ECB Doubles Down on Bitcoin Criticism
Posted by Colin Lambert. Last updated: February 23, 2024
Just weeks after US approval for crypto ETFs, the European Central Bank has doubled down on its criticism of bitcoin, with a blog post arguing that the ETF approval “doesn’t change the fact that Bitcoin is not suitable as means of payment or as an investment”.
The blog is the second authored by Ulrich Bindseil, director general of the ECB’s market infrastructure and payments team; and Jürgen Schaaf, an advisor to that team, and follows a November 2022 publication that claimed bitcoin “was on the road to irrelevance”.
The blog, which carries the usual disclaimer of the views not necessarily representing those of the central bank, says for “disciples”, the ETF approval confirms that bitcoin investments are safe and the preceding rally is proof of an unstoppable triumph. “We disagree with both claims and reiterate that the fair value of bitcoin is still zero,” the authors assert. “For society, a renewed boom-bust cycle of bitcoin is a dire perspective, and the collateral damage will be massive, including the environmental damage and the ultimate redistribution of wealth at the expense of the less sophisticated.”
Although bitcoin is still thriving in terms of price at least, the authors argue they were right in late 2022, to warn that it was not a financial asset, and about the risks to society and the environment if the bitcoin lobby managed to re-launch a bubble with the unintended help of legislators, who could give a perceived blessing where a ban would be required. “Alas, all these risks have materialised,” they claim.
To support their assertion, the authors argue that today, bitcoin transactions are still “inconvenient, slow, and costly”. They add that, “Outside the darknet, the hidden part of the internet used for criminal activities, it is hardly used for payments at all.”
They further argue that regulatory initiatives to combat the large-scale use of the bitcoin network by criminals have not been successful yet. “Even the full sponsoring by the government in El Salvador which granted it legal tender status and tried hard to kick off network effects through an initial Bitcoin gift of $30 in free bitcoin to citizens could not establish it as successful means of payment,” they state.
Likewise, the authors state that bitcoin is still not suitable as an investment. “It does not generate any cash flow (unlike real estate) or dividends (stocks), cannot be used productively (commodities), and offers no social benefit (gold jewellery) or subjective appreciation based on outstanding abilities (works of art),” they write. “Less financially knowledgeable retail investors are attracted by the fear of missing out, leading them to potentially lose their money.”
Finally, they observe that the mining of bitcoin using the proof of work mechanism “continues to pollute the environment on the same scale as entire countries, with higher bitcoin prices implying higher energy consumption as higher costs can be covered by miners”.
The authors do acknowledge the price recovery in bitcoin, and sticking to their guns, ask the question, “why is this dead cat bouncing so high?”
The accept that two drivers were expectations of the Federal Reserve quickly reversing recent policy tightening, as well as the ETF approval. Both promised large inflows of funds – the only effective fuel in a speculative bubble, the blog observes.
“Still, this could turn out to be a flash in the pan,” they write. “While in the short run the inflowing money can have a large impact on prices irrespective of fundamentals, prices will eventually return to their fundamental values in the long run – and without any cash flow or other returns, the fair value of an asset is zero. Detached from economic fundamentals every price is equally (im)plausible – a fantastic condition for snake oil salesmen.
“Likewise, the use of ETFs as financing vehicles does not change the fair value of the underlying assets,” they continue. “An ETF with only one asset turns its actual financial logic on its head (although there are others in the United States). ETFs normally aim to diversify risk by holding many individual securities in a market. Why would anybody pay fees to an asset manager for the custody service of only one asset – instead of using the custodian directly, which is in most cases one huge crypto exchange, or even holding the coins for free without any intermediary?
“Moreover, there were already other easy ways to gain listed exposure to bitcoin or to buy bitcoins without any intermediation,” they add. “The problem has never been a lack of possibilities to speculate using bitcoin – but rather that it is only about speculation. Finally, it is incredibly ironic that the crypto unit that had set out to overcome the demonised established financial system should need conventional intermediaries to spread to a broader group of investors.”
The blog further suggests three reasons for the seeming resilience of bitcoin, “the ongoing manipulation of the “price” in an unregulated market without oversight and without fair value, the growing demand for the “currency of crime”, and shortcomings in the authorities’ judgments and measures.”
In conclusion, the authors argue, “Bitcoin’s price level is not an indicator of its sustainability. There are no economic fundamental data, there is no fair value from which serious forecasts can be derived. There is no “proof of price” in a speculative bubble. Instead, a reflation of the speculative bubble shows the effectiveness of the Bitcoin lobby.
“The “market” capitalisation quantifies the overall social damage that will occur when the house of cards collapses,” they add. “It is important for authorities to be vigilant and protect society from money laundering, cyber and other crimes, financial losses for the financially less educated, and extensive environmental damage. This job has not been done yet.”