Economists at the European Central Bank (ECB) believe that Bitcoin’s continued rise in value will drastically affect wealth distribution, but not in a good way for most people.
In their paper, titled “The distributional consequences of Bitcoin,” the economists claim that early Bitcoin adopters will be the primary beneficiaries, while latecomers and non-holders will face the brunt of the consequences.
It doesn’t matter if the so-called “Bitcoin bubble” bursts or not. Even without a price crash, this asset is pushing wealth in one direction — up, toward the early birds.
Bitcoin, built as a revolutionary decentralized currency for peer-to-peer payments, is unfortunately treated as an investment, which works in favor of those who got in early.
With no real economic value attached to it, Bitcoin’s surge is purely a result of collective belief and constant fresh investments.
The ECB economists argue that even though the value could continue to rise, the benefits will not be distributed evenly.
Instead, it will make economic inequalities worse, creating a divide between those who capitalized early and everyone else.
Bitcoin’s changing role in the global economy
The idea that Bitcoin would transform payment systems hasn’t materialized. Well except for illicit transactions, according to the ECB.
Instead, Bitcoin’s value became based on the belief that its price will keep increasing. Economists at the ECB explain that the price rise is driven by new investments, and this has caused BTC to transition from a payment system to a speculative investment.
It’s no longer about Nakamoto’s vision of using Bitcoin for everyday transactions. Now it’s all about making a quick profit. For retailers, institutions, and governments alike.
According to the paper, this situation is incredibly problematic. Bitcoin doesn’t contribute to the production potential of the economy, and economists are skeptical of its long-term sustainability.
Societies can sustain these belief-based asset bubbles for extended periods. This speculative approach to Bitcoin could have some huge social consequences.
If Bitcoin reaches a valuation of $1 million per coin, as some predict, its total market cap could hit $20 trillion.
Former presidential candidate Robert Kennedy Jr. even sees a future Bitcoin market cap of hundreds of trillions of dollars, implying a Bitcoin price of at least $10 million.
For context, the total global equity valuation at the end of 2023 was $111 trillion. That’s a number that includes the market value of every publicly traded company worldwide.
As of August, gold’s total market value was roughly $12.2 trillion. So when people talk about Bitcoin reaching astronomical prices, they’re essentially predicting a market value beyond gold and global equity combined. How crazy is that?
Consumption effects favor early Bitcoin owners
With Bitcoin wealth concentrated in the hands of early adopters, consumption patterns shift in their favor. The ECB economists explain that Bitcoin holders benefit from rising prices, which increases their wealth.Â
They consume more, but because Bitcoin doesn’t add to the economy’s production, this increased consumption comes at the expense of others.
Specifically, the economists believe that this extra consumption could lead to reduced consumption for the rest of society.
Bitcoin’s wealth effect on early holders comes from the ability to sell Bitcoin to latecomers, who fund their purchases by either reducing their own consumption or liquidating other assets.
It’s a cycle where early adopters benefit from selling to new investors, while new investors are left holding a less advantageous position.
Essentially, the wealth redistribution occurs when latecomers sacrifice to participate in the Bitcoin market, selling off their own assets and cutting back on their spending to buy into the dream.
The paper makes clear that while Bitcoin supporters see the potential for massive gains, these gains are likely to come at the expense of non-holders and latecomers.
As prices continue to rise, the crowding out effect becomes more apparent—investors buying Bitcoin are siphoning wealth from other areas of the economy.
The economists assume a scenario where latecomers buy Bitcoin by reducing consumption and selling real assets, while early birds accumulate those real assets, increasing their wealth over and over.Â
The economists go on to explain that Bitcoin’s rise doesn’t boost the overall economy, but instead takes from one group and gives to another. Even if the price stabilizes, the early Bitcoin adopters have already cashed in on the lion’s share of the wealth.
Bitcoin’s zero-sum game
Interestingly, the economists point out that Bitcoin’s wealth effect is much higher than that of traditional equity investments.
Some research shows that crypto holders, compared to equity holders, have a higher marginal propensity to consume (MPC). This means they spend more out of their crypto wealth than they would from equity gains.
At its core, Bitcoin creates a zero-sum game in wealth distribution. The ECB economists describe a scenario where Bitcoin’s wealth effects don’t add to the economy’s productive capacity, which means that gains made by Bitcoin holders are directly offset by losses suffered by non-holders.
When Bitcoin’s wealth reaches a point where it’s evenly distributed, it will no longer create fresh distributional effects.
But by then, early adopters will have already enjoyed years of higher consumption and asset accumulation. Latecomers will still be playing catch-up.
The ECB economists also touch on Bitcoin’s effect on other markets, particularly real estate. Crypto wealth has been linked to rising house prices, especially in areas with high crypto exposure.
When Bitcoin holders cash out, they often invest in housing, driving up demand and prices. This creates yet another issue for non-holders, as rising house prices make it harder for them to afford homes.
The housing market, much like the wealth market, becomes another battleground for redistribution. In some regions, growth in crypto wealth has been directly correlated with higher house prices, creating a cycle where Bitcoin wealth inflates other asset prices.
