In their recent blog post, European Central Bank advisors have likened the U.S. Securities and Exchange Commission’s approval of spot Bitcoin exchange-traded funds (ETFs) in January to “the naked emperor’s new clothes.” Ulrich Bindseil, the ECB’s Director General for Market Infrastructure and Payments, and Advisor Jürgen Schaaf, expressed criticism towards Bitcoin, emphasizing its inadequacy as both an investment vehicle and a method of payment. They elaborated on the limitations and risks associated with Bitcoin, highlighting concerns that challenge its viability in traditional financial systems.
ECB Advisors Challenge Bitcoin’s Validity
Contrary to the widespread perception that the approval of Bitcoin ETFs in January marked a significant validation for the cryptocurrency and signaled its imminent success, Bindseil and Schaaf hold a dissenting view. In their analysis, outlined in a recent ECB post, they challenge the notion that the ETF approval confirms Bitcoin’s safety and point to the subsequent price surge as evidence of its triumph in the eyes of its proponents.
However, the two advisors contend that Bitcoin’s intrinsic value is fundamentally zero. They express apprehension regarding the possibility of another boom-bust cycle for the asset, characterizing it as a bleak prospect with potentially far-reaching negative consequences, including environmental degradation and wealth redistribution that disproportionately affects the less informed.
Furthermore, Bindseil and Schaaf underscore the practical limitations of Bitcoin as a medium of exchange. They note that Bitcoin transactions remain slow, cumbersome, and costly, with minimal real-world usage beyond illicit activities on the dark net. Despite El Salvador’s decision to grant Bitcoin legal tender status, the cryptocurrency has failed to gain traction as a viable means of payment.
The advisors also critique regulatory efforts aimed at curbing Bitcoin’s illicit use, citing their ineffectiveness. They highlight instances of price manipulation in the cryptocurrency market and emphasize the environmental impact of Bitcoin mining, which relies on an energy-intensive proof-of-work consensus mechanism, contributing to pollution on a scale comparable to entire nations.
Moreover, Bindseil and Schaaf argue that Bitcoin lacks the characteristics of a suitable investment. Unlike commodities, they argue, Bitcoin lacks inherent utility and fails to generate cash flow or provide social benefit. They express concern that retail investors, particularly those less financially savvy, may be lured into Bitcoin investments by the fear of missing out, exposing them to the risk of significant financial losses.
ECB’s ‘Last Gasp’ Critique
The most recent critique from the ECB builds on a blog post from November 2022, which suggested that Bitcoin was nearing its “last gasp” before fading into irrelevance. This assessment coincided with a market downturn triggered by the collapse of the FTX crypto exchange.
In the aforementioned post, the ECB refuted the notion that Bitcoin was a resilient financial asset destined for prolonged growth. However, it’s worth noting that Bitcoin had already reached its bear market low of $16,000 a week before the blog was published. Since then, it has experienced a robust resurgence, soaring by 225% to reach $51,930.
Regarding the significant rebound observed in Bitcoin, ECB advisors offered insights into several contributing factors. These include the anticipation of a potential shift in U.S. Federal Reserve interest rate policy, the upcoming Bitcoin halving event scheduled for April, wherein the block reward for miners is halved, and the recent introduction of spot ETFs, which have served as catalysts propelling the cryptocurrency’s surge.
