The distributional consequences of Bitcoin

Ulrich Bindseil, Jürgen Schaaf 1

This version: 12 October 2024

Abstract:

The original promise of Nakamoto (2008) to provide the world with a better global means of payment
has not materialized. Instead, the focus has increasingly shifted to Bitcoin as an investment asset
promising high capital gains. Promoters of this investment vision put little effort relating Bitcoin to an
economic function which would justify its valuation. While most economists argue that the Bitcoin
boom is a speculative bubble that will eventually burst, we analyse in this paper the impact of a
Bitcoin-positive scenario in which its price continues to rise in the foreseeable future. What sounds
intuitively promising or at least not harmful is problematic: Since Bitcoin does not increase the
productive potential of the economy, the consequences of the assumed continued increase in value
are essentially redistributive, i.e. the wealth effects on consumption of early Bitcoin holders can only
come at the expense of consumption of the rest of society. If the price of Bitcoin rises for good, the
existence of Bitcoin impoverishes both non-holders and latecomers. While previous discussions on the
redistributive effects of Bitcoin assumed that badly timed trading was a necessary condition for losses,
this paper shows that neither poor timing of trades nor holding Bitcoin at all are necessary for
impoverishment under a Bitcoin-positive scenario.

JEL classification: E21; E25; E53; G12

Key-words: Bitcoin; asset price bubble; wealth effect on consumption; redistribution

1
Views expressed in this paper are the ones of the authors and not necessarily the ones of the ECB. We would
like to thank Klaus Adam, Charles-Enguerrand Coste, Kelvin Low, George Pantelopoulos, Dirk Schumacher, Bob
Seeman, Oreste Tristani, Mika Tujula, Anton van der Kraaij, for useful comments. All remaining errors are ours.

1
1. Introduction

The pseudonymous Satoshi Nakamoto published the whitepaper on Bitcoin in 2008, with the vision of
a global digital currency by creating a structure for making payments without a trusted third party
acting as intermediary. But Bitcoin's conceptual design and technology appear to have prevented this
vision to materialise. Even 16 years after its inception, real Bitcoin payments, i.e. effectively “on
chain”, are still cumbersome, slow and expensive. Moreover, its value is considered too volatile to
fulfil the classic functions of money, i.e. unit of account, means of payment, and store of value (Bergsli
et al., 2022; Chu et al. 2017; Segnon and Bekiros, 2020).

Bitcoin has never been used to a significant extent for legal real-world transactions (Bindseil and
Schaaf 2022). In El Salvador, the first country to declare Bitcoin as an official currency with legal tender
status in 2021, Bitcoin is not extensively used and has remained “a failure” (Perez-Obregon 2023).
Moreover, the El Salvadorian Chivo Wallet settles Bitcoin payments in its own central ledger and not
on the Bitcoin blockchain, betraying the core proposition of the Bitcoin Whitepaper and of
Decentralised Finance (DeFi). Many Bitcoin critiques deny a real use case within the boundaries of
legality: Cryptocurrencies “remain the financial product of choice among financial predators,
lawbreakers and criminals worldwide. The least harmful use would be speculation and gambling (as
opposed to its other uses for tax evasion, fraud, ransomware, sanctions evasion, terrorist funding,
narcotics trafficking, money laundering, etc.)” (Kelleher 2024). At the same time, and maybe for this
reason, the Bitcoin narrative has changed gradually for some years away from the means of payment
idea of the Whitepaper to Bitcoin as an attractive investment, the price of which would significantly
increase over time (Paterson 2022).

The Bitcoin price has been on an unprecedented rollercoaster ride, with interim price gains of 1,000 %
(e.g. from spring 2020 to November 2021) but also losses of almost 80 % during the “crypto winter”:
After the Bitcoin price had reached a record high of around USD 69,000 in November 2021, the price
fell in the subsequent correction phase, which intensified over the course of 2022, to around USD
16,000 in November 2022. In this respect, those who got in at relatively low prices and / or sold at
high prices have made high profits and those who bought and held bitcoins at low prices and did not
sell them have high imputed profits. Opinions differ as to how sustainable the high valuation of Bitcoin
is and where its fair value lies. Many economists consider the fair value of Bitcoin to be zero and
therefore classify the Bitcoin market capitalisation as a bubble (e.g. Taleb 2021; Avoca 2021). In
contrast, Bitcoin enthusiasts believe that the rally is far from having reached its ultimate peak, even
though they generally find it difficult to justify or even calculate both a fair value and their price
forecasts.

Section 2 will review the question of uses cases and fair valuation of Bitcoin, and the emerging
investment view of Bitcoin, which also gained prominence in the political debate.

Section 3 analyses the macro-economic issues associated with speculative increases of asset prices
and applies the findings from the literature to the Bitcoin-positive scenario in which Bitcoin prices
increases significantly for a prolonged period.

Section 4 turns to the redistributive aspects of Bitcoin. A number of economists (e.g. Rogoff 2017,
Roubini 2018, Avoca 2021, Bindseil and Schaaf 2022) have critically examined the social damage
associated with the wealth redistribution resulting from high volatility of the Bitcoin price or an
eventual burst of the assumed Bitcoin bubble: redistribution takes place that benefits those who time
their trades well (e.g. bought Bitcoin at an early stage when the price was low, or in the crypto winter,
and sold it when the price was much higher) at the expense of those with a poor timing (e.g. who

2
bought in November 2021 and sold during the crypto-winter, or who bought Bitcoin any time at a high
price and would still hold it when the price would fall to an end state of zero). 2 In this paper we go
one step further and ignore the scenario of high price volatility or a bursting bubble: instead, section
4 focuses on a type of redistribution that occurs in particular in a Bitcoin positive scenario of
continuously increasing prices in the foreseeable future. Even Bitcoin-critical economists may have
assumed that this scenario does no harm anyone. Earlier discussions on the redistributive effects of
Bitcoin assumed that trading Bitcoin in a badly timed manner was a necessary condition for welfare
losses from Bitcoin, but this paper demonstrates that neither poor timing of trades nor holding Bitcoin
at all are necessary for impoverishment under a Bitcoin positive scenario. Moreover, the redistribution
of wealth and consumption in this scenario at the expense of latecomers and non-holders of Bitcoin
is not a relative one, but an absolute one.

Section 5 concludes accordingly that the consequences of the Bitcoin-as-an-investment vision with
perpetually increasing Bitcoin prices imply a corresponding impoverishment of the rest of society,
endangering cohesion, stability and ultimately democracy. 3

2. The use case of Bitcoin and its valuation

2.1 Bitcoin offers payment services to society: Nakamoto’s original vision of 2008

Nakamoto (2008) believed that Bitcoin would play a role in the future of payments, thereby also
generating value for society that could justify a positive price. More specifically, he explained:

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving
as trusted third parties to process electronic payments. While the system works well enough
for most transactions, it still suffers from the inherent weaknesses of the trust-based model.
Completely non-reversible transactions are not really possible, since financial institutions
cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting
the minimum practical transaction size and cutting off the possibility for small casual
transactions, and there is a broader cost in the loss of ability to make non-reversible payments
for non-reversible services this seems to be purely a contractual and legal problem, not a
technological one. With the possibility of reversal, the need for trust spreads. Merchants must
be wary of their customers, hassling them for more information than they would otherwise
need. A certain percentage of fraud is accepted as unavoidable. These costs and payment
uncertainties can be avoided in person by using physical currency, but no mechanism exists to
make payments over a communications channel without a trusted party.”

