ECB Bitcoin Report: What Investors Need to Know

Introduction

The European Central Bank (ECB) recently released a report on Bitcoin. The report is titled "The Distributional Consequences of Bitcoin." Despite the polite title, the contents are more pointed.

To summarize the conclusion: if Bitcoin’s price continues to rise, only early investors will benefit, while later investors and non-holders will experience a relative loss of wealth. This could diminish the purchasing power of those outside the initial investment group and potentially lead to societal divisions. ECB suggests that non-holders should support legislation against Bitcoin to prevent price increases or its existence. Let’s dive deeper into the details.

ECB’s Arguments

(1) It's intriguing that the ECB—a highly respected institution—references price projections for Bitcoin by figures like Cathie Wood ($1 million) and Robert Kennedy ($10 million), despite these views being somewhat unconventional. The ECB doesn’t endorse these forecasts, instead stating that Bitcoin lacks intrinsic value and that such price predictions have no economic basis.

(2) The ECB claims that Bitcoin’s original vision, set by its creator Satoshi Nakamoto, has largely failed. While it aimed to become a global payment system, it has instead transformed into a mere investment asset.

(3) According to the ECB, the wealth gained by early Bitcoin investors through price increases translates into losses for latecomers and non-holders, who grow poorer as a result, leading to reduced consumption. They argue that luxury items like sports cars, luxury watches, and vacation homes enjoyed by early investors aren’t derived from increased economic productivity but rather from the redistribution of wealth and purchasing power away from non-holders. They suggest that this will further contribute to an increasingly divided society. The ECB even urges those who don’t yet hold Bitcoin to support regulatory measures against it to avoid such outcomes.

(1) Thoughts on ECB’s Arguments

Arguments (1) and (3) contradict each other. The ECB claims that Bitcoin has no intrinsic value and that there is no economic rationale for forecasts of massive price increases, yet it also argues that Bitcoin’s price may continue to soar, leading to a redistribution of wealth between those who hold Bitcoin early, those who adopt it late, and those who don’t hold it at all. How can they predict such a vast societal divide over wealth distribution if they believe Bitcoin has no lasting value at all? It’s surprising that prominent economists could overlook such a logical contradiction.

(2) Thoughts on ECB’s Arguments

The second argument also doesn’t hold up. Bitcoin emerged in response to the 2008 global financial crisis when established banks faced bankruptcy, and governments printed money extensively to fund bailouts. Naturally, the value of money decreased. Even ignoring Bitcoin’s spectacular rise against the dollar, consider gold: in January 2007, it was around $650 per ounce, and recently it’s hovering around $2,750, marking a 420% increase. This reflects a decline in the dollar’s purchasing power (please note that most other currencies have depreciated even further against the dollar).

Bitcoin was designed to maintain or even enhance its relative value without a central authority, gradually reducing issuance in a mathematically predetermined way unlike governments that erode currency value through excessive seigniorage—the profit from printing fiat currency, the difference between its face value and production cost (which is zero in the electronic age). From the outset, one of Bitcoin’s objectives has been value preservation. However, the ECB report fails to address whether Bitcoin has achieved this widely recognized success.

So, has Bitcoin failed in its other goal of becoming a global payment system? Let me first explain how the dollar payment system operates, which isn’t a single unified system.

In simpler terms, the banking system can be divided into three tiers. Large U.S. banks with direct access to the Federal Reserve’s payment systems, Fedwire and FedLine Direct, form the first tier. Smaller U.S. banks and foreign banks that lack direct Fed access constitute the second tier. These banks rely on the first-tier banks to process their transactions. Finally, small foreign banks unconnected to U.S. banks typically utilize large banks within their home countries for international transactions, forming the third tier. For instance, J.P. Morgan is in the first-tier group, First National Bank of Omaha is in the second tier, and a lesser-known foreign bank may be in the third tier.

In the crypto world, Bitcoin functions as a first-tier network. Just as most global financial institutions don’t directly use Fedwire, most crypto investors don’t transfer funds directly in Bitcoin. For example, they can convert to Tether and use the Tron network for transactions because it’s faster and fee-free. Furthermore, the Lightning Network—designed to solve Bitcoin’s issues with slow processing speed and high fees—serves as a sort of second-tier system for Bitcoin. It’s hard to imagine that authors of ECB reports were not aware of this.

(3) Thoughts on ECB’s Arguments

The third argument or suggestion is, in some respects, the least convincing. A person who invested $1,000 in Nvidia five years ago has seen a huge gain compared to someone investing in 2024. Likewise, those who bought a beachfront apartment in Florida several years ago have widened the wealth gap with those who didn’t—or couldn’t—buy such property. This is an inevitable reality of investing in a capital market society.

The report’s authors argue that Bitcoin should be legislated against to prevent its price increases or even its existence because it doesn’t contribute to increasing the economy’s productive potential. But what about gold, which is hardly used as an industrial metal, or diamonds? If Florida beachfront condominium prices keep soaring, does that somehow increase economic productivity? Why do they propose strict legislation only for Bitcoin, while assets like gold or diamonds, renowned high-value paintings, or luxury real estates remain free of such legislation? It’s a glaring inconsistency.

ECB’s Previous Report on Bitcoin

The report’s authors, Ulrich Bindseil and Jürgen Schaaf, have an interesting history: they co-authored another piece on Bitcoin in November 2022, which is still available on the ECB's website. Please refer to this link if interested to read: [Bitcoin’s Last Stand].

The article opens with this: “The value of bitcoin peaked at USD 69,000 in November 2021 before falling to USD 17,000 by mid-June 2022. Since then, the value has fluctuated around USD 20,000. For bitcoin proponents, the seeming stabilization signals a breather on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance.”

Let’s take a look at the evolution of Bitcoin price since then.

Source: Coinbase

Bitcoin reached a near-bottom of $16,441 on November 30, 2022 (red circle in the above graph), coinciding with the publication of the ECB article. Since then, it has experienced a relentless rise, currently hovering around $70,000 after gaining approximately 330%, more than doubling in value for two consecutive years and breaking its previous record price. Thus, their assertion that Bitcoin would soon become irrelevant was completely misguided.

Two years ago, they claimed Bitcoin was on its “last gasp,” about to become obsolete. Now, they argue that if Bitcoin prices rise indefinitely, the wealth disparity between those who have it and those who don’t might become so extreme that it might fracture society—requiring government intervention to prevent such an outcome. This leap in logic is puzzling.

Is it possible that the ECB is simply afraid of Bitcoin because it’s beyond their control? The U.S. took a similar stance until recently, before approving a Bitcoin ETF earlier this year and seeing pro-crypto support from both presidential candidates. Meanwhile, Europe appears poised to reject Bitcoin, the foundation of blockchain technology, rather than embrace it. This recalls Europe’s past resistance to new ideas, like when the Copernican theory and Christianity were initially repressed before they were widely accepted.

Closing Remarks

I don't hold the belief that Bitcoin prices will inevitably and perpetually rise. While there are many factors at play, the trajectory of Bitcoin’s value largely depends on how governments and central banks worldwide (particularly in the U.S., Europe, China, and Japan) manage debt levels and the pace of currency issuance.

The ECB report appears to reflect the anxiety of central banks as Bitcoin’s price continues to climb resiliently, contrary to their expectations. This anxiety stems from their lack of control over Bitcoin.

This post neither encourages nor discourages Bitcoin investment. Instead, it aims to shed light on how the ECB, one of the world's most important central banks and financial regulators, views Bitcoin, along with the rationale behind its position and whether it holds merit.

Thanks for reading. Wish you grow rich slowly and surely!

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