We examine the redistributive effects of Bitcoin in a theoretical scenario where its price continuously appreciates. Early adopters benefit from rising consumption and asset accumulation at the expense of later investors, who fund Bitcoin purchases by liquidating real assets and reducing their consumption. The analysis reveals that even in the absence of a crash, Bitcoin causes wealth redistribution that enriches early investors while reducing the real wealth and purchasing power of non-holders and latecomers. This dynamic, if unaddressed, risks eroding societal cohesion. Amid a record high market capitalization of USD 1.8 trillion following the 2024 election in the USA, this risk is higher than ever.

1. Introduction
The debate over Bitcoin’s utility and sustainability dates back to Nakamoto’s 2008 white paper. Many economists see Bitcoin as a speculative bubble that will eventually burst, causing social damage through high energy use and illicit payments (Rogoff 2017, Roubini 2018, Avoca 2021, Taleb 2021). Many Bitcoin supporters, however, have changed their primary interest in Bitcoin as they see it as an investment asset with the potential for everlasting capital gains, encouraging even latecomers to invest and assuming no harm to those staying out.

Our paper explores both Bitcoin’s original promise as a payment system and its current role as an investment asset. We argue that Nakamoto's (2008) understanding of retail payments was inaccurate and that this explains why Bitcoin has never been significantly used in legal e-commerce. Likewise, Bitcoin lacks the traits of financial assets: It does not generate any cash flow like real estate, interest like bonds or dividends like stocks, and it cannot be used productively like commodities (Bindseil, Papsdorf and Schaaf 2022). 

In fact, many supporters now dispense with any reference to economic justifications as to why the Bitcoin price should rise or reach a specific level. They simply take further price increases for granted and promote the idea of Bitcoin as a pure investment asset. The list of those in favour of this financial situation without “reason” ranges from politicians and financial giants to sportsmen and Hollywood stars (Hoffman 2024, Bent 2024, Coindesk 2021, Gerard 2024, Bitfinex 2024, CNN 2024).

We therefore conclude that Bitcoin’s appeal is based on self-fulfilling beliefs in its rising value, fuelled by new investments (van Oordt 2024), but not supported by economic fundamentals or legal social utility, which also implies that Bitcoin has no impact on the economy's production potential. This means that the wealth gained by early adopters comes at the expense of latecomers. It’s like filling a big barrel by draining water from many buckets.

2. Technology shocks, the increase of the production potential and wealth effects
New technologies are key to economic growth and social welfare. The rapid rise in market capitalization of tech companies (Google, Tesla, Amazon, Apple, Nvidia) is seen as reflecting both the future production potential of the economy and their expected profitability. An aligned increase of equity wealth and production potential allows the wealth effect on consumption to be matched with a greater supply of goods and services without inflation.

There are however cases without such a match. Increased competition from technology can reduce equity market cap despite higher production potential, and some firms may see equity values rise sharply from breakthrough technologies long before the economy benefits. Sometimes, expectations are wrong, leading to a tech equity bubble burst. Phenomena like Bitcoin, which don't enhance the production potential at all, may still aim for high market caps. In these cases, the neutral level of nominal interest rates and therefore monetary policy are likely affected. Tightening might become necessary when wealth effects outpace production growth, as with Bitcoin. If the central bank optimally tightens policy, it can prevent wealth-effect driven inflation and macroeconomic instability. In our simulation of Bitcoin’s redistributive effects, we assume the central bank successfully manages this. We also simplify by assuming a steady rise in Bitcoin prices and corresponding policy responses, ignoring short-term shifts between consumption and real investment.      

3. The mechanics of redistribution
We examine the redistributive effects of Bitcoin in a theoretical, Bitcoin-friendly scenario, in which the price of Bitcoin rises continuously and no “bubble burst” occurs. Since investing in Bitcoin doesn’t boost production, this consumption crowds out other spending or investment, potentially harming non-Bitcoin holders. Early investors, or ”Early Birds”, increase their consumption by selling Bitcoin to “Latecomers” - in our simplified model, society consists only of these two types. Early Birds sell Bitcoin to Latecomers, who fund these purchases by liquidating real assets and reducing their consumption. This transfer raises Early Birds’ consumption and wealth over time. We illustrate the simple model with specific parameter values, assuming for example 10% annual appreciation and 2% of Bitcoin being transferred each year, with one-half of this being financed by Latecomers’ reduced consumption and the other half by the transfer of real asset wealth.

Under the assumption of unchanged investments, early adopters increase their real wealth and consumption at the expense of the real wealth and consumption of goods and services of those who invest in it only at a later stage.
Initially, Early Birds dominated both Bitcoin and real assets, but over time, Latecomers’ share of Bitcoin increased, although Early Birds still hold more real assets. The simulations show that while Bitcoin ownership eventually converges, Early Birds maintain higher consumption due to their asset accumulation.

Overall, even if Bitcoin prices were to continue to rise, wealth gains for early adopters come entirely at the expense of latecomers, leading to significant redistribution. Early holders’ wealth and consumption grow, while others become poorer. When Bitcoin converges to an equal distribution across the population, further price increases become neutral in every respect. Unsurprisingly, in the absence of positive effects on the production potential, proportionally distributed Bitcoin wealth increases cannot lead to an expansion of consumption.

On the way to this state, the Lamborghini, Rolex, villa, and additional equity portfolio bought by early Bitcoin investors are financed by diminishing consumption and real wealth losses of those who initially do not hold Bitcoin, but only jump later the bandwagon.