The problem that Nakamoto (2008) believes to have identified seems however to start from a
misunderstanding. In principle, financial institutions can avoid mediating disputes. Mediation is rather
an optional service than a necessity. It is demanded by customers and charged by payment services

3
Indeed, the redistribution in a zero-sum game over the time axis was already touched upon implicitly discussed
in in the P2Pfoundation forum with Satoshi Nakamoto himself immediately after the publication of the original
white paper. There, it was pointed out “that the early adopter finds the worm" in this system. But it was more
referring to the miners rather than investors: “This would mean that - the earlier someone gets in on the bitcoin
system establishing a node, the more chance they have of becoming lucky and being able to generate coins.”
https://p2pfoundation.ning.com/forum/topics/bitcoin-open-source?id=2003008%3ATopic%3A9402&page=1
3
We (Bindseil and Schaaf 2024; Bindseil et al. 2022) and many others (e.g. Kolbert 2021) have pointed out the
energy consumption and implied ecological and social damage caused by Bitcoin mining. However, the focus of
this paper is different, and we therefore do not recall the ecological issues in detail.

3
providers. For example, PayPal does not offer any dispute mediation if payments are made in the
“friend and family” mode; and these are free of charge. Likewise, credit transfers between bank
accounts are not mediated, i.e. if an e-commerce delivery is paid in advance via credit transfer and
the customer is unsatisfied with the good received, the bank will not mediate. Nakamoto seems to
misinterpret the modus operandi of e-commerce by confounding it with a technical necessity.
“Delivery-vs-payment” (or “atomic” settlement) to prevent principal settlement risk is difficult to
achieve in e-commerce, and ex ante trust building mechanisms (e.g. assessment histories by users),
escrow accounts, or ex post mediation mitigate this problem, but are not per se necessary. Nakamoto
continues:

“What is needed is an electronic payment system based on cryptographic proof instead of

trust, allowing any two willing parties to transact directly with each other without the need
for a trusted third party. Transactions that are computationally impractical to reverse would
protect sellers from fraud, and routine escrow mechanisms could easily be implemented to
protect buyers. In this paper, we propose a solution to the double-spending problem using a
peer-to-peer distributed timestamp server to generate computational proof of the
chronological order of transactions.”

Again, it can be argued that a normal credit transfer has also no trusted third party and does not
promise a mediation mechanism either. Moreover, escrow accounts are also provided as add-on to
credit transfers in some e-commerce market platforms. Also, Nakamoto’s perspective seems to be
tilted towards the interest of the merchant, who according to his view, needs protection from
fraudulent buyers. In this context the merchant’s key interest is to receive the funds instantaneously.
The received money is fungible, i.e. homogeneous and standardized. The customer, however, might
only approve of the purchase after having assessed the quality of the purchased product or service.
Hence the customer has a higher interest in mediation and the option to reverse the purchase. The
proposed escrow mechanism for buyers’ protection would need to be provided by a third party, i.e. a
(trusted) intermediary. It is the nature of an escrow account that it should not be managed, controlled,
or owned by one of the acting parties amid potential conflict of interest.

A further point that Nakamoto (2008, 8) claimed to address with Bitcoin related to the perceived
problem of double spending in peer-to-peer networks:

“We started with the usual framework of coins made from digital signatures, which provides
strong control of ownership, but is incomplete without a way to prevent double-spending. To
solve this, we proposed a peer-to-peer network using proof-of-work to record a public history
of transactions that quickly becomes computationally impractical for an attacker to change if
honest nodes control a majority of CPU power.”

While it is true that the history of transactions of the Bitcoin network is “impractical for an attacker to
change”, it is unfortunately also true that proof-of-work is highly impractical itself as it is costly and
inefficient compared to alternative ways to secure the safety and prevent double-spending of a
payment instrument. The problem of double-spending is hardly an issue in payments (because it is
generally solved without particular difficulties, and certainly with far less social cost than those
incurred in the solution offered by Bitcoin). Cyber-crime and fraud are serious risks for payment
systems including Bitcoin, but they are different from the problem of double-spending (see also Watts
and Low, 2024, for a critique of Nakamoto’s treatment of the double-spending issue in the Bitcoin
white paper).

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Overall, Nakamoto's (2008) understanding of retail payments was inaccurate. It is therefore doubtful
whether his invention effectively addressed the problems he perceived in e-commerce and it is
therefore also hardly surprising that Bitcoin was never significantly used in legal e-commerce. 4

2.2 The fair value of Bitcoin

Financial and real asset values are typically anchored in a future income or utility stream. Most assets
generate regular cash flows, e.g. real estate yields a rent, shares pay dividends and bonds pay interest.
Based on the present and expected future cash flow, the present value of such an asset can be
calculated. Obviously, the future income stream is exposed to a high level of uncertainty and subject
to expectation. As has been argued elsewhere (e.g. Bindseil and Schaaf 2022), Bitcoin lacks the traits
of established financial assets. It does not generate any cash flow (like real estate), interest (like bonds)
or dividends (like stocks), cannot be used productively (like commodities). By consequence, most
established ways of calculating or estimating the fair value of an asset fail when applied to Bitcoin.

- The Discounted Cash Flow (DCF) is a valuation method that estimates the present value of an
investment using its expected future cash flows. Applying the DCF model to Bitcoin is
challenging because of Bitcoin’s lack of income streams, coupon or dividends.
- Technical analysis is employed by traders to predict price movements by analysing historical
price charts, patterns, and indicators. While sometimes useful for short-term and medium-
term predictions, this method is not typically suitable for long-term fair value estimation as it
is detached from economic fundamentals.
- Relative valuation compares an asset to other assets. This method could allow investors to
estimate Bitcoin's value by assessing its relative strengths and weaknesses. Some indeed
compare Bitcoin's price to that of gold, adjusting for volatility differences to estimate Bitcoin's
fair value. However, in the absence of a clear understanding or notion what the autonomous
value of Bitcoin were, the calculation of a relative price (and exchange rate) remains doubtful.
- Fundamental analysis evaluates Bitcoin's utility, scarcity, security, and potential use cases,
providing a qualitative perspective on its value based on its inherent characteristics and future
applications – a method that might work for believers but lack analytical rigor amid the
absence of legal use cases that are effectively beneficial to society.
- Regression analysis could seek more generally relationships between Bitcoin's price and
various fundamental or market-related variables. This quantitative approach can offer insights
based on historical data and identified correlations – but fails in the not too unlikely case of
an inflated speculative bubble.
- The Stock-to-Flow (S2F) model compares the current supply of Bitcoin to the new supply
(mined coins) over a specific period. It suggests that assets with a lower S2F ratio are scarcer
and should therefore have higher value. While this model has gained popularity, critics argue
that a basic linear regression with only one predictor (the stock-to-flow ratio) to forecast
something as complex as Bitcoin's price is overly simplistic. Moreover, the model has not been
published in any scientific journal nor undergone – solid - peer review (Cordeiro 2021).
Accordingly, the S2F model had failed to predict Bitcoin's price movements accurately in
recent years, for example, it did not anticipate the significant price drop in 2022 (Rustgi 2023).

4
We deliberately do not consider the use of bitcoins to pay for or conceal illegal activities, as we do not think
that these widespread uses are socially or economically useful.

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Valuation is a challenging issue for other investments as well, and in particular for firms with perceived
high growth potential. If a new technology is discovered and/or pioneered by one company, its market
value can initially be very high relative to its net income stream over the first years (e.g. Tesla, Amazon,
OpenAI, Nvidia in their early years). These companies will thus exhibit a high equity to earnings ratio,
suggesting that investors expect a significant growth of future earnings. In some cases, it can even
take years until such a company stops operating at a loss and eventually earns net profits, as was the
case with Amazon. Some of these companies match expectations, some will disappoint, others will
even exceed the high-growth scenarios that had justified their very high price-to-earnings ratio. Still,
their valuation is typically based on fundamental analysis, and their expected capacity and risks to
deliver products for society in a profitable way.

2.3 Bitcoin as a pure investment detached from any use case

Many Bitcoin supporters nowadays view Bitcoin as an investment asset the value of which will
increase for a long time regardless of the specific service it may have for society or the traditional
traits which define a financial asset. They argue that a demand effect, combined with the limited
supply, would fuel an eternal upwards valuation trend (despite occasional cyclical term setbacks).

