«A viable bitcoin is as impossible as dividing by zero», conclude in an influential article in N, Ulrich Bindseil, Director General of Market Infrastructures and Payments at the European Central Bank (ECB) and Jürgen Schaaf, a consultant in the same field.

The ECB's senior officials deconstruct one by one the arguments in favour of cryptocurrency. As they state among others:

«There is now broad consensus that bitcoin has not achieved its original goal of being a currency. It is too unstable and too expensive to maintain to fulfill the classical functions of money, namely a unit of value, a means of payment, and a means of holding value.

Because bitcoin is not efficient as a means of payment, it is not competitive for legal payments and has no other intrinsic value. Moreover, it generates neither cash flow nor dividends, and it is extremely expensive to maintain. No deep knowledge of financial mathematics is required - common sense is enough to realize that the price of bitcoin will sooner or later go to zero.

One can look at it from any angle: the bitcoin bubble has all the characteristics of a speculative bubble according to the «biggest sucker» theory: the value increases as long as there is an even bigger sucker who assumes that he can sell at an even higher price some time later. But, like the fact that the number of bitcoins is ultimately limited, at some point there will no longer be enough suckers who want an ultimately worthless speculative item. In the long run, bitcoin's inherent lack of value will also prevail in the market.».

Below is the full text of Ulrich Bindseil and Jürgen Schaaf:

The «boom» of bitcoin continues despite repeated adversity. The success story of the most popular crypto asset to date, with a market capitalisation that for a time exceeded one trillion US dollars in the course of the year, is based on three promises: first, to create a globally efficient currency; second, to be inflation-proof and even allow for large capital gains; and third, to liberate the «individual» from the state and empower it. But the promises of this digital triad are not being fulfilled. And because the collective illusion has now reached proportions that will cause significant damage to society, interventions by legislators are becoming increasingly likely. And then the paper tower will be threatened with collapse.

But let's take things in order: Bitcoin was originally just a gimmick whose economic justification seemed specious. In 2007, a then nebulous group of software developers devised a completely decentralized concept of accounting records that allowed electronic payments to be largely anonymous through encryption and irreversible, i.e. without subsequent settlement. Under the pseudonym Satoshi Nakamoto, a white paper and source code for this «digital money» was published, and in January 2009 the first fifty bitcoins were created. With no central authority, a global network of equivalent computers controls, monitors and stores the system and sets the financial incentives for all participants to keep it running. Every few minutes, new packets of data are collected on the «blockchain», a digital ledger of payments. Technically, a blockchain is a chain of data blocks that continues to be updated over time and is maintained as a distributed ledger. To prove this, computers must solve a mathematical «cryptographic puzzle» for each «block», for which a reward awaits them in the form of transaction fees and newly created bitcoins. The new bitcoins are minted by decentralized «mining» by countless users and their computers. The maximum total number of bitcoins is technically limited to about 21 million, of which just under 19 million are already in circulation.

Bitcoin is not a currency

There is now broad consensus that bitcoin has not achieved its original goal of being a currency. Bitcoin is too unstable and too expensive to maintain to fulfill the classic functions of money, namely a unit of value, a means of payment, and a means of holding value. Providing incentives to maintain the system without central authority is inherently wasteful and costly. It cannot compete with traditional governance of market infrastructures. Therefore, the business model of bitcoin as legal tender cannot work in the long term. The lack of acceptance by merchants due to long settlement times and high fees already indicate that bitcoin cannot be taken seriously as a means of payment except for a few small and scattered pockets. The latest failure on a larger scale was El Salvador's attempt to introduce bitcoin as a second legal tender alongside the US dollar on September 7. The attempt failed for the time being, mainly because there was no acceptance by the population, and sent the bitcoin exchange rate on a downward trend (15% loss over the course of a day).

The technically stable «money supply» of bitcoin also turns out to be a weakness if we look at it more closely: what is being launched as a protection against inflation would inevitably lead to the deflation trap in a developing economy. When we have deflation, falling prices tempt people to put off less urgent purchases until the future. This is perhaps reasonable when it comes to an individual, but when it comes to society as a whole, demand falls and the economy slows down. There is comfort, however, in the fact that the supposed protection against inflation through a steady supply of cryptocurrencies is false as the number of potential cryptocurrencies that can compete with bitcoin is, after all, unlimited.

