ECB Slams Bitcoin, A Year After Proclaiming Its Death

The ECB's authors have shut the stable door, hoping to confine a horse that is already disappearing over their horizon.

Is the ECB reduced to hand-wringing on the sidelines?

The European Central Bank has published a blog post stating that Bitcoin has failed, despite the much-hyped launch of the spot ETFs.

The blog, titled "ETF approval for bitcoin – the naked emperor’s new clothes", warns that the renewed rally is not the success that Bitcoin "disciples" think it is, and will instead have a series of harmful consequences.

On 10 January, the US Securities and Exchange Commission (SEC) approved spot exchange-traded funds (ETFs) for Bitcoin. For disciples, the formal 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. 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.

Bitcoin's "Last Stand"

Interestingly, the writers (Ulrich Bindseil and Jürgen Schaaf) reference a previous blog post they wrote in November 2022, titled "Bitcoin's Last Stand", when bitcoin was trading a little above its cycle low, around $20,000. This was, they claimed, "an artificially induced last gasp before the road to irrelevance".

Their prediction was wrong, of course. However, they claim they were correct in their description of Bitcoin's shortcomings, and in their concerns, which include:

  • Bitcoin's failure as a currency
  • Its failure as a financial asset of ever-rising value
  • The risks to society and the environment
  • Its slow speed, high cost, and inconvenience
  • Its use as a darkweb currency
  • Its lack of cashflow or other utility
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The Dead Cat Bounces?

The authors blame anticipation of lower interest rates and the approval of spot ETFs for the dramatic turnaround, warning that nothing has fundamentally changed.

Still, this could turn out to be a flash in the pan. 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 (Gabaix and Koijen, 2022). 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.

They also mention the irony of a decentralized asset requiring centralized and conventional intermediaries to bring it to a wider audience, and criticize the prevailing halving narrative (priced in, they believe). Energy consumption looms large in their critique, despite the fact that detailed research suggests Bitcoin is one of the cleanest industries on the planet, and is even driving renewable usage.

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Bindseil and Schaaf state three reasons for bitcoin's apparent resilience:

  • Price manipulation
  • Demand for a "currency of crime"
  • Shortcomings in the authorities’ approach to crypto

Recent analysis shows that crime accounts for only a tiny percentage of crypto transactions. Price manipulation, meanwhile, is a key issue that was specifically addressed through the legal process between the authorities and crypto product providers before the ETF launch.

Banning Bitcoin

The writers' implicit recommendation is a total ban on Bitcoin, enforced by pursuing key network stakeholders.

The Bitcoin network has a governance structure in which roles are assigned to identified individuals. Authorities could decide that these should be prosecuted in view of the large scale of illegal payments using Bitcoin. Decentralised finance can be regulated as forcefully as the legislator considers necessary.

Price does not reflect success, they say. "The 'market' capitalisation quantifies the overall social damage that will occur when the house of cards collapses" (a sentiment many Bitcoiners would apply to the collapse of the fiat world).

The whole article, quite aside from the inaccuracies, has the air of shutting the stable door after the horse has bolted. Bitcoin has a global, decentralized network. Regulators have made their decisions. ETFs have been approved.

The dam has been breached. Hand-wringing isn't going to work. And the value of euros is still trending in the opposite direction to that of bitcoin.

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