Bitcoin's Obscene Wealth Disparity Is a Feature -

Bitcoin’s Obscene Wealth Disparity Is a Feature


Bitcoin promises extraordinary rewards to early adopters, should it go mainstream. The rewards are potentially far greater, for the earliest adopters, than could be achieved by starting a successful business. Nakamoto himself could end up by far richest person who has ever lived, and many others will end up in fabulous luxury just for mining on their laptops or spending miniscule amounts of money in 2009.

Lots of people don’t like this prospect, often because they believe that a few individuals with extraordinary wealth is harmful to the social order. For example, Michel Bauwens of the P2P Foundation calls Bitcoin an “engine of inequality” and argues that proponents of the libertarian ideology to which Bitcoin appeals “inevitably ally themselves with oligarchic forces and support their political programs of the dismantling of social solidarity mechanism, and any regulation which limits the freedom of powerful corporate forces”.

It is, furthermore, hard to argue that early adopters deserve what they get. In fact, just for the sake of argument, let’s say that early adopters don’t deserve it. They were lucky enough to be in the right place in the right time. Sometimes having the right inclinations and skills helped, but sometimes it was just dumb luck.

I think this issue, however, is framed incorrectly. The reward to Bitcoin’s early adopters is not an arbitrary choice. It is an integral part of Bitcoin’s success; Bitcoin would simply not work without it. Bitcoin needs investors in order to run. The more investment it has, the better it becomes, and it needs a lot of demand before it is liquid enough to handle large amounts of trade. Therefore, the more that Bitcoin attracts early adopters, the more viable it is.

Let us compare two different scenarios. Both take place in the early days of Bitcoin. In one Bitcoin is designed as it really was, whereas in the other, Bitcoin was designed not to produce such an enormous wealth disparity, perhaps because the supply manages to grow with the adoption rate. Choosing investments is always a matter of finding the best balance of risk and reward. How would these two scenarios compare? In the second scenario, the potential rewards to early adopters are clearly less than in the first, but interestingly enough there is also a lot more risk. The reason is that, for Bitcoin, the likelihood of success is simply the likelihood that there will be lots of investment in it. Consequently, the greater potential rewards in first scenario mean that people are more likely to invest, which means that success is inherently more likely. Furthermore, potential investors will have some understanding of this effect and would therefore regard any initial success as much more likely to drive further success in the first scenario.

Thus, the issue is not whether Bitcoin is unfair or whether extreme wealth disparity has bad consequences—the issue is whether Bitcoin could be successful any other way, which I doubt very much. The extreme potential rewards for early adopters produces an incentive that drives adoption. Bitcoin serves its own interest by rewarding early adopters. Attempts to concoct more “fair” distribution models, such as in this discussion by Vitalik Buterin on the ethereum blog, can only inhibit adoption, no matter how much more appealing the result might appear.

Rewards to early adopters are also useful from a security standpoint as a kind of bribe. Government attacks on Bitcoin are a real threat, but a currency that benefits early adopters is also one that invites government agents to defect and buy rather than attack. Every government agent has the opportunity and incentive to be an early adopter today, and the greater the incentive, the more likely is it that any government attack will be sabotaged by an early adopter among the agents carrying out the attack.

If Bitcoin succeeds, it will result in a world without a banking industry as we know it and without government control over the money supply. Its adoption will also produce a lot of very rich people. I have tried to show that these two consequences are closely related. I have not attempted to argue that wealth inequality is good in general, but only that it has benefits in this particular circumstance. I do not have any particular reason to dislike Bitcoin’s wealth inequality, but those who do not like it ought to understand that it is extremely functional in order to make a reasonable evaluation of Bitcoin. I do not think it is good or bad, fair or unfair that Satoshi will become by far the richest person in history if Bitcoin takes over. I don’t think that early adopters are necessarily smarter, cooler, prettier, better, or more deserving than anyone else. Rather, I think that they should be rewarded as a way to make Bitcoin’s future success credible. The best strategy in the Bitcoin game is to swallow your regret and jealousy and just buy, and the more that people come to understand this, the more successful Bitcoin will be.

Update September 16: expanded and clarified the last paragraph.