The oft-used comparison with gold is also misleading, as gold is used in industry and had value as jewellery for centuries before anyone thought of using it as a store of value, a form of investment or a currency reserve. Moreover, gold does not degenerate over time and retains its value even in chaotic conditions or temporary failure of digital infrastructure.

Finally, the argument that the fiat money of modern central banks also has no intrinsic value is not valid as by deliberately moving away from gold backing, states and central banks have established strict mandates, legal safeguards, and institutional and operational arrangements (independence, as well as loans against collateral) in order to be able to let go of the gold brake without losing stability.

The favorite investment of the «biggest sucker»

Because bitcoin is not efficient as a means of payment, it is not competitive for legal payments and has no other intrinsic value. Moreover, bitcoin generates neither cash flow nor dividends, and it is extremely expensive to maintain. No deep knowledge of financial mathematics is required - common sense is enough to realize that the price of bitcoin will sooner or later go to zero.

Investors who bet on a perpetual increase in value because supply is limited confuse scarcity with value: limited quantities of any good are worth a penny a dozen - it is only useful subjective demand that makes a good valuable. Subjective enthusiasm for bitcoin alone is not enough in the long run, especially since the following principle also applies to a purely numerical chain like bitcoin: technologies are replaced by better technologies and newer technologies soon displace the until recently newer ones. In fact, the relative importance of the dominant bitcoin in the crypto asset market continues to decline: while bitcoin accounted for almost 90% of the capitalization of all crypto assets at the end of 2016, today it only accounts for about 40%.

It is not surprising that the market celebrations for other cryptosystems are wild, without the working hypothesis becoming more convincing. Cardano doubled in value in August and climbed to third place among cryptocurrencies behind bitcoin and ethereum. A token called avalanche tripled in value in the same period. At the same time, prices for digital photos of laser-eyed rocks or encrypted whales soared, sometimes in just a few days. And tabloids in some countries are now giving advice on investing in cryptocurrencies, just like the manager of a local tattoo studio.

Since the value of bitcoin is not linked to any economic benefit (as it is unsuitable as a means of payment) and since the cost of maintaining this economically meaningless system is too high, the valuation of bitcoin in the market is based purely on speculation. This only works for as long as the illusion of the bitcoin community about its supposed advantages as a means of payment can be maintained.

The illusion of liberation

Despite all its economic weaknesses, there is still a vision of liberation from state control and abuse of central authority. Bitcoin, with its decentralised organisation, promises the emancipation of the individual and the total democratisation of the monetary system. However, the pseudo-liberal ambitions of bitcoin tend to come from privileged elites who have become comfortable in the security of the rule of law, without understanding how the market and the regulatory influence of the rule of law and institutions work. Freedom needs rules, otherwise there is the threat of anarchy and the law of the strongest.

This lack of understanding was already evident in Nakamoto's (2007) White Paper. In it, Nakamoto criticised the fact that online commerce, unlike cash, relies almost exclusively on financial institutions as trusted third parties to process payments. Irreversible transactions are not possible, he said, as disputes sometimes have to be resolved by arbitration. With the possibility of reversal, however, the need for trust increases. This increases the cost of transactions, limits the minimum practical size of transactions and prevents small occasional transactions.

However, the finality of payments is an established concept, and the reversibility of payments has less to do with payment systems as such than with the objectives of civil and criminal law, i.e. the possibility of returning or confiscating illegally obtained funds. The fact that a payment cannot technically be reversed does not preclude the subsequent initiation of a new payment, either voluntarily or by order, for example in the case of compensation. The fact that this economic reversibility is costly in the case of bulk payments is not due to technology but to legal and contractual requirements.

The almost religious glorification of maximum decentralisation as the optimal organisational form of markets reveals something similar. The fact that the economy and financial markets in developed market economies are not organized in a purely decentralized and spontaneous way, but rather are characterized by centralized institutions and structures with an internal hierarchy (firms) within defined rule frameworks, has long been recognized in the economic literature, at least since the time of Nobel Prize winners Ronald Coase and Oliver E. Williamson. Firms and imperfect contracts help address uncertainty and complexity and reduce transaction costs - and are by no means the second-best solution in the absence of appropriate technologies. The mechanistic rules that bitcoin seems to create are not the right solution for a changing world.