The list of prominent supporters of Bitcoin who seem to take this investment perspective is long and
encompasses financial professionals, huge investors, campaigning politicians and other celebrities. For
example, Larry Fink, CEO of BlackRock, the largest asset manager in the world, draws the analogy to
gold, 5 and skips the attempt to explain why Bitcoin has value as means of payment (or through other
specific use cases). As reported widely in the media (this excerpt from Bitcoin Magazine):
In a notable statement, BlackRock CEO Larry Fink has expressed a positive perspective on Bitcoin during
an interview today with CNBC, affirming that … "I believe it goes up if the world is frightened, if the
people have fearful geopolitical risks, they're fearful of their own risks," said Fink. "It's no different than
what gold represented over thousands of years. It is an asset class that protects you." … This
endorsement from the head of the world's largest asset management firm is a significant milestone for
Bitcoin's acceptance within mainstream financial circles. "Unlike gold where we manufacture new gold,
we're almost at the ceiling of the amount of Bitcoin that can be created," Fink continued. "What we're
trying to do is offer an instrument that can store wealth." (Nik Hoffman 2024)

"I'm very bullish on the long term viability of Bitcoin," Fink stated… Fink's bullish stance on Bitcoin's
long-term prospects aligns with the broader trend of institutional adoption and recognition of Bitcoin
as a legitimate investment opportunity. As the CEO of the world's largest asset management firm,
Fink's positive outlook on Bitcoin carries significant weight and may influence investor sentiment
towards BTC. (Hoffman 2024a)

In a TV interview, Mike Novogratz, a former hedge fund manager and founder of Galaxy Digital, also
compared Bitcoin to gold: “It will be larger than gold,” – although he admitted that Bitcoin’s then
market cap wasn’t yet one-tenth of gold’s - USD 1.21 tr compared with USD 13.79 tr. (Rohe 2024). In
a similar way Tyler Winklevoss, the co-founder of Gemini, formulates: “We believe Bitcoin disrupts
gold. We think it's a better gold if you look at the properties of money. And what makes gold? Scarcity.
Bitcoin is actually fixed in supply, so it's better than scarce. It's more portable, it's fungible, it's more

5
A deeper analysis of the analogy with gold, is beyond the scope of this paper. Taleb (2021) dismisses the
analogy, he argues, that gold is used industrially and has been appreciated as jewellery for centuries before it
became a store of value, an investment asset, or a reserve currency. Moreover, he continues that gold it does
not degenerate over time and retains its value even in chaotic or degenerative states of the world like natural
catastrophes or in the case of a temporary or lasting failure of the electric or digital infrastructure.

6
durable. It sort of equals a better gold across the board.” Unsurprisingly, earlier Bitcoin owners also
continue to have a positive view on the long-term viability of Bitcoin. For example, Hope (2024) reports
that some Bitcoin investors expect the price of Bitcoin to go up significantly:
“Cathie Wood, CEO of the investment firm ARK Invest, has significantly increased her bullish outlook on
Bitcoin's price trajectory. In a recent interview, she revealed that ARK has "brought forward" its previous
$1 million price target for Bitcoin by 2030. Wood attributes this shift to the recent approval of spot
Bitcoin ETFs in the United States. The surge in interest and investment potential unlocked by these ETFs
has prompted ARK to re-evaluate Bitcoin's future. "That target...it was before the SEC gave us the green
light," Wood explained, referring to the Securities and Exchange Commission's approval of spot Bitcoin
ETFs. "And I think that was a major milestone, and it has pulled forward the timeline." While Bitcoin has
already seen significant price appreciation, Wood believes the party is just getting started.”

With a similarly optimistic mindset, Marty Bent believes that Bitcoin can play a key role in closing gaps
in US pension fund solvency (Bent 2024):
“Once you hit the end of the road and visualize the state of the American economy through a multi-
generational lens you'll come to the conclusion that the American pensions are absolutely f[…]. … The
only viable solution to this problem is to get off the hamster wheel of the fiat system. Bitcoin is the
antidote to this problem. It is a verifiably finite asset running on a distributed system that cannot be
controlled by any central authority and its demand will only increase from here on out as individuals
around the world rabidly search for the antidote to the fiat poison they've been free basing for a
decades. If pensions have any intention of closing the massive gaps between the money they've
promised and the money they actually have, they better start allocating to bitcoin. In all seriousness
though, the fact that a $1.2 Trillion pension fund out of Japan has begun the diligence process on bitcoin
should be a sign to every other pension around the world that the tock is clicking. … . As more and more
pensions follow the first domino a virtuous cycle the likes of which you have never seen before will begin
to take hold and there will be many pension managers kicking themselves because they didn't move
early enough.”

Celebrities who are not expected to be particularly familiar with the subject of finance and economics
also do not shy away from expressing their enthusiasm or loyalty for Bitcoin as an investment
instrument. “I’m a big believer in the future of Bitcoin”, NFL quarterback Tom Brady revealed in an
interview at Consensus 2021 (Coindesk 2021). Hollywood actress Gwyneth Paltrow stated on Twitter:
“I think Bitcoin and cryptocurrency is here to stay.” Actor Ashton Kutcher told the TechCrunch Disrupt
conference already in 2013 that “bitcoin revolution” is here, and it offers an investing opportunity. “I
think bitcoins are obviously becoming more and more relevant,” said Kutcher, who is also founder of
the A-Grade venture (CNBC 2013).

Larry Fink, Cathy Wood, Marty Bent, and many other prominent figures share a common view on
Bitcoin as a pure investment asset and growing future valuations decoupled from economic services
Bitcoin could potentially deliver to society. In their public statements, Bitcoin's future value does not
rely on the Nakamoto narrative, which positions Bitcoin as an attractive means of payment. Instead, -
at best - they draw parallels with gold as a pure investment, assuming that society can coordinate
around any asset with a finite or limited supply as an investment vehicle, leading to a virtuous cycle
where its value continuously rises. They do not present or explain the reasons, why society would
choose Bitcoin for this purpose. While there may be volatility, they expect Bitcoin's valuation to follow
a long-term upward trend, independent of any utility it provides to society – apart from making its
holders wealthier.

That this vision could materialise for a significant period of time is not excluded, despite the fact that
economists have argued that this investment perspective would be flawed (e.g. Roubini 2021): there

7
are countless assets on earth with a limited or finite supply, and for none of them the notion that they
can sustain an ever-increasing valuation over the long term, regardless of the services or benefits they
provide to society, is particularly plausible. These scarce assets include tangible items like “German
stamps from the 19th century” and any other set of collectibles, pieces or art, land (which however
also has use for society), and virtual assets, such as various possible types of unbacked crypto-units,
the value of which is supposedly guaranteed by computer code that limits the number of “coins” or
non-fungible tokens that could be generated. Proponents of the Bitcoin investment perspective ignore
the fact that “scarcity” describes the relationship between supply and demand. A limited, finite supply
does not equate to scarcity. In the context of Bitcoin with its limited and fix supply the non-economic
term “rarity” seems more appropriate. If supply is fixed, the price becomes exclusively dependent on
demand. And if the demand were to disappear, the price would be zero.

2.4 The investment vision of Bitcoin in the political debate

The development of the Bitcoin price does not take place in a vacuum. As there is no intrinsic anchor
of value and given the wide range of criticism that Bitcoin has faced, politics plays a major role for
Bitcoins destiny, as the legal framework, including approval as investment product or possible
restrictions or bans, affect price developments and market sentiment. There is a very heterogeneous
regulatory landscape ranging from the ban of trading and mining in some jurisdiction, via the
recognition in the US as an investment product (e.g. by licensing Bitcoin ETFs and Futures) to the legal
tender status in El Salvador. In contradiction to the initial vision of Bitcoin as being independent from
legal and governance interference, legislation and legal recognition are crucial for the prospects of
Bitcoin.

