ECB's Bindseil, Schaaf: ETF approval for bitcoin – the naked emperor’s new clothes
23 February 2024
Bitcoin has failed on the promise to be a global decentralised digital currency and is still hardly used for legitimate transfers. The latest approval of an ETF doesn’t change the fact that Bitcoin is not suitable as means of payment or as an investment.
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.*
A post on The ECB Blog in November 2022 debunked the false promises of Bitcoin and warned of the social dangers if not effectively addressed.
We argued that Bitcoin has failed to fulfil its original promise to become a global decentralised digital currency. We also showed that Bitcoin's second promise to be a financial asset, the value of which would inevitably continue to rise, was equally wrong. We warned 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 (Bindseil, Schaaf and Papsdorf, 2022).
Alas, all these risks have materialised.
- Today, Bitcoin transactions are still inconvenient, slow, and costly. Outside the darknet, the hidden part of the internet used for criminal activities, it is hardly used for payments at all. The 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.
- Likewise, 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). Less financially knowledgeable retail investors are attracted by the fear of missing out, leading them to potentially lose their money.
- And 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....
© ECB - European Central Bank