Bitcoin is also nowhere near as «democratic» as the community thought, at least in the early days, but is shaped by financial interests and powerful shareholders. The masses, the 75% of addresses, hold only 0.2% of market share. The hundred largest bitcoin shareholders hold more value than the smallest 38 million combined. In such concentrated markets, the comment of a large investor with numerous followers in Twitter is enough to cause price drift or fireworks. This is more elitist than egalitarian. Tesla CEO Elon Musk had commented several times on bitcoin, repeatedly revising his opinion, to which the price reacted violently each time.

Finally, the prospect of a borderless world is part of the pseudo-liberal fantasy that bitcoin, as a global means of payment without national jurisdictions, could transcend borders - quite unlike conventional cross-border payments. Specifically, the benefit of bitcoin would then be that people could send value across borders for free and without hindrance to anyone with a bitcoin wallet. This argument fails to acknowledge that the high cost of conventional cross-border payments is not due to the inefficiency of payment instruments, but to a significant extent to regulatory requirements to combat money laundering and terrorist financing. However, these requirements, the costs of compliance with them and the provisions for legal risks only affect the regulated financial sector. The fact that bitcoin payments have so far managed to escape this phenomenon altogether is therefore a regulatory oversight rather than a technological achievement. But more on that below.

Possible change of attitude by regulators

In addition to the design flaws that undermine long-term interest in bitcoin, the cryptocurrency also poses risks to society and the environment: the system is widely used for criminal activities and wastes energy on a large scale. The fact that lawmakers in many countries have long watched this game idly does not mean that this situation will remain so.

The development of the bitcoin market has been characterised from the beginning by market manipulation and the dubious activities of the operators. This is coupled with the fact that a not inconsiderable proportion of bitcoin is used for illegal activities. Drug trafficking, money laundering, terrorist financing and extortion are the most popular areas of use, especially for cross-border payments. The relevant figures are disputed here. Some studies conclude that use for illegal activities reaches 40-50%. Proponents of bitcoin, on the other hand, talk about a figure of less than 1%. But this is mainly due to the fact that the denominator confuses the volume of trade with economic activity.

To the extent that the principle of «same function - same risks - same rules» is to be applied to money laundering and terrorist financing and to target the act rather than the means, a change in the attitude of regulators is increasingly likely. In fact, European legislators are already moving in this direction. Otherwise, a simple feature of a computer network could override a central element of the global financial regulatory framework. The group of twenty major industrialised and emerging economies, the G20, is currently working hard to improve cross-border payments. These are expensive and because the not always clear and globally still inconsistent application of regulatory requirements leads to high compliance costs and legal risks for legally operating companies. An overall improvement of the regulatory framework would involve covering all cross-border payments and at the same time improving the clarity and enforceability and therefore the effectiveness of the regulatory framework.

Finally, there is the gigantic energy waste of the bitcoin network. In June, the University of Cambridge estimated bitcoin's annual energy consumption at just under 115 terawatt hours, roughly equivalent to Pakistan's electricity consumption. And there's no hope of improvement on the horizon, because an insatiable thirst for energy is inherent in the system. Without an official or trusted issuer, complex decentralized control mechanisms and therefore high computing power are required, meaning that the huge energy consumption is the inevitable symptom of the social inefficiency of the bitcoin system. Electronic payment instruments issued centrally by trusted issuers are incomparably more energy efficient and therefore more sustainable, as various studies have now proven.

The threat of damage to the environment as well as regulatory arbitrage, especially of illegal activities, make a government response increasingly likely. Leading global bodies such as the Financial Action Task Force (FATF) and the Financial Stability Board (FSB) have recently declared an unequivocal war on cryptocurrency money laundering.

The list of arguments against a permanent bitcoin is long. Even if no one can say exactly how much longer the spectre will hover, everyone is already well enough informed not to rely on bitcoin either as a means of payment or as a capital investment. A viable bitcoin is as impossible as dividing by zero.