This means that Bitcoin’s redistribution effects go beyond the implications of good or bad timing of purchases and sales by investors amid a volatile price, or the risk of financial losses in case the Bitcoin bubble would eventually burst as predicted by many (e.g. Krugman 2013, Rogoff 2017, Roubini 2018).

This redistribution bears the risk of destabilizing society. Latecomers, even if unable to pinpoint the cause ^[1], will feel frustration as their purchasing power erodes. It is important that current non-holders recognize that Bitcoin’s rise is driven by wealth redistribution at their expense, posing a threat to societal cohesion.

4. Bitcoin and the US election
In the US, the crypto industry is celebrating itself as the real winner of the presidential election, as the new administration promises a more crypto-friendly policy.     

According to Strobel (2024), FairShake, the industry's largest super political action committee (PAC),   won 48 out of 48 races in which it supported a candidate (with Fairshake supporting crypto-friendly candidates regardless their political camps). Interestingly, many of the ads didn't even mention crypto, technology or tech regulation. Rather, they were aimed at discrediting supposedly crypto-critical candidates (White 2024). 

No wonder markets are euphorically bullish in anticipation of rosy times: Since the US presidential election on 5 November, the Bitcoin price has risen by over 30% from USD 68,000 to above USD 90,000. What looks like good news for investors at first glance is a bleak outlook for social fairness and ultimately cohesion.  With a market capitalization of Bitcoin having grown to above USD 1.8 trillion (as of 18 November 2024), the economic interests to continue the bull run and the financial fire power of the industry to spread the narrative of Bitcoin as an ideal investment asset are higher than ever before.     

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Authors’ note: The views expressed in this column are the ones of the authors and not necessarily the ones of the ECB. We would like to thank Klaus Adam, Charles-Enguerrand Coste, Troy Cross, Kelvin Low, Omid Malekan, George Pantelopoulos, Dirk Schumacher, Bob Seeman, Oreste Tristani, Mika Tujula, Anton van der Kraaij,for useful comments. All remaining errors are ours.
This blog post is an abridged summary of a full article, available here.

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About the Authors

Ulrich Bindseil is Director General of Market Infrastructure and Payments (DG-MIP) at the European Central Bank. 
Mr Bindseil started working in the field of central banking in 1994 in the Economics Department of the Deutsche Bundesbank. He worked as an economist at the European Monetary Institute as of 1997 and was later on responsible for the Directorate General Market Operations at the ECB. Mr Bindseil received a PhD in economics at the University of Saarbrücken.

Jürgen Schaaf is advisor to the Senior Management of the Market Infrastructure and payments business area of the ECB.
In previous occupations he was Counsellor to the Executive Board of the ECB, Personal Adviser to the Governor of Banque centrale du Luxembourg (BCL), worked as ECB watcher at Börsen-Zeitung and as a Senior Economist at Deutsche Bank. He studied Economics in Marburg and Canterbury (Kent, UK), and received his PhD in Economics from the University of Marburg.

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References

Avoca (2021), “Bitcoin: a trojan horse”, 14 October 2024.

Bent, M (2024), “Pensions are doomed without Bitcoin”, Marty’s Bent, 19 March 2024.

Bindseil, U, P Papsdorf and J Schaaf (2022), “Bitcoin – the encrypted threat”, SUERF policy note, issue 262, 7 January 2024.

Bitfinex (2024), “Where do US Presidential Candidates Stand on Crypto Policy?“.

Chernoff, A and J Jagtiani (2024), “Beneath the Crypto Currents - The Hidden Effect of Crypto “Whales””, Federal Reserve Bank of Philadelphia, Working Paper 24-14, August 2024.

CNN (2024), “RFK Jr. suspends presidential campaign and endorses Trump”, 23 August 2024.

Coindesk (2021), “Tom Brady Says He’s a ‘Big Believer’”, Crypto, 28 May 2024.

Gerard, D (2024), “Trump’s Crypto Turnaround Heralds an Economic Nightmare - The former president is pitching a new grift”, Foreign Policy, 30 July 2024.

Hoffman, N (2024), “BlackRock CEO Larry Fink says Bitcoin ‘Is An Asset Class That Protects You’”, Bitcoin Magazine, 12 January 2024.

Krugman, P (2013), “Bitcoin Is Evil.”, The New York Times, 28 December 2024.

Nakamoto, Satoshi (2008), “Bitcoin: A peer-to-peer electronic cash system”.

Rogoff, K (2017), “Bitcoin’s Price Bubble Will Burst under Government Pressure””, The Guardian, 9 October 2024.

Roubini, N (2018), “Crypto is the Mother of All Scams and (Now Busted) Bubbles”; Testimony for the Hearing of the US Senate Committee on Banking, Housing and Community Affairs On “Exploring the Cryptocurrency and Blockchain Ecosystem”; October 2024.

Strobel, Aubrey, “The many ways crypto won in this election”, CoinDesk, 15 November 2024. , 

Taleb, N (2021), “Bitcoin, currencies, and fragility”, 22 July 2024.

van Oordt, M R C (2024), “On Bubbles in Cryptocurrency Prices”, 1 August 2024. 

White, M (2024), “Cryptocurrency companies have raised over $135 million to influence US elections this cycle, and they’re just getting started, Citation Needed, Newsletter, 30 May 2024. 

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^[1] Indeed, recent research confirms that cryptocurrency markets are often characterized by market manipulation or, at the very least, by a sharp distinction between large and sophisticated investors and small retail investors (Chernoff and Jagtiani 2024).