It is therefore hardly surprising that the crypto industry and major investors are trying to influence
legislation and politics in general to sustain positive price momentum. In fact, this phenomenon is not
new anymore. In the US, the number of crypto lobbyists would have almost tripled from 115 in 2018
to 320 in 2021 (The Economist 2021). And the 2024 U.S. presidential election has brought
cryptocurrency regulation to the forefront of political discourse, with the major parties and their
potential candidates adopting distinct stances on Bitcoin and crypto (Bitfinex 2024). It fits into this
picture, that the current election campaign is also being financed with funds from the Bitcoin industry.
Public Citizen, a think-tank, reports that crypto companies have contributed USD 119 million to crypto-
friendly super PAC (political action committee) already, representing nearly half of all corporate
election spending in the current cycle (Claypool 2024).

A significant portion of the funds donated by the crypto industry for the campaigns has not yet been
spent, however (as of early September 2024). Of the approximately USD 25 million which have been
utilized, more than USD 20 million have been allocated to supporting Republican candidates or
opposing Democratic ones. Interestingly, many adverts placed by these crypto reserves refrain from
even mentioning crypto, technology, or technology regulation. Rather, they aim to discredit alleged
crypto-critical candidates (White 2024). Three crypto-funded super PACs spent $62 million on video
ads in September 2024 that never mentioned crypto but that supported crypto-friendly candidates
and/or went against more crypto-critical ones (Ge Huang and Ostroff, 2024).

Voters might also be concerned by the political stance on Bitcoin – but far less than the crypto lobby
may want to make politicians think. The precise fraction of the US population holding Bitcoin is
disputed. While there are findings surveyed by the crypto industry according to which, 16 % of US
adults say they have invested in, traded, or used cryptocurrencies like Bitcoin or Ether (Perrin 2021),

8
and other sources indicate that more than 15 % of US adults have engaged with cryptocurrencies in
some form, the real figures are probably lower. A survey by the US Fed concludes that only about 7 %
of US adults were holding or using cryptocurrency in 2023, down 3 percentage points from 2022 and
down 5 percentage points from 2021 (Federal Reserve 2024).

To create more interest and revive capital inflows from retail customers, the cryptocurrency industry
is exploring strategies to engage the broader public. Firms such as Crypto.com, Kraken, Bitpanda, and
Arkham Intelligence have recently secured new sponsorship agreements with European football clubs,
contributing to the sector’s record spending of USD 170 million on the sport this season. Football, as
one of the most widely viewed sports globally, has emerged as a key avenue for mass-market
outreach, offering a more cost-effective platform compared to previous industry practices. During the
cryptocurrency boom in 2021, companies engaged in aggressive marketing and expansion efforts,
pursuing high-profile deals exceeding USD 100 million, including Formula One team sponsorships and
naming rights for major U.S. stadiums. At the time, cost considerations were secondary, as retail
investors were eager to enter the cryptocurrency market at unprecedented rates (Nicolle 2024).

Currently, within the relatively small group of owners, the Bitcoin related wealth is more concentrated
than other wealth. Research found that the Bitcoin eco-system is dominated by large players, be it
miners, Bitcoin holders or exchanges – despite the significant attention that Bitcoin has received over
the last few years. The same study shows that individual investors collectively control 8.5 million
Bitcoins, i.e. less than half the Bitcoins in circulation by the end of 2020, and within individual holdings,
there is significant skewness in ownership; the rest of the Bitcoin is held by large miners or exchanges
(Makarov and Schoar 2021).

While only a small fraction of US citizens seems to hold Bitcoin or crypto, the cryptocurrency industry
pushes hard to urge political candidates on both sides of the aisle to embrace crypto (White 2024).
Whether or not the respective candidates are convinced, there proclaimed political stances on Bitcoin
- and crypto in general – will most likely have an impact on the future regulation.

Bitcoin and crypto do not play a major role in any of the party programs. They are not mentioned at
all in the official 2024 Democratic Party Platform and only got a got a paragraph on the Republican
agenda (Kharif 2024). Still, politicians have aimed at attracting voters invested in Bitcoin to support
them, with mentioned US Presidential campaign generating unprecedented commitments of
candidates. The Democratic Party, represented by Vice President Kamala Harris as nominee, has
shown a nuanced approach to crypto regulation. 6 Initially, the Biden administration took a cautious
stance, focusing on consumer protection and financial stability (The conversation 2024). However, as
the election approaches, there's been a moderate shift towards a more crypto-friendly view. The
passage of the Financial Innovation and Technology for the 21st Century Act (FIT21) in May 2024, with
significant Democratic support, signalled a growing recognition of the industry's importance. Harris,
while not yet articulating a definitive position, has engaged with crypto representatives, indicating a
willingness to consider the sector's perspectives (ibid). On the Republican side, former President
Donald Trump has made a dramatic pivot in his approach to crypto assets (ibid). Once a critic, Trump
now presents himself as a champion of digital assets, embracing the industry. For example, when
Trump spoke at the Libertarian National Convention on 25 May 2024 and promised supporting Bitcoin
if elected and emphasised that Bitcoin holders already represent 50 million voters in the US:

6
However, there are internal debates within the Democratic Party, exemplifying the divergence within the party.
While some Democrats, like Senator Elizabeth Warren, continue to emphasize the risks associated with
cryptocurrencies, others are advocating for a more open approach “to foster innovation”.

9
 “I will ensure that the future of Crypto and the future of Bitcoin will be made in the USA, not
driven overseas; I will support the right to self-custody to the nation’s 50 million crypto-holders,
I say this, with your vote; I will keep Elizabeth Warren and her goons away from your Bitcoin,
and I will never allow the creation of a central bank digital currency.” (Gerard 2024)

Trump continued to ramp up his support for Bitcoin over the course of the campaign. He appeared at
the Bitcoin 2024 Conference in Nashville on 27 July and signalled to the Bitcoin industry:

“In just 15 years, Bitcoin has gone from merely an idea posted anonymously on an internet
message board to being the ninth most valuable asset anywhere in the world. … It's already
bigger than Exxon Mobil. Soon it will be surpassing the entire market cap of silver. … One day
it probably will overtake gold… …bitcoin and crypto will skyrocket like never before, even
beyond your expectations… Because when America is prospering, bitcoin is soaring, and it will
go up with it…. During my four years in office, bitcoin surged by 3,900%, from $898 the day I
took office to $35,900 the day I left… Now, compare that to just after three and a half years of
Biden and Harris adjusted for inflation, bitcoin is up 50% now 50% sounds good, but not when
you're comparing it to almost 4,000% right?

… if I am elected, it will be the policy of my administration, United States of America, to keep

100% of all the bitcoin the U.S. government currently holds or acquires into the future, we'll
keep 100… This will serve, in effect, as the core of the strategic national bitcoin stockpile. … …
I take steps to transform that vast wealth into a permanent national asset to benefit all
Americans. … You are the modern-day Edisons and Wright brothers and Carnegies and Henry
Fords, and what you do in your lifetime stands a chance to outlive us all and inspire humanity
for generations to come.”

Trump does not explain in his speech what services of Bitcoin to society would justify its current and
future ever higher valuation, even though he compares it to past innovations for which this was rather
clear. This shift aligns with the broader Republican stance, which generally favors less regulation and
more market-driven approaches to the crypto sector (Bitfinex 2024). The Republican stance, as
embodied by Trump's recent statements, leans towards a more permissive regulatory environment
for crypto assets (Seatter 2024). This approach aims to attract support from the crypto community
and appeal to younger, tech-savvy voters who are increasingly engaged with digital assets (The
conversation 2024). Overall, the crypto industry perceives Trump as significantly more favourable
candidate. While the crypto industry has recently shown more willingness to engage with the Harris
campaign, hoping for a more positive policy direction, analysts anticipate a significant disparity
between the two political outcomes. They predict very different prices developments for Bitcoin
depending on who wins the U.S. Presidential election: if Trump wins, Bitcoin could go up to USD 80-
90 000 – but if Harris wins the presidential race the price could drop to USD 30-40 000 (Hunt 2024).
Consistent with this, the price for Bitcoin slid as investors reacted to the presidential debate on 11
September between Harris and Trump, when the market assessed Harris having won the debate –
even though Bitcoin was not discussed at all. Indeed, Trump who has embraced the crypto sector was
often on the defensive; moreover, pop star Taylor Swift announced her endorsement of Harris right
after the debate (Ghosh 2024).

