A recent ECB paper argues that Bitcoin is a non-productive asset with no legal use case, diverting resources from productive sectors. Are they right, or is Bitcoin merely misunderstood?
A recent paper authored by two economists at the European Central Bank (ECB) caught my attention. By defining bitcoin as a non-productive asset without any “legal use case,” they claim that as the market share of bitcoin grows, it deprives productive sectors of the economy of vital resources, thus “impoverishing” society as a whole.
This position is particularly problematic from an economic point of view, even for those who do not believe in the future of Bitcoin. Why? Because regulators have no business trying to forecast markets, especially the economic utility of emerging sectors. It is neither their role nor expertise to analyze the social desirability of technological disruptions. Central bankers should stick to the business of controlling inflation.
Good policymakers know that emerging technologies are inherently unpredictable. Regulators should not pick winners and losers in the economy. Only through market competition, societies can “decide” whether an asset is valuable or not. The venture capital market illustrates this point, as VCs know that their portfolios are composed of a few extraordinary investments that compensate for many startup failures. This phenomenon, referred to as the “power law” of venture capital, shows why markets must remain open to experimentation, as innovation is a sort of unpredictable and stochastic process.
This process of experimentation is decentralized and consensual. No one is forced to hold bitcoin. If people and companies are voluntarily choosing to include bitcoin in their balance sheets, it shows that bitcoin is offering them some sort of economic utility. This includes people living in high-inflation countries who use bitcoin as a store of value, individuals without access to financial services who use bitcoin as a medium of exchange, or companies that see bitcoin as a preferred form of investment.
Innovation is, by definition, an act of risk-taking and non-conformity. Profit opportunities derive from uncertainty. There is no innovation without heterodox thinking; no alpha in consensus.
In November of 2024, economists at the European Central Bank (ECB) published a paper titled “the distributional consequences of Bitcoin.” The researchers claimed that bitcoin should be seen as a “problematic investment asset” not only because of its speculative nature but also because of its redistributional design. They specifically make two arguments:
First, they argue that the increased market share of bitcoin “can only come at the expense of consumption of the rest of society, which is impoverished.” In simpler words, since the researchers see bitcoin as an asset “absence of legal use cases that are effectively beneficial to society,” they argue that all capital moving towards bitcoin is essentially wasted and should be used in other sectors of the economy that can effectively increase the “production potential” of the economy.
“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, which is impoverished.”
Second, since the researchers view Bitcoin as “detached from any use case,” they classify it as some sort of Ponzi scheme, meaning that it functions primarily as a speculative asset that generates returns for earlier investors through the capital of new investors. There is no legitimate business activity or profit-making venture involved; returns are simply the redistribution of new investors' money. According to them, “all the wealth-effects enjoyed by the early adopters through the rising prices would be at the expense of the latecomers (and possibly non-holders), who are impoverished.”
“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. This redistribution of wealth and purchasing power is unlikely to occur without detrimental consequences for society.”
As mentioned in the introduction, this perspective is problematic. Regulators should abstain from forecasting markets or dictating the direction of technological innovation, including evaluating the economic utility of emerging sectors. Markets, driven by the decentralized actions of countless participants, are inherently unpredictable and complex.
Modern economics emphasizes that specialization and the division of labor are fundamental drivers of economic growth, and the dynamics of innovation—emerging from diverse ideas, competing strategies, and consumer-driven adoption—are not subject to centralized control. Attempts by regulators, or even central banks, to predict market trends or analyze the "desirability" of technological disruptions risk substituting their limited perspective for the collective intelligence embedded in market processes.
The primary mandate of regulators is to safeguard market integrity by protecting consumers from deceptive practices, fraud, and unethical business behavior. This includes fostering fair competition and upholding standards that maintain trust in economic transactions. However, stepping beyond these roles to assess the long-term feasibility of innovations risks undermining the market's evolutionary potential.
As John F. Kennedy aptly observed, “the free market is not only a more efficient decision maker than even the wisest central planning body, but even more important, the free market keeps economic power widely dispersed.” This dispersion of power makes markets robust and adaptive, enabling them to aggregate dispersed knowledge and respond dynamically to new information. Over time, market competition allows societies to “decide” the value of an asset or innovation, often through iterative experimentation and adaptation.
Efforts to predict or control market outcomes impose arbitrary constraints on entrepreneurship and resource allocation. Entrepreneurs and firms rely on market signals—prices, consumer feedback, and competition—to guide decisions on which projects to pursue, abandon, or scale. Regulatory interference, particularly when it favors specific technologies or strategies, risks redirecting capital and effort away from superior opportunities. For instance, subsidies for one technology can crowd out emerging alternatives that, while less developed initially, might ultimately prove more efficient or valuable to society.
Additionally, regulators are further constrained by bounded rationality: their knowledge is partial, their foresight limited, and their decision-making prone to political and institutional biases. The late Austrian economist, Friedrich Hayek, is known for his works highlighting how centralized entities cannot effectively aggregate or utilize the dispersed and tacit information held by individuals across the economy.
“I wish now to consider competition systematically as a procedure for discovering facts which, if the procedure did not exist, would remain unknown or at least would not be used … competition is important only because and insofar as its outcomes are unpredictable and on the whole different from those that anyone would have been able to consciously strive for.”
Excessive control over technological innovation also erodes the incentives driving entrepreneurship. Innovators thrive in environments that reward risk-taking and experimentation. Overregulation introduces uncertainty and raises barriers to entry, discouraging entrepreneurs and investors from pursuing ambitious ideas. The result is a less dynamic economy with fewer transformative breakthroughs and slower societal progress.
Allowing people and firms to experiment — whether by investing in unconventional assets or pursuing heterodox ideas — ensures that markets remain a robust engine of discovery and growth. This has been America’s secret weapon. It is the reason that market economies like the United States grow and innovate, while socialist systems decay and eventually collapse.
