As a Greek-American, I’ve been paying attention to the European Central Bank (ECB) for too long.
Imagine the scene: There’s a teenager on the way to soccer practice absolutely in shambles because he just learned that Goldman Sachs brokered a cross-currency swap for Greece so that the latter could gain admission into the eurozone. The teenager then systematically loses his mind after each austerity package is announced in the following months and years.
That teenager was me.
Next, imagine that now-adult person, who writes about bitcoin for a living, reading a ECB blog post with the title: “Bitcoin’s last stand.”
The kid can’t catch a break. But no need to imagine because this actually happened last Wednesday. It’s critical to level-set that the published article doesn’t represent an official position of the ECB. It’s just a blog post on the ECB’s official website. But because it’s on the ECB’s official website it is flying under a banner of authority. As such, it is worth parsing through the main points brought up in the post.
The post starts with an unsubstantiated (which was never substantiated later) point that bitcoin’s current price action is “an artificially induced last gasp before the road to irrelevance.” But what can be asserted without evidence can also be dismissed without evidence. So, let’s dismiss this point.
The next section in the ECB post is titled: “Bitcoin is rarely used for legal transactions.” Unfortunately, the body of the section doesn’t prove this point specifically (a shame, really, because it isn’t true) and instead focuses on how bitcoin’s value is based solely on speculation because a) it has no cash flow (like real estate), dividends (like equities), productivity (like commodities) or social benefits (like gold) and b) VCs are propping it up with $17.9 billion of investment in blockchain and crypto.
On a), not all real estate generates cash flow, Google has never paid a dividend, people use bitcoin so it is productive and there are clear social benefits to bitcoin. On b), the idea that $17.9 billion of VC investment in blockchain and crypto is enough to sustain $300 billion of value to bitcoin is frankly absurd, but I’ll concede that point because VCs do have vaunted reputations, so their involvement might, in fact, be propping up some of bitcoin’s market value.
Point is, there’s more than just speculation giving bitcoin value, even if speculation is part of it.
The last two sections in the ECB post are about how regulation can be misunderstood as approval, complete with a tired jab about Bitcoin energy pollution, and how promoting bitcoin bears a reputational risk for banks.
On the former point about regulation, I agree. Regulation could be misunderstood as approval, and regulation has prompted “the conventional financial industry to make it easier for customers to access bitcoin.” And yes, maybe this ease has suggested to small investors that bitcoin is a sound investment even if some other investors don’t think so. But that’s exactly how markets work: Some people think something is worth buying and some people think something is worth selling. Just because you think something is worth selling doesn’t mean that it isn’t worth buying.
As for the authors noting that the “Bitcoin system is an unprecedented polluter,” I will point you to some of the many articles and reports about this in particular (here, here, here and here). But just for the sake of a semantic argument (which are bad arguments), the energy sector is really the only “unprecedented polluter” given it’s the biggest.
On the latter, banks have enough reputational risk on their own. Two examples:
HSBC was fined $1.9 billion in 2012 for laundering money for drug cartels (by the way, HSBC still exists)
Wells Fargo was fined $3 billion in 2020 for fraudulent sales practices including opening accounts for people without their knowledge (by the way, Wells Fargo still exists)
Sure, this doesn’t mean there might not be reputational risk for banks associated with promoting bitcoin, but surely there’s a reputational merit outweighing this risk if bitcoin works out and customers make money.
In summary, I think this blog post is just that: a short blog post that isn’t meant to represent anything definitive. I look forward to a more thoughtful, wholesome report on bitcoin’s march to irrelevance by the ECB in the future.
