially deepening societal divisions.
“In absolute terms, early adopters exactly increase their real wealth and consumption at the expense of the real wealth and consumption of those who do not hold Bitcoin or who invest in it only at a later stage.
“At some stage, the Bitcoin holdings are equally spread amongst the two subsets of the population we assume in section 4 (or have largely converged to this state), such that subsequent valuation increases of Bitcoin will be neutral (and have no effects at all on relative consumption, and none on total consumption unless consumption crowds out investments and therefore undermines growth),” the economists wrote.
Bitcoin’s rising prices have no benefit to the broader economy
Despite the rising value of Bitcoin, Bindseil and Schaaf argue that its wealth effects are not linked to an increase in the economy’s production potential.
- Instead, they assert that Bitcoin’s value is largely speculative and lacks a stable economic foundation.
- The economists highlight that the price of Bitcoin could rise to any level—including $10 million or more—but without any real economic justification.
- They also caution that Bitcoin’s volatile price is heavily influenced by government policies, regulations, and even political attitudes.
- This dependency on government actions, they say, undermines Bitcoin’s original appeal as a decentralized and independent financial asset.
Political implications and election influence
Bindseil and Schaaf raise concerns about Bitcoin’s influence on politics, noting that the growing number of crypto investors could sway election outcomes.
They point to the ongoing U.S. presidential elections, where some candidates are actively courting crypto voters to secure their support. The economists argue that pro-Bitcoin political campaigns may further exacerbate wealth redistribution, as early adopters have a vested interest in promoting policies that maintain or increase Bitcoin prices.
- The ECB economists call for regulatory measures to address the growing influence of Bitcoin and prevent further societal harm.
- They suggest that non-holders and their political representatives should recognize that Bitcoin’s rise benefits early adopters at their expense and advocate for legislation to curb its growth.
- Failing to act, they warn, could lead to increased societal division and further wealth disparities.
What you should know
Bindseil and Schaaf’s paper comes as a stark reminder that Bitcoin, often touted as a revolutionary financial innovation, may have far-reaching consequences that extend beyond individual investment returns.
- Bitcoin price has been on an unprecedented rollercoaster ride, with interim price gains of 1,000% from 2020 to November 2021 but also losses of almost 80% during the “crypto winter”.
- After the Bitcoin price had reached a record high of around $69,000 in November 2021, the price fell in the subsequent correction phase, which intensified throughout 2022, to around $16,000 in November 2022.
In this respect, those who got in at relatively low prices and/or sold at high prices have made high profits and those who bought and held bitcoins at low prices and did not sell them have high imputed profits.