Some people have it in for Bitcoin.

They didn’t like this upstart money when they first learned about it. The more they investigate it, the less they like how it’s challenging the fiat money monopolies, and the worse, paradoxically, their perspective becomes. And if you’re an established economist at a central bank, your obvious conflict of interest clouds your vision even more. 

In November 2022, Ulrich Bindseil and Jürgen Schaaf of the European Central Bank were fast to gloat over bitcoin’s demise. From its all-time high a year earlier, bitcoin suffered what every other asset class did as monetary conditions tightened. Add on the sector-specific blow-ups of crypto-related exchanges and hedge funds (FTX, Celsius, Three Arrows Capital etc., etc.), and bitcoin traded down 75 percent from its dollar high. Bindseil and Schaaf confidently declared that this was the end of bitcoin, its “last stand.” It was always a bubble, and now it had burst.

Two years on, they are back — not with an apology given that bitcoin hit new all-time highs earlier this year and is comfortably back at pre-FTX prices, but with a paper investigating “The Distributional Consequences of Bitcoin.”

The paper received a lot of undeserved slack over the last few days — mostly, I believe, from people reading the title, skimming the abstract, and concluding from these authors’ employer (the ECB) that it must be junk.

Junk it may be, but not for the reasons the online commentariat assumed.

Throw the First Two Sections Out the Window

The authors try — horribly and unsuccessfully — to describe what bitcoin is and does. They play word games with Satoshi Nakamoto’s early writing and redefine terms to argue over mediation in PayPal transactions(?!). They quote prominent Bitcoiners and try to connect them to America’s election campaigns. The paper is full of errors and reeks of someone who has never made a Bitcoin transaction.

With a straight face, these otherwise well-respected monetary scholars state: “Even 16 years after its inception, real Bitcoin payments, i.e. effectively ‘on chain’, are still cumbersome, slow and expensive.”

A quick look at mempool.space as I’m writing this (5 sats/vbyte, or $0.30 or so for a standard transaction) — or indeed at any point in the last few months — would have dispelled this idea. (Let alone the Lightning network which allows for convenient retail, day-to-day payments.) Neither of these value-transferring methods can be considered “slow” or “cumbersome” compared to the legacy patchwork that is fiat payments: $5-25 dollars for ACH payments? International wiring fees? Tried sending bank money over the weekend?

What the Paper is Actually About

Bindseil and Schaaf have written a good overview of the state of the economic literature for speculative bubbles. We’re also treated to a nice, two-page summary of the lean-vs-clean debate in macroprudential policy.

But that’s not their point. What they deliver is a small, easily understandable model for what happens to the distribution of real goods when an asset appreciates forever.

They begin by assuming that bitcoin is an infinitely appreciating asset without productive improvements to society, i.e., its existence and usage does not enrich the economy. Under this assumption — which they think “seems reasonable,” apparently along with “most economists” — a world running on Bitcoin does not improve economic affairs.

For serious readers who hadn’t been put off by the incorrect, level-zero-type objections in the first half of the paper, most have now stopped reading. After years of monetary mismanagement by central banks, extreme fiscal excesses, censorship/debanking efforts, and money printing that shot “inflation” to the top of consumers’ worries, dismissing a system of non-discretionary monetary policy and uncensorable, fixed-supply money as having no productive purpose whatsoever would seem an elaborate exercise in shit-testing. 

But, hinging their entire argument on this assumption, the conclusion also becomes trivial:

• If an asset increases in (real) value forever; 
• if that asset doesn’t in some way improve the productive workings of the economy; and 
• if the monetary authority leans against the wind to mitigate the additional wealth effect-fueled consumption by tightening monetary conditions (“crowding in”),

then the conclusion clearly follows: Society redistributes real goods and services from latecomers and non-holders to those who acquired the asset first. Some people get to live rich lives at the expense of everyone else.

We don’t need models, ECB affiliations, heck even a high school diploma, to grasp that. If these conditions hold for bitcoin, then all that its exchange rate appreciation amounts to is a redistribution of wealth.

Of course this assumption doesn’t hold: Bitcoin definitely has real-world, positive productivity impacts, everywhere from consumer sovereignty to electricity-grid operation to no-chargebacks to removing credit card fees and international bank transfers. An instantly settled, globally unified money that does away with the Oldest Market in the World, that constrains fiscal excesses, and all but eliminates monetary mismanagement?

If I slammed my eyes shut, I, too, wouldn’t be able to see how any of that could have positive productive impacts on the world economy.

More, the logic of this toy model is a little suspect: how, for instance, could (or would) an asset increase in value forever without productive improvements to the way we do things? Latecomers and non-holders transfer economic value by voluntarily buying the asset or taking the asset in payment, thus epistemologically must see some virtue in it — monetary services, at the very least.

What this has to do with bitcoin specifically is a mystery. The authors are explicitly violating what I’ve called rule #4 of how not to attack bitcoin (“make sure that the property of Bitcoin that you’re attacking isn’t worse in the legacy system”). If a central banker believes that bitcoin is bad because its appreciation redistributes from those who don’t yet own it to those who do — without somehow productively enriching the rest of us — the fiat monetary system already does that on a trillion-dollar basis.

Example: the dysfunctional housing markets in most Western countries. A combination of social trends, money printing, tax treatments of debts, and falling mortgage interest rates, has turned real estate into most households’ savings accounts. Yet, housing does not — to quote a sentence from Bindseil and Schaaf on bitcoin — “increase the productive potential of the economy, the consequences of the assumed continued increase in value are essentially redistributive.”

Those who got cheap loans to get on the ever-inflating housing market early received a wealth benefit paid for by those who arrive later. To the extent that infinitely elastic monetary regimes and a growing world population can keep that expanding monetary premium going, we’re in the same position now that the authors direly warn would be the case under their hypothesized version of a bitcoin standard.

If, as it seems the authors are implying, the bitcoin constellation of ever-appreciating real value is morally unfair — “problematic from a social perspective” — they should be making moral arguments instead of economic ones. Even under the unfitting assumptions about bitcoin’s role in the current and future financial system, it’s hard to see where the “problem” is.

What Bindseil and Schaaf fail to include in their analysis is that the status quo isn’t value neutral nor, by any stretch of the imagination, ideal. It’s unfortunate that they overlook the more interesting (accurate, real?) case where bitcoin does have productive implications for the economy.

I understand that it would be hard for two central bank researchers — bought and paid for by the money printer, if you wish — to see past the magnificence of that horrid creation. 

If something appreciates in value without making the rest of us better off, society “hands over” real goods and services to their owners. This is trivial. But if the thing does make the functioning of our economies better, the early birds benefit the same way early investors in anything do. 

That’s a good thing, and at some level how (financial) market economies should function.