Why the economy would be better off without Bitcoin: Dieter Wermuth

• Bitcoin is a wasteful asset that does not contribute to global welfare, Dieter Wermuth, economist and partner at Wermuth Asset Management, wrote in a recent note.
• He says that the bitcoin market is highly centralized and primarily benefits early investors and miners.
• The tokens fail as currency, given their high volatility and lack of real-world use, according to Wermuth.

Despite calls from crypto enthusiasts to HODL (hold on for dear life), letting go of bitcoin could be good for world prosperity, at least according to one economist.

That’s because the cryptocurrency is a wasteful investment that takes funds away from general economic growth, Dieter Wermuth – economist and partner at Wermuth Asset Management – ​​wrote in a note published on Wednesday.

Not only does the speculative asset not contribute to wider welfare, it creates social inequalities and opens the door to money laundering, tax evasion and major climate deteriorations, said Wermuth.

“Bitcoin activities are a negative-sum game,” he wrote. “Without crypto, the economy would be better off – there would be more money for consumption and investment.”

Detailed below are three reasons to support Wermuth’s negative claims about bitcoin.

(1) It does not distribute wealth equally

After the cryptocurrency bitcoin first launched in 2009, it went from being a virtually worthless asset to reaching a level of nearly $68,000 by 2021. But Wermuth argues that the gains were not shared by all investors; rather, an uneven distribution of wealth was formed that favored crypto insiders.

To illustrate, a 2021 Wall Street Journal article reported that 0.01% of bitcoin investors held 27% of the coins then in circulation, or roughly $232 billion at the time.

Wermuth notes that coin-producing crypto miners and those who held positions long before the 2021 rally overwhelmingly benefited from the currency’s gains, while latecomers helped make early investors richer—only to potentially experience losses even as bitcoin crashed by around 75 % in 2022.

(2) It is not really a currency

The intense volatility that bitcoin has experienced throughout its history also shows how ill-equipped it is for a monetary role.

“Bitcoin has been brought to market with the narrative that it would be a better, more stable currency than traditional money,” Wermuth wrote. “This story has been a deception.”

His claim is based on the assumption that money must achieve three core roles – as means of payment, unit of account and store of value – at which all bitcoins perform poorly.

To facilitate stability, cryptocurrencies such as bitcoin have a limit on how many tokens will enter circulation. However, this is quickly undone when investors treat it as an investment and creates more daily volatility than other markets, Wermuth said.

At the same time, he cites the fact that bitcoin is not yet widely used as a purchase unit, and has not been accepted as a means of paying taxes. Transfers between bitcoin accounts, meanwhile, continue to be slower and more expensive than traditional ones.

(3) It is an asset with a negative sum

Despite the elements outlined above, bitcoin generates a lot of financial liquidity without any evidence that it contributes to productivity growth, Wermuth said.

“Back in November 2021, bitcoin’s market capitalization reached $1.27 trillion,” he wrote. “When Lehman Brothers went belly up in 2008, a small amount of money had triggered the biggest financial crisis and the deepest recession of the post-World War II period.”

On top of that, the process of bitcoin mining — which uses hardware to add crypto transactions to a blockchain in return for newly minted coins — is so energy-intensive that Wermuth described it as a “huge climate killer.”

Broader crypto market issues

His note comes at a time of high-profile challenges for the broader crypto world — ones that may have begun to erode investor confidence in the asset.

Most recently, the collapse of crypto-friendly Signature Bank revealed that it had faced a US investigation that indicated its crypto customers may have participated in money laundering. At the same time, crypto exchange Binance is facing a US lawsuit, with one of the claims citing that it knew it was facilitating criminal transactions.

Before that, November’s FTX collapse demonstrated the risks to crypto investors operating in the unregulated market, as many of the lender’s clients saw their holdings wiped out.

“I wonder if simply stepping up regulatory efforts, or banning the participation of banks and other financial institutions — or getting rid of these markets altogether (if this is still an option) will be enough,” he wrote.