The then independent presidential candidate Robert F. Kennedy Jr. has gained traction as a prominent
pro-crypto candidate, resonating strongly with independent voters and those dissatisfied with the
policies of Trump and Biden. Kennedy has consistently emphasized his support for Bitcoin and
blockchain technology, distinguishing himself as a unique advocate for digital assets in the presidential
race. Among his campaign promises are ambitious initiatives, such as placing the entire U.S. budget

10
on the blockchain to enhance transparency and accountability in government spending. He envisions
a system where every American can review budget items at any time, aiming to promote greater
public oversight and trust (Bitfinex 2024). Kennedy promised in the 2024 Nashville Bitcoin convention
on 27 July 2024 that he would order massive purchases of Bitcoin by the US Treasury if he would be
elected and in addition that Bitcoin would effectively be exempt from capital gains taxation and from
controls against illicit payments:
“I intend as President of the United States to sign an Executive Order on day 1… to transfer
approximately 200,000 Bitcoin held by the US Government to the US Treasury where it will be held as a
strategic asset. …. On day one as President, I will sign another Executive Order directing the US Treasury
to purchase 550 Bitcoin daily until the US has a reserve of at least four million Bitcoin. … our nation holds
approximately 19% of global gold reserves; this policy will give us around the same proportion of total
Bitcoin. The cascading impact of these actions will eventually move Bitcoin to a valuation of hundreds
of trillion of dollars. On day one as President, I will sign also an Executive Order directing the IRS to issue
public guidance that all transactions between BTC and the USD are unreportable transactions, and by
extension untaxable. … Bitcoin is a technology for freedom, for optimism, for independence, for
democracy, for transparency, it is the currency of hope, it is the perfect currency.”

Kennedy did not elaborate further on why he believes Bitcoin to be the perfect currency, and what
would justify making Bitcoin transactions against USD unreportable and untaxable. In any case, a total
valuation of “hundreds of trillion” of USD of Bitcoin would imply a valuation of one Bitcoin of at least
10 million USD. Kennedy suspended his campaign on 23 August 2024. He has since the endorsed
Trump (CNN 2024).

As the election draws closer, both Democrats and Republicans are recognizing the growing importance
of crypto policy to voters. A recent survey indicates that a significant portion of voters in swing states
consider crypto policies important enough to influence their voting decisions (Seatter 2024). This has
led to increased efforts from both sides to court the “crypto vote”, with initiatives like Crypto4Harris
emerging to enhance the Democratic candidate's appeal on cryptocurrency issues (The conversation
2024). The outcome of the 2024 election could have far-reaching implications for the future of
cryptocurrency regulation in the United States. While the Democratic approach under Harris may seek
a middle ground, a Republican victory led by Trump could potentially usher in a more crypto-friendly
regulatory environment (Seatter 2024).

3. The macro-economics of large asset price exuberance

In this section we briefly review the literature on the macro-economic effects of speculative asset
price increases and how the central bank may react to neutralise their impact on inflation or that they
trigger short term fluctuations in economic activity. We focus on the period of asset price increases,
as we are less interested in a possible burst of a bubble, consistent with our interest in a Bitcoin-
positive scenario. While in section 4 we will assume for simplicity reasons that the central bank is
perfectly able to neutralise the effects of significant Bitcoin price increases on inflation and avoid
economic volatility, we briefly review in section 3 the economic literature on how the central bank
can achieve this result.

New technologies are pivotal to growth and the increase of welfare of societies. By increasing the
overall economic production potential, technological progress facilitates the inflation-free expansion
of the consumption potential. Innovations based on technological progress increase total factor

11
productivity (TFP), which leads to a more efficient utilisation of existing production factors (Grimm,
Kroeger, Ochsner 2024). The increase in production potential through new technologies manifests
itself in various forms. Investments in machines, automation systems and intangible capital can
increase productivity. More recently, new technologies such as artificial intelligence and robotics
could replace missing labour and thus counteract demographic change (Sachverständigenrat 2024).

For Tech companies and their market cap (Google, Tesla, Amazon, Apple or Nvidia) sudden market
cap explosions are assumed to match the increase of the future production potential of the economy,
taking also assumptions on the specific profitability path of the companies. In general, the co-
movement of equity wealth and of the production potential enables a higher supply of goods and
services without leading to inflation. The increased consumption triggered by wealth effects match
the improved and augmented supply of goods and services, as a rise in assets’ valuation is generally
believed to stimulate people’s consumption. “In cases where wealth is gained and the additional value
is spent within the economy, there is a wealth effect […]” (WEF 2022), e.g., soaring stock markets can
increase the marginal propensity to consume through wealth effects even before the actual increase
in productivity have materialised in anticipation of future real wealth increases. 7 However, the market
valuations of new technologies or products as well as their producers and providers can obviously be
based on a misjudgement by investors. The wealth effect on consumption of a significant increase in
asset prices and its implied macroeconomic consequences in year T are probably independent of
whether in T+10, the valuation of year T appears in retrospect justified or not. The more the asset
price increases anticipate a future increase of the production potential (in contrast to an immediate
one), the more the implied wealth effect will likely be inflationary and risk a boom-bust cycle, and
therefore raise questions of the right monetary policy reaction.

Several cases can be distinguished in terms of timing and uncertainty of asset price increases vs.
increases of the production potential of the economy. Consider the following five examples.

(A) Productivity increase without (marketable) wealth effect

Some increases of the production potential (say through the invention and deployment of a new
technology) may come along without a directly related visible increase in asset values, for example if
the growth of the production potential relates to a sector which is not incorporated in the form of
stock-traded companies (e.g. the government sector). In this case there is no directly visible positive
asset valuation shock and if some assets gain value, these may be illiquid (e.g. human capital). The
absence or illiquidity of increases in asset values will reduce the effects of the positive productivity
shock on consumption, even if the anticipation of higher future incomes will likely still have a positive
effect on consumption. In the following figures, we show productivity increases in light green boxes
and related asset price increases - if any - in dark red. We show case (A) in its extreme form in which
a positive productivity shock would have no direct wealth effect at all. From the perspective of
monetary policy, this would likely be largely a positive supply shock with price-dampening effects
being predominant.

7
For simplicity reasons don’t take explicitly account of the differences in the wealth effect type of financial and
non-financial assets between the US and the euro area. Indeed, the wealth effects are generally lower in the
euro area than in the US (de Bondt et al. 2019; Sousa 2009; Cooper and Dynan 2016).

12
Figure 1: Productivity increase without wealth effect

T (in years)
1 2 3 10

(B) Simultaneous wealth and productivity effects.

In case a new technology (the news about it) appears more or less simultaneously to its deployment
and the start of the realisation of a steady flow of additional production, while the future productivity
is captured by widely held stock company, then the wealth effects on consumption and the increase
of the production potential may be considered to match, so that we obtain a sort of neutrality from
the perspective of the macroeconomic equilibrium and price pressures in the economy.

Figure 2: Productivity effect and wealth effect occurring simultaneously.

