Bitcoin’s last gasp?
This week, the ECB has been vocal in sharing its prognosis for the future of bitcoin. In addition to this blog post, it also posted a tweet articulating its thoughts in no uncertain terms:
“The apparent stabilisation of bitcoin’s value is likely to be an artificially induced last gasp before the crypto-asset embarks on a road to irrelevance.”
Despite being on the slightly more skeptical end of the spectrum when it comes to crypto, I think this is incredibly naive of the ECB. And I want to explain why.
A flawed argument
Their arguments around lack of utility, prevalence of fraud, no cashflows etc are all true. But, despite all those facts, it’s fully possible to expect a non-zero $ value for bitcoin that can persist for many years to come. The key actually lies in one of the lines from the blog:
“It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore based purely on speculation.”
The flaw in the ECB’s argument is that the “social benefits” attributed to gold are exactly the same as what bitcoin could have.
Always believe in… gold
Gold has some marginal industrial utility, with some estimates suggesting 11% of gold production is used for practical industrial uses. But, by far the most dominant uses are jewelry (50%) and central bank holdings and investment (36%).
Both of those uses rely on the same thing that bitcoin for now relies on – belief.
How and why gold was chosen over other materials is important:
It doesn’t rust
It doesn’t disintegrate over time
It doesn’t burn
It can be combined and divided almost endlessly into different sizes (unlike a diamond)
It was first used by the ancient Egyptians as a currency in 1,500 BCE. Since then, for the past 3,500 years, people have believed in it “because others have.” Other metals have some of the characteristics above, but in the collective consciousness, gold got there first. And ever since, it has been the “gold standard.”
First-mover advantage
Prior to bitcoin, there was no equivalent digital commodity. All other digital instruments are either central bank issued fiat currency (that needed to be held at a bank) or financial securities (stocks, bonds, derivatives etc that need to be held with a broker/custodian).
Bitcoin was the first digital instrument that was permanent, infinitely divisible, electronically transferable, and didn’t require a bank or other intermediary.
Since the introduction of bitcoin, plenty of other cryptocurrencies have been created that combine all of bitcoin’s characteristics (infinite divisibility, non-custodial, scarcity, etc). But that doesn’t matter. Bitcoin was first, and so has captured humanity’s collective imagination. That is enough for it to have some value (as long as we have electricity and the internet).
Bitcoin’s appeal
A few keen observers on Twitter have pointed out that the authors of the blog post have been heavily involved in the ECB’s CBDC (Central Bank Digital Currency) initiatives, and are likely biased in their opinion of bitcoin.
But while the merits of a CBDC can be endlessly debated (in both a retail and wholesale context), bitcoin’s appeal lies in the fact that it sits outside the purview of the world of central banks, in the same way that gold does.
Difficult to value
Gold isn’t a perfect inflation hedge (its price actually peaked in April 2022 and has gone down ever since, despite inflation running hot), and neither is bitcoin. Warren Buffett finds gold incredibly difficult to value, famously saying:
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
While that’s all true, Gold doesn’t trade at $0. It might be impossible to predict whether it will go up or down, but its value is definitely non-zero.
Similarly, bitcoin might seem endlessly “useless” to technocrats and academic economists (at least the non behavioural economists). But, I don’t think it’s going down to $0 anytime soon.
