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

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Fernando Gutierrez-Juarez/picture alliance via Getty Images Bitcoin is a useless asset that contributes nothing to global well-being, wrote Dieter Wermuth, economist and partner at Wermuth Asset Management, in a recent note. He says the bitcoin market is highly centralized and mainly benefits early investors and miners. Tokens are failing as a currency, given their high volatility and lack of real-world usage, according to Wermuth.

Despite calls from crypto enthusiasts to HODL (hold on for life), ditching bitcoin may be good for global prosperity, at least according to one economist.

Indeed, cryptocurrency is a wasteful investment that diverts funds from general economic growth, wrote Dieter Wermuth, an economist and partner at Wermuth Asset Management, in a note released Wednesday.

Speculative assets not only do not contribute to broader well-being, but they create social inequalities and enable money laundering, tax evasion and major deterioration of the climate, Wermuth said.

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

Below are three reasons to support Wermuth’s negative assertions about bitcoin.

(1) It does not distribute wealth equally

After the center-forward cryptocurrency bitcoin launched in 2009, it went from a virtually worthless asset to near $68,000 by 2021. But Wermuth says the gains haven’t been appreciated by all investors; instead, an unequal distribution of wealth 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 about $232 billion at the time.

Wermuth notes that coin-producing crypto miners and those who had positions long before the 2021 rally largely benefited from the currency’s gains, while those who joined late helped enrich initial investors to eventually suffer themselves. same losses when bitcoin crashed by around 75% in 2022.

(2) It’s not really a currency

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

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

His assertion assumes that money should fulfill three main roles as a means of payment, a unit of account, and a store of value, for which bitcoin performs poorly.

In order to facilitate stability, cryptocurrencies like bitcoin have a limit to the number of tokens that will enter circulation. However, that is quickly negated when investors treat it like an investment and create more daily volatility than other markets, Wermuth said.

At the same time, he cites the fact that bitcoin has not yet been widely used as a means of purchase 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 transfers.

(3) It is a negative sum asset

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

“In November 2021, bitcoin market capitalization reached $1.27 trillion,” he wrote. “When Lehman Brothers went bankrupt in 2008, a smaller amount of money triggered the biggest financial crisis and deepest post-World War II recession.”

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

Wider Crypto Market Issues

His rating comes at a time when high-profile challenges for the wider crypto world may have started to deteriorate investor confidence in the asset.

More recently, the collapse of the cryptocurrency-enabled Signature Bank revealed that it had been the subject of a US investigation indicating that its crypto customers may have participated in money laundering. Meanwhile, crypto exchange Binance is facing a lawsuit in the United States, with one of the allegations citing that it knew it was facilitating criminal transactions.

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

“I wonder if it will be enough to step up regulatory efforts, ban banks and other financial institutions from participating, or get rid of these markets altogether (if that remains an option),” he wrote.

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