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Bitcoin's potential and risks have been hotly debated since its emergence 15 years ago. While proponents see it as the future of money, replacing traditional currencies, others view it as a speculative bubble with no intrinsic value. The recent approval of a bitcoin exchange-traded fund (ETF) by the US Securities and Exchange Commission (SEC) reignited this discussion.
In a blog post, the European Central Bank (ECB) - the central bank responsible for the euro and monetary policy in the euro area - has weighed in critically on the ETF approval. The ECB argues bitcoin has failed to deliver on its promises due to a lack of real-world usage and price volatility. With no underlying cash flows, the fair value of a bitcoin is "zero."
ZERO!? I just wrote an essay about how it costs over $20 billion to attack the Bitcoin network. That doesn't seem like something that is worth nothing to me. But I digress...
While the ECB raises valid concerns, its stance ignores positive counterarguments. Bitcoin is still in early stages and addressing challenges like price stability takes time. Major companies are increasingly adopting bitcoin on their balance sheets, signalling growing acceptance from large investors. The ECB also overlooks regulation improving bitcoin's transparency.
This essay aims to have an informed counter argument on bitcoin's risks and potential. Both perspectives will be considered through exploring the claims and counterclaims around bitcoin's value, price drivers, regulation hurdles and more. The goal is to cut through hype and provide a balanced analysis to help readers make up their own minds on this complex issue.
The ECB takes a dim view of bitcoin's potential in its blog post. It argues bitcoin has failed to become a widely-used means of payment, and without real-world usage, its fair price is zero. While it's true that 'payments' remain challenging, bitcoin proponents see it less as a payments network and more as a store of value.
The ECB dismisses bitcoin's price rises as purely speculative bubbles with no relation to economic fundamentals. However, I would argue early-stage technologies like the internet also experienced volatility before finding stability. Bitcoin's price swings have have slowed dramatically from its wild early days. With continued development and more mainstream adoption, it could potentially become a stable asset class over the long run.
The ECB also downplays factors like lower interest rates and the SEC's ETF approval fuelling bitcoin's recent rally. Yet major companies adding bitcoin to their balance sheets before an ETF was even approved, like Tesla and MicroStrategy, show growing institutional interest. This suggests new investors see bitcoin not just as a speculative fad, but a legitimate investment worth holding for the foreseeable future.
While the ECB raises valid concerns, in some areas its critique overlooks positive counterarguments and alternatives. Frankly, dismissing new technologies entirely based on current limitations may hinder progress. A more open-minded, evidence-based approach is needed to have a constructive debate on bitcoin's evolving role. Personally, I think the ECB sees Bitcoin and Crypto as an existential threat to its control of the economy and therefore has a vested interest in poisoning the well.
The ECB highlights bitcoin's history of price manipulation and dubious trading volumes as an ongoing risk. While some past exchanges lacked oversight(We all know about FTX), regulation is improving transparency at major players.
The ECB cites a report that over 50% of daily bitcoin volume may be fake, according to one analysis of crypto exchanges. However, the study's methodology is not clear and largely focused on small, unregulated exchanges. Large regulated exchanges have strengthened anti-money laundering checks like ID verification that don't apply to unregulated exchanges. It would be very difficult to argue that trading volumes on Coinbase or Kraken aren't legitimate for example.
Bitcoin transactions are also transparently recorded on its public blockchain, unlike opaque traditional markets. This open ledger makes manipulation more difficult versus hidden activities in traditional markets. Of course, decentralized networks are still vulnerable to bad actors, but increased adoption and oversight aid deterrence over time.
I don't think I need to remind readers that the vast majority of all financial fraud is committed by the very institutions that the ECB and other central banks partner with. Just google banking fines and you'll see what I mean.
Rather than dismissal, the ECB could acknowledge regulatory progress while still calling for continued improvements. New technologies may take time to reach maturity, and an open dialogue on challenges and solutions is more constructive than blanket criticism.
The ECB warns of bitcoin's role in enabling illicit finance like money laundering and terrorism. While a real risk, physical cash remains the primary tool for crime according to other analyses. The ECB also overlooks technological advances improving bitcoin's ability for fast, low-cost payments.
Bitcoin transactions can indeed offer users some anonymity, but the ECB neglects that each transaction is permanently recorded on its public ledger. This allows illicit funds to be traced more easily than with cash. As regulation strengthens, the ability to use bitcoin for criminal ends may decline further over time.
New layer-two technologies on bitcoin are coming and will allow microtransactions far cheaper and faster than legacy systems. This enhances bitcoin's capability as an everyday payment rail, reducing costs that have impeded broader usage. The ECB dismisses such pro-privacy and scaling innovations without consideration.
The ECB expresses alarm over bitcoin's large energy use, yet often overlooks nuances. While bitcoin's electricity consumption is substantial, it can be argued that it incentivises usage of and investment into renewable sources in mining hubs like Iceland. As more transactions are processed, the energy required per transaction also decreases with scaling.
El Salvador has unveiled ambitious plans to power bitcoin mining operations using energy harnessed from a volcano. The Central American country became the first nation to adopt bitcoin as legal tender in September 2021. Its president Nayib Bukele aims to build a Bitcoin City at the base of the Conchagua volcano, which will obtain 100% of its power from geothermal energy to mine bitcoin.
All that being said, I agree with the ECB about Bitcoin being environmentally & energetically inefficient. It's one of the reasons I'm much more interested in Ethereum because it completely sidesteps this issue with its Proof-of-Stake consensus mechanism.
Rather than condemnation, the ECB could acknowledge the renewable focus of much bitcoin mining. It may also recognize energy efficiency is improving through technological progress. Of course, environmental sustainability must be an ongoing priority as bitcoin expands. But banning technologies tends to push activities underground, so open discussion on mitigation strategies is preferable to inaction or prohibition.
If you've read this far, I thank you.
Gryphonboy
789
This was a great article!
Thank you 😊👍