Image source:

Daniel Krawisz

Daniel Krawisz

Daniel Krawisz received his master's in physics from The University of Texas at Austin in 2010 and is now pursuing a master's in software engineering there. He has been involved in Bitcoin since 2011 and writes articles at Bitmessage: BM-NBPVwY5A26MtyfbHyh4UfA4Hn76DamAP

  • Nicolaas Smith

    Bitcoin at USD 8 billion market cap is almost nothing compared to the hundreds of Trillions in fiat transactions. Bitcoin has – as of now – done nothing to the status quo in the credit card hegemony (scam/rip-off), for example.

    You are a dreamer, not an economist or economic scientist.

    Bitcoin – as an ever-increasing-in-real-value investment destroys its chances to be a real currency.

    As a real currency (real money) bitcoin has to be perfectly or at least relatively stable in real value which is the absolute last thing you want (in your natural, human unlimited greed). Greed is good: Gecko :-)

    There is absolutely nothing wrong with bitcoin being the greatest niche value-transfer medium of exchange to date. What would be wrong with that?

    As a medium of exchange bitcoin could be valued at 1 cent or even 0.0001 cent too. It would work perfectly well at any value – with very efficient medium of exchange technology. As a medium of exchange you want to (eventually) go into and out of bitcoin in a nano second.

    That is bitcoin´s unique selling point, and not its potential to have an exponential increase in real value over time.

    Bitcoin´s best value to the world economy would be the ability to instantly transfer real value at almost no cost to anywhere else in the world – outside the traditional banking system. Governments are still going to regulated it to protect consumers.

    Just as it was very difficult to make money from the internet in the beginning, so it should be very difficult to make money from using bitcoin as a medium of instant exchange in the beginning until clever minds monetize free bitcoin exchange in a profitable way – similar to monetization of internet businesses.

  • tawster

    Attainment of wealth legitimate or not is a separate topic from how beneficial that disparity is to society.

    “Lots of people don’t like this prospect, often because they believe that a few individuals with extraordinary wealth is harmful to the social order.”

    A few individuals with extraordinary wealth *is* harmful to the social order. This is not something that is in debate by anyone any more really. Can anything be done about it? Not really. In the past, revolutions, wars, and periods of heavy taxation generally reboot and mix up these inherited states.

  • nozomi hayase

    I wrote a similar article in response to P2P foundation’s critical
    examination of Bitcoin’s wealth disparity. It also explores Bitcoin’s
    unique Swarm effect.

  • nozomi hayase

    I wrote a similar article in response to P2P foundation’s critical
    examination of Bitcoin’s wealth disparity. It also explores Bitcoin’s
    unique Swarm effect.

  • AJ AJ

    What’s missing from this analysis is dishoarding incentives.

    You’d have to be an insane true believer, especially in the early days, to keep more than about 10% of your net worth in bitcoin. If price growth made your initial investment grow to become more than 10% of your portfolio, you’d dishoard. Yet we are to believe these pizza millionaires are just “lettin’ it ride” knowing they could be back living paycheck to paycheck if Bitcoin fails?

    As shown in numerous cases, and as came to a head in 2011 when the price fell 95% (pizza guy who still *somehow* has 30000 BTC goes from millionaire to only having $60000 and rapidly falling), volatility and radical future uncertainty have led to a very high average dishoarding rate as the price increases. This means very few people have managed the superhuman feat of holding onto their bitcoins all this time. Those who have managed to retain a sizable amount have mostly done so by literally forgetting about them or losing access to them in the meantime, or by being so rich from the start that the incentives mentioned above didn’t apply to them. For those two groups we can indeed make a much more limited argument that some people got very lucky and there were some instances of rich getting richer (though the same is true of any investment – capital always begets capital, the first million is always the hardest, etc.). For the rest, like Nakamoto himself, holding out of sheer balls-to-the-wall ideological conviction, I would say they do deserve it.

    Nakakoto is almost a billionaire right now but is selling nothing, so he could go back to zero any time if a flaw in Bitcoin is discovered. Think of all the scares, the 51% attack concerns, the government crackdowns, the hard fork in March 2013, so many chances to lose all his money, but never sold. Could you do that? No normal person could. He either lost the keys or is a true believer of the noblest kind. If he were motivated by wealth he would have cashed out at least a few million long ago.

    A commonly cited statistic is that on average, for every doubling of the bitcoin price, long term holders sell 17% of their bitcoins. Run the numbers on this and find there is very little left of that 10000BTC pizza.