The Distributional Consequences of Bitcoin

A recent paper from economists at the European Central Bank titled The Distributional Consequences of Bitcoin argues that even with rising bitcoin prices, only early adopters benefit, while latecomers and non-holders face dire consequences.

The authors contend that Satoshi Nakamoto's vision for bitcoin as a payment system has failed, as it is now viewed predominantly as an investment asset. According to Ulrich Bindseil and Jürgen Schaaf, bitcoin:

> "does not generate any cash flow (like real estate), interest (like bonds) or dividends (like stocks), cannot be used productively (like commodities)."

Consequently, traditional methods of valuing assets do not apply to bitcoin. The paper highlights how public figures, from BlackRock CEO Larry Fink to athlete Tom Brady, have promoted bitcoin as a continuously appreciating investment asset.

Even if bitcoin's value rises without risk of a market crash, the authors assert that latecomers and non-holders will suffer at the expense of early adopters, who may sell their coins or convert them into tangible assets, referred to as “the often-cited 'Lambo.'” Since bitcoin does not enhance the productive capacity of the economy, the authors suggest it represents a zero-sum game where gains by early adopters come at the loss of latecomers and non-holders.

The paper states:

> "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."

Thus, missing out on bitcoin results not just in lost wealth accumulation but real impoverishment when compared to a world without bitcoin. This wealth redistribution carries detrimental societal implications, threatening cohesion, stability, and democracy.

The paper also examines the current U.S. presidential candidates’ views on bitcoin. Although former President Trump has shown support, he fails to clarify how bitcoin benefits society amidst its rising value.

Current non-holders are encouraged to oppose bitcoin and to advocate for legislation that aims to curb its rise or promote its decline, emphasizing that bitcoin’s perception as an investment largely relies on the redistribution of wealth at their expense.

The paper has sparked intense backlash from the crypto community. Analyst Tuur Demeester noted that it reflects the increasing view of bitcoin as an existential threat to established financial authorities.

While the paper discusses potential central bank interventions regarding bitcoin price fluctuations, it acknowledges that interventions also come with significant drawbacks, particularly when considering the aggregate demand effects of bitcoin's value increases.