T (in years)
1 2 3 10

(C) Lagged productivity effects relative to wealth effects

It might be that a new technology is invented but will take years before being usable. Still investors
may believe in its future deployment are such that the stock company that invented the technology
(or the related industrial sector) has immediate large valuation gains. In this case, in between the
increase of wealth and the productivity gains, the wealth effects are likely inflationary, and monetary
policy may have to be tightened for a while to prevent inflation or unwarranted economic fluctuations.

Figure 3: Productivity effect appearing after a significant time lag relative to the wealth effect

T (in years)
1 2 3 10

13
 (D) Wealth effect without productivity effect: Bitcoin-positive scenario

The case of Bitcoin as investment detached from any use case can be understood as an increase of
wealth without any increase of the production potential, whereby the wealth increase is gradual over
years as Bitcoin prices increase and increase. This case is likely similar for the initial years as the
previous one, i.e. a tightening of monetary policy is likely warranted. However, the phase in which the
productivity gains kick in and may allow for an opposite adjustment of policies does not materialise.

Figure 4: wealth effect without productivity effect

T (in years)
1 2 3 10

(E) Asset price bubble that bursts without any productivity effect

Finally, the classic asset price bubble would mean that there is a temporary wealth effect which is later
reversed when the bubble burst, and that there are no productivity gains that match the asset price
bubble.

Figure 5: wealth effects and burst of a bubble (without productivity effect)

T (in years)
1 2 3 10

In the literature and the numerous analyses of exuberant asset price increases, economists mostly
focus on financial stability risks and the consequences of the bubble bursting. For instance, in Minsky's
groundbreaking theory (1993), investors initially engage in save financing at the beginning of a cycle:
the income that follows the investments is sufficient to repay the loans, including principal.
Speculative financing initially appears profitable. In the next phase, the cash flow is then only sufficient
to service the interest on the loans taken out; the repayments of the principle, on the other hand, are
replaced by new loans. Finally, the investors switch to a “Ponzi scheme”: loans are even taken out to
finance the interest burden, as investors still trust that at the very end the income from the investment
will be sufficient to meet all accumulated obligations. The economic system becomes increasingly
unstable until the speculative bubble bursts.

We are less interested here in the scenario of an asset bubble burst, as we assume a Bitcoin positive
scenario in which the value of Bitcoin continues to increase in the period covered by the analysis. The

14
literature is relevant in our context in the sense that if the wealth effects relate to an unjustified asset
price “bubble” they would also not be associated with proportionate growth of productivity, and
therefore would initially require a similar monetary policy reaction like the case of the Bitcoin positive
scenario.

Our Bitcoin-positive scenario comes closest to the Rational Bubbles approach in economics, where
asset prices deviate from their fundamental values but persist due to the collective belief that prices
will continue to rise. Tirole (1985) argues that overpriced assets (relative to their fundamentals)
emerge in environments where no alternative, fundamentally-driven asset has a better yield than the
bubble asset. Blanchard and Watson (1982) show how bubbles can persist under rational expectations
as long as agents believe that they can sell the asset to someone else at a higher price in the future
(the “greater fool theory”). Abreu and Brunnermeier (2003) show how rational traders do recognize
that an asset is overvalued but are uncertain about the timing of the inevitable crash. Within their
concept of “synchronized beliefs” such bubbles can grow even though rational investors are aware
that they are in a bubble.

. Regardless of the origins of a bubble, as the bubble grows, unsophisticated investors are drawn into
the market. (Mishkin, 2008, Borio and Lowe 2002; Kindleberger and Aliber 2011). These latecomers
are often retail participants. Their interest is triggered by the success stories of early adopters and the
belief that prices will continue rising indefinitely. Lacking economic, financial and investment
knowledge, they contribute to the bubble by pouring new capital into already exuberantly priced
assets, accelerating the market frenzy (Barber and Odean, 2000; Greenwood and Nagel, 2009; Welch,
2000).

Some argue that asset price exuberance could have also positive macroeconomic effects under certain
circumstance. According to this view, under certain conditions, asset bubbles can crowd in productive
investment and lead to an expansion in total employment, and the bursting of these bubbles can have
an immediate negative impact on these variables (Shi et al. 2014). Similarly, bubbles could also
promote innovation and technological progress by channelling capital into new sectors in the presence
of endogenous credit constraints. Credit-driven stock price bubbles could the relax credit constraints
and reallocate capital more efficiently among firms (Miao and Wang 2012).

Central banks ask themselves how to respond to price pressures arising from wealth effects due to
the soaring valuations (either relative to a “bubble” or to tech companies without corresponding
immediate productivity gains). Despite the abundant literature, there is no consensus on the policies
a central bank should adopt to address price pressures stemming from soaring asset prices to enhance
macroeconomic stabilisation (Myftari and Rossi 2007). The problem starts with the fact that central
banks will normally not know in advance when the anticipated enhancement of the production
potential will materialise – if at all. To identify speculative asset bubbles has been one of the major
challenges for macroeconomists and central banks alike over the last decades (Bernanke 2002).

Since identifying asset price bubbles (or more generally significant asset price increases which are not
matched by a timely increase of the production potential) is already an analytical challenge, it is little
surprising that there is neither a clear consensus on how central banks or other macroeconomic
authorities should address supposed speculative bubbles. Indeed, various approaches exist to tackle
these challenges. For example, Bernanke and Gertler 2001 recognize the effect asset prices (including
bubbles) have on aggregate demand, like many other phenomena impacting economic developments
and argue that these effects should be included in the central bank’s projections for output and
inflation, and be addressed in that general context, implying that no special treatment of asset price
explosions is required. A related eclectic approach is the “flexible inflation targeting,” which involves

15
considering asset prices within the framework of inflation targeting rather than targeting them
directly. This method allows central banks to account for the broader economic implications of asset
price movements without making them the primary focus of monetary policy (Cecchetti et al. 2002).

In contrast, the “leaning against the wind” approach advocates that central banks tighten monetary
policy to counteract the formation of asset price bubbles. This approach assumes that pre-emptive
action can avoid excessive risk-taking and the buildup of financial imbalances (Lukonga 2023).
Hennequin and Hommes (2024) even find that a strong interest rate response is successful in
preventing or deflating large price bubbles, while a weak response is not.

However, Gali (2014) warns that central bank interventions targeting asset price bubbles might
backfire: If interest rates are raised in the presence of an identified bubble, the bubble must grow at
a higher rate to survive, potentially worsening the threat. Conversely, Adam et al. (2017) challenge
the rational expectation assumption and show that “Leaning Against Bubbles” can be optimal for
monetary policy.

The use of macroprudential tools has been proposed to address financial imbalances without resorting
to broad monetary tightening (Fernandez-Gallardo 2024). These tools, such as capital requirements
and countercyclical buffers, allow for targeted interventions that can help maintain financial stability
while minimizing the impact on overall economic growth.

Currently, most central banks apply a pragmatic approach that prioritizes price stability and inflation
targets while incorporating financial stability considerations into their policy decisions, including the
monitoring and analysis of asset prices. In this context, macroprudential tools are often seen as the
first line of defence against financial imbalances, allowing for more targeted responses to specific
risks. Additionally, maintaining flexibility in policy decisions is crucial for central banks to adapt to
rapidly changing economic conditions. In general, one could conclude, that central banks avoid
targeting asset prices directly, but monitor and analyse the respective phenomena and consider the
broader economic impacts of these prices within their existing mandates and policy frameworks. In
the case of Bitcoin, they would presumably also avoid a specific judgement but simply take into
account the positive aggregate demand effects of a significant Bitcoin price increase 8 by tightening
policies further, i.e. imposing higher policy interest rates to bring back aggregate demand to a non-
inflationary level. If they do not fully identify the consumption effect of Bitcoin wealth, then they might
tighten insufficiently and a temporary effect on inflation may materialise.

