For years, Ulrich Bindseil, Director General of Market Infrastructure and Payments at the European Central Bank (ECB), has published highly critical articles on Bitcoin. In his latest plea on the ECB blog, the economist claims that even the recent rally is merely a bubble created through manipulation.
At the end of November 2022, shortly after the collapse of the cryptocurrency exchange FTX, Bitcoin's price stood at $20,000 after a harsh winter. ECB Director General Bindseil felt vindicated in his long-standing criticism of the cryptocurrency. On the official ECB blog, he stated that Bitcoin was on the verge of becoming irrelevant, a prediction that had been foreseeable before the FTX debacle and the subsequent price decline. A year and a half later, a spot-based Bitcoin ETF is trading in the USA, Swiss state banks like PostFinance are offering direct trading to customers, and the price of the cryptocurrency has increased by +160.1%. However, according to Bindseil and his advisor Jürgen Schaaf, the fair value of Bitcoin remains zero, as they reiterated today on the ECB blog.
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An imminent disaster?
On January 10, the US Securities and Exchange Commission (SEC) approved spot exchange-traded funds (ETFs) for Bitcoin for the first time. In the first weeks, these products generated a record volume and gathered over $5 billion in assets under management. Nonetheless, according to the ECB Director General and his co-author, another boom-bust cycle is imminent, with massive collateral damage, including environmental damage and the ultimate redistribution of wealth at the expense of the weaker sections of society. All the risks that had been pointed out over a year ago have come to fruition, at least that's what the article claims.
- Claim: Bitcoin transactions remain cumbersome, slow, and costly. The cryptocurrency is hardly used outside of the "Darknet" - a place for illegal transactions. Regulatory initiatives have so far been unsuccessful. Fact: Only a tiny fraction (less than 0.5%) of the total Bitcoin volume is associated with illegal activities.
- Claim: Bitcoin is not suitable as an investment vehicle. The cryptocurrency does not generate any cash flow (like real estate) or dividends (like stocks), cannot be used productively (like commodities), and offers no social utility (like gold jewelry) or a subjective appreciation in value due to exceptional skills (like artworks). Fact: A cross-border, immutable currency with a clearly defined monetary policy (as opposed to the Euro's record-high inflation) creates great value for society as a whole
- Claim: Bitcoin mining continues to strain the environment with its Proof-of-Work consensus mechanism. The extent of this surpasses the energy consumption of entire countries, a situation that is likely to worsen with rising prices. Fact: Mining is becoming more environmentally friendly every year, while the process is essential for the security of a decentralized network.
Bitcoin price recovery means nothing
The authors further note in their ECB blog post that Bitcoin has significantly recovered since their last article. This is attributed to expectations of a rate cut in the US and the approval of spot Bitcoin ETFs; a potential flash in the pan. Short-term, inflows of money can have a significant impact on prices regardless of fundamental data, but in the long term, prices will return to their fundamental values. According to Bindseil, without cash flow or other returns, the fair value of an asset - in this case, Bitcoin - is zero. The use of ETFs as financial instruments wouldn't change the market value of the underlying asset.
Even if the current Bitcoin rally is fueled by temporary factors, according to the ECB Director General, he sees three structural reasons for its "apparent resilience": Ongoing price manipulation in an unregulated market without oversight and without fair value, growing demand for the "currency of crime," and inadequacies in the assessments and actions of authorities. A highly questionable analysis by two members of the European Central Bank.
Is a Bitcoin ban necessary?
The post repeatedly emphasizes that Bitcoin has no economic fundamentals. The authors see no fair value from which serious forecasts can be derived. According to them, Bitcoin remains a massive speculative bubble, while the price level is not an indicator of sustainability. The high market capitalization merely quantifies the societal harm that will ensue when the house of cards collapses. Authorities should protect "the financially less educated" from losses related to the cryptocurrency.
The European Union finalized a comprehensive framework for dealing with digital assets (MiCA) over the past few years. Last spring, the Parliament approved the proposal. For Bindseil and Schaaf, however, the regulations should be stricter. Investors should be completely patronized, as indicated by the reference to "the financially less educated." Better than strict regulation would be a ban on Bitcoin,as the authors suggest. Director General Bindseil did not immediately respond to an inquiry from CVJ.CH.
