ECB: Early Bitcoin adopters will be the only beneficiaries, latecomers and non-holders may suffer serious consequences

A new paper by economists at the European Central Bank (ECB) titled “The Distributional Consequences of Bitcoin” argues that even in the event of a sustained rise in the price of Bitcoin, early adopters will be the only beneficiaries, while latecomers and non-holders will suffer severe consequences, even without a “bubble burst” scenario. The economists argue that Satoshi Nakamoto’s original vision of Bitcoin as a global payment system has largely failed, with people instead looking at Bitcoin as a growing investment asset. Economists Ulrich Bindseil and Jürgen Schaaf argue that Bitcoin “… does not generate any cash flows (like real estate), interest (like bonds) or dividends (like stocks) and cannot be used in production (like commodities). Therefore, “… most existing methods for calculating or estimating the fair value of an asset fail when applied to Bitcoin.” The paper argues that everyone from BlackRock CEO Larry Fink and Galaxy Digital founder Mike Novogratz to athlete Tom Brady, actors Gwenyth Paltrow and Ashton Kutcher, celebrities, and thought leaders do not view Bitcoin as a traditional asset, but rather as an investment asset with the potential to grow. However, even in the case of a sustained rise in Bitcoin prices without the possibility of a “bubble burst” affecting holders, late adopters and non-holders will still suffer huge losses, with early adopters either selling their Bitcoin to late adopters or cashing it out for physical assets. The paper states. Since Bitcoin does not increase the productive potential of the economy, the authors argue that it can be viewed as a zero-sum game, meaning that early adopters will only benefit at the expense of late adopters or non-holders. These harmful consequences include “…corresponding impoverishment of the rest of society, endangering cohesion, stability, and ultimately democracy,” the paper states. While the paper evaluates several ways that central banks could intervene in Bitcoin’s price behavior, it also points out the drawbacks of several proposed interventions: “In the case of Bitcoin, [central banks] might also refrain from making specific judgments and simply consider the positive impact of a sharp rise in Bitcoin prices on aggregate demand by further tightening policy, i.e., implementing a higher policy rate to return aggregate demand to non-inflationary levels.” (The Block)