4. The distributional effects of Bitcoin: an illustration

The payment services view of Bitcoin by Nakamoto has not materialised (but for illicit payments) and
has largely been replaced by a pure investment vision for Bitcoin. We therefore assume now that
Bitcoin takes its value only from a collective self-fulfilling belief of an increasing valuation, also
supported by steady fresh investment inflows (van Oordt 2024). While economists may not like this
scenario because it relies on the random choice of one equilibrium amongst many possible ones, it
needs to be acknowledged that societies can sustain such belief-equilibria for a long time. For

8
To refrain from an explicit judgement that Bitcoin is a speculative bubble (which would inevitably burst) we
replace the term “bubble” in the remainders of this paper by “price exuberance” when we discuss Bitcoin, as we
assume here that the valuation of Bitcoin “rises exuberantly” while this is not matched by an increase in the
production potential, Still, we would keep open if the prices ever were to “implode” again.

16
example, very diverse and mutually exclusive spiritual beliefs have existed simultaneously for
centuries or even millennia, illustrating the lasting power of beliefs beyond a purely scientific logic 9.
Moreover, we assume that Bitcoin has no impact on the economy's production potential. This
assumption seems reasonable, or slightly biased to the positive side. Most economists view Bitcoin
negatively due to its in their view missing use case, high energy use and association with illicit
payments. On the other side, some supporters still believe in Nakamoto’s vision of it as an efficient
payment tool, even though this has still not materialised, and most holders now focus on Bitcoin as
an investment.

A price of one million USD per Bitcoin (as insinuated by Cathy Wood) would mean a market
capitalisation of close to USD 20 trillion, while Robert Kennedy refers to a future market capitalisation
of “several hundreds of trillions” implying a Bitcoin valuation of at least USD 10 million. To put this in
perspective: Total global equity valuation was USD 111 trillion in end 2023. As of August 2024, the
total market value of gold was around USD 12.2 trillion. This estimation takes account of gold held in
central banks as reserves (one quarter) and by private investors in various forms such as jewellery,
coins, and bullion (Gold Council 2024). Against this backdrop, Kennedy’s vision acclaimed at the
Nashville Bitcoin Conversion would imply a Bitcoin market cap way beyond equity and gold taken
together (the size of the global bond market is estimated around EUR 130 billion according to the
International Capital Market Association, but debt does not represent a net value, it rather cancels
out between creditors and debtors). While the current market value of a Bitcoin is in the range of USD
50,000-60,000, it could be argued that any price for Bitcoin is equally plausible, including 10 million or
more – as none of these prices has any particular economic justification or imputed basis.

Bitcoin wealth has, as any wealth, positive consumption effects on Bitcoin owners. At the same time,
since Bitcoin does not impact on the production potential of the economy, these positive consumption
effects must be at the expense of some other usage of GDP, so either the consumption of the rest of
society, or investments, or the current account (“GDP = Consumption + Investment + current
account"). As we are not interested in the effects of Bitcoin in a specific country, but in principle for
society as a whole, we can ignore the possible Bitcoin wealth effect on the external balance (since the
external balance cancels out globally). Effects on investment vs. effects on consumption of others
depend on interest rate elasticities: when the central bank tightens monetary policy to address the
additional consumption of Bitcoin owners, it will normally impact on both, with elasticities
determining the relative decline of the two. In the example below, we assume for the sake of simplicity
that the crowding out goes exclusively at the expense of other consumers. A scenario in which also
investments are impacted requires more comprehensive modelling to be meaningful. In any case, it is
not a scenario that seems more attractive than the one examined below in which total consumption
and investments each stay the same: lower investments mean lower growth which also eventually
impacts negatively on the welfare of the non-Bitcoin owners and latecomers (in addition to the direct
crowding out of the consumption). A further simplifying assumption in the illustration below is to only
have two subsets of the population each of which is internally homogeneous with regards to their
Bitcoin holdings: Early Birds (who have Bitcoin from the beginning) and Latecomers (who gradually
buy Bitcoin from the Early Birds). We do not foresee a category of people who never hold any Bitcoin,
although the simulation could be adopted to include those (the people never holding Bitcoin would

9
Even the Crypto-critical Zeke Faux (2023, 237) concludes that “The one coin I especially would never bet
against is Bitcoin. It’s not that it is useful – if anything, it’s more unwieldy than the others. But Bitcoin’s true
believers are so convinced that it’s hard to imagine anything will change their minds. To them, whatever the
question, the answer is ‘buy Bitcoin.’ Everything they see is evidence Bitcoin will rise, like the members of a
cult certain that the apocalypse – and their salvation – is just around the corner.”

17
be even worse off compared to the Latecomers). For simplicity reasons we further assume that the
marginal propensity to consume out of wealth/income is the same for “Early Birds” and “Latecomers”.
Moreover, we ignore possible anticipation effects of future wealth on consumption. Last but not least,
we abstract from Bitcoin mining and assume the amount of Bitcoin held by society remains unchanged
across time.

We assume, again to be able to formulate a simple example, that the over-proportional Bitcoin owners
sell every period some of their Bitcoins to the under-proportional Bitcoin owner, and that the latter
finances this partially by reducing consumption, and partially by liquidating real assets (which are
bought by the early Bitcoin owners). The Bitcoin sales flow is specified such that a fixed percentage of
the Bitcoin holding difference between the two subsets of society is sold from Early Birds to
Latecomers. In other words, the flow of Bitcoin from the over-proportional to the under-proportional
consumer is matched by both a reverse effect on consumption and a reverse flow of standard
investment assets (summing up to the Bitcoin transfer). Aiello et al. (2024) provide empirical evidence
on the impact of Bitcoin valuation gains on consumption, although they do not cover the crowding
out effects on the non-Bitcoin holders and how the latter finance their gradual way into higher Bitcoin
holdings:

“Household crypto investors appear to treat crypto as one piece of an investment portfolio,
some households chasing crypto gains and other households rebalancing a portion of crypto
gains into traditional brokerage investments. Households also use crypto wealth to increase
their discretionary consumption. The MPC [marginal propensity to consume] out of crypto
wealth is substantially higher than the MPC out of equity wealth, but lower than the MPC out
of lottery winnings. Households also withdraw crypto gains to purchase housing—both to
enter the market as new buyers and to upgrade their existing housing. This increased spending
on housing puts upward pressure on local house prices, particularly in areas that are heavily
exposed to crypto assets. In the aggregate, growth in county-level crypto wealth causes county
house prices to increase.

As mentioned, the Early Birds’ wealth effect on consumption is financed through gradually selling
some Bitcoin to the Latecomers. We assume that the amount of Bitcoin sold corresponds to w % per
annum of the difference of Bitcoin holdings between the initial holders and the non-initial holders. In
the figures below w=2%. Therefore, over time there is (at least for a range of parameter values) a
convergence of the exposure to Bitcoin of the two groups. The Latecomers finance their Bitcoin
purchase by either selling other assets or reducing consumption with shares being q and (1-q),
respectively. The initial Bitcoin holders will accordingly consume more and accumulate other assets,
mirroring the shares q and (1-q). In the figures below we assume that q=0.5, i.e. the Latecomers
finance their Bitcoin acquisition half by liquidating their real asset holdings and half by reducing
consumption. Initial Bitcoin owners will consume more for two reasons: first, they consume a part of
the Bitcoin they sell (1-q) and second over time they accumulate more and more real assets which
yield a financial return. We assume that real assets generate a real net annual return of z % in net
terms that the owners of the assets consume. In the figures below z=2 %. We also assume annual
labour income of v (homogeneously across the two groups; set to 2 in the figures below such as to
obtain an equal stream). Early birds and Latecomers are assumed to have labour income of same size.
Total capital and labour income do not change in our economy over time (we assume a constant
production potential). We assume an initial Bitcoin endowment of the Early Bird of BE0, e.g. BE0 = 10.
The initial endowment of Latecomers with Bitcoin is 0: BL0 = 0. The real wealth of society of 100
(consisting ultimately in real assets). We also assume a Bitcoin value growth rate of y (e.g. y = 10 %),

18
consistent with the Bitcoin-positive scenario we are focusing on. Table 1 summarises again the key
parameters and their definitions.

19
Table 1: Key parameters of the example for the distributional effects of Bitcoin

Parameters Description range

w share of difference between Bitcoin Early Birds and w in [0,1]
Latecomers which is transferred every year for example w=2 %
q share of transfer of Bitcoin that is financed by an equal q in [0,1]
transfer in the other direction by real assets. The other share for example q=0.
1-q is finance by reduced consumption of Latecomers
(implying correspondingly higher consumption of Early Birds)
z real yield of real assets (that is consumed by the owner of the z in [0,0.1],
asset) for example z=2%
v annual labor income (which is consumed) v in R (real number)
y annual price increase of Bitcoin in percentage y in [0,0.5]
For example y=10%

We are interested in the evolution of the six key variables summarised in table 2.

Table 2: Key variables simulated

Variable Description Initial value Evolution

BEt Bitcoin value held by an Early BE0 in [0,∞[ BEt = (1+y)BEt-1 -w(BEt – BLt)
bird in period t e.g.: BE0=10
BLt Bitcoin value held by a BL0 = 0 BLt = (1+y)BLt-1 +w(BEt – BLt)
Latecomer in period t
REt Real asset value of held by RE0 in [0,∞[ REt = REt-1 +wq(BEt – BLt)
Early Birds in period t e.g. RE0 = 50
RLt Real asset value held by RL0 in [0,∞[ REt = REt-1 -wq(BEt – BLt)
Latecomers in period t RL0=RE0
CEt Consumption of Early Birds in CEt = v + z REt + w(1-q)(BEt – BLt)
period t
CLt Consumption of Latecomers in CLt = v + z REt – w(1-q)(BEt – BLt)
period t
Remarkk: RLt and CLt cannot get negative. If any of the two hits zero, the evolution comes to an end. (We are
more interested in the parameter value combinations in which this does not occur).

On this basis, we can simulate for any set of parameters and horizons the evolution of the 6 variables
of Table 2. Figures 6 to 9 show such a simulation for w=2 %; q=0.5; v=2; y=10 %; BE0 = 10; RE0=RL0 =
50 and a time horizon of 35 years: specific set of parameters, as an illustration, the evolution of the
shares of Early birds and Latecomers in real wealth (figure 6), Bitcoin wealth (Figures 7 and 8), and
consumption (Figure 9). Figure 6 shows that Early Birds gradually take over a larger share of real assets
since we assumed that a part of the Bitcoin transfers to Latecomers are effectively paid through a
transfer of real assets. Cumulating real assets implies to have a larger share per capita of capital
income that can be consumed.

20
Figure 6: Sharing of real wealth (total real wealth stays constant at 100)

Figures 7 and 8 show that the Latecomers have a growing share of Bitcoin and ultimately the Bitcoin
distribution converges to equality across the entire population. When equality is close, Bitcoin will no
longer trigger any material fresh distributional consequences, i.e. it will have become neutral.
However, when this stage is reached, (i) the Early Birds had benefitted for years from higher
consumption levels; (ii) they will continue enjoying higher consumption as a result of their higher share
in the capital stock.

Figure 7: Total Bitcoin wealth

21
Figure 8: Sharing of Bitcoin holdings

Finally, Figure 9 illustrates the Early Birds increasing share in consumption, necessarily at the expense
of the Latecomers.

Figure 9: Per capita consumption

100%
90%
80%
70%
60%
50% Latecomer share consumption

40% Early Bird share consumption

30%
20%
10%
0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

5. Conclusion
The debate about the benefits, utility and sustainability of Bitcoin goes back to Nakamoto’s original
work from 2008. Most economists argue that Bitcoin is a speculative bubble that will burst at some
point and will then have accumulated substantial social cost (such as the energy costs of mining, and
the costs of having facilitated illicit payments). Bitcoin supporters deny this and assume that the
Bitcoin value will continue rising, that Bitcoin is a great investment asset, and that even a – relatively
– late jump on this bandwagon is still worthwhile. In this paper, we show that even a Bitcoin-positive
scenario, in which the Bitcoin price continues to rise (and the “bubble” diagnosed by critics does not
burst) is problematic from a social perspective, as all the wealth-effects enjoyed by the early adopters
through the rising prices would be at the expense of the latecomers (or non-holders), who are
impoverished. Therefore, Bitcoin’s redistribution effects and the related social damage go far beyond

22
the implications of good or bad timing of purchases and sales by investors amid a volatile price, or the
fact that some may lose all their money in case the Bitcoin bubble would eventually burst as predicted
by many economists. Even if Bitcoin prices increase steadily for good, the wealth effects on
consumption of early holders (the often cited “Lambo”) go at the expense of consumption of the rest
of the population (also investments can be negatively affected). This paper demonstrates that neither
a poor timing of trades, nor holding Bitcoin at all, are necessary for impoverishment under a Bitcoin
positive scenario.

In line with the shift of the Bitcoin community to emphasise less and less the role of Bitcoin as means
of payment, but as the one of an investment vehicle, we assumed that Bitcoin does not change the
production potential of the economy (which may be criticized as Bitcoin-benevolent in view of the
high energy consumption of and crime-facilitation by Bitcoin). This implies that the wealth effects
associated with it would be viewed as a zero-sum game. In absolute terms, early adopters exactly
increase their real wealth and consumption at the expense of the real wealth and consumption of
those who do not hold Bitcoin or who invest in it only at a later stage. At some stage the Bitcoin
holdings are equally spread amongst the two subsets of the population we assume in section 4 (or
have largely converged to this state), such that subsequent valuation increases of Bitcoin will be
neutral (and have no effects at all on relative consumption, and none on total consumption unless
consumption crowds out investments and therefore undermines growth). However, the sharing of
real wealth has shifted from the Latecomers to the Early Birds and will remain as legacy of the initial
disparity in Bitcoin holdings. These redistributive effects can be significant in a long-term scenario
characterized by ever-increasing Bitcoin prices. The new Lamborghini, Rolex, villa, and equity
portfolios by early Bitcoin investors do not stem from an increase in the economy’s production
potential; rather, they are financed by diminishing consumption and wealth of those who initially do
not hold Bitcoin. It’s like filling one bucket by draining water from another — the latecomers have to
give up for the benefit of the early holders. Thus, “missing out” on Bitcoin is not merely a lost
opportunity for wealth accumulation, but means real impoverishment compared to a world without
Bitcoin. This redistribution of wealth and purchasing power is unlikely to occur without detrimental
consequences for society. Even if the Latecomers cannot attribute their loss of purchasing power, they
will feel a malaise and frustration, that will contribute further to an ever more split society.

The evolution of Bitcoin's price, lacking a stable intrinsic anchor, is heavily influenced by government
attitudes and actions, including regulatory measures, legislation, and the potential establishment of a
Bitcoin reserve – although this reliance on government obviously undermines the original concept of
Bitcoin's independence from public policies and government intervention. In a democratic context,
where politicians are accountable to voters, this dependency implies that attitudes toward Bitcoin
could sway election outcomes. The ongoing U.S. presidential election campaigns illustrate strong
efforts of some candidates to win over crypto voters. Early adopters have a vested interest in
promoting Bitcoin values to redistribute wealth and consumption from Latecomers to themselves,
maybe without being conscious of the redistributive nature of their vision. In any case current non-
holders should realise that they have compelling reasons to oppose Bitcoin and advocate for
legislation against it, aiming to prevent Bitcoin prices from rising or to see Bitcoin disappear
altogether. Latecomers and non-holders and their political representatives should emphasize that the
idea of Bitcoin as an investment relies on redistribution at their expense. Failing to do so could skew
election results in favour of politicians who advocate pro-Bitcoin policies, implying wealth
redistribution and fuelling the division of society.

23
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