2.5% of Bitcoin Owners Hold 95.5% of Total Bitcoin Wealth. That's a Problem.

In my previous article 7 Considerations Before Buying Bitcoin, I mentioned that 2.5% of bitcoin owners hold 95.5% of total bitcoin wealth. This fact prompted twice as many responses as any other point, many of which were very strongly worded and some not so nice (why the hate, bitcoin acolytes?). So rather than replying to each message and comment individually, consider this my blanket response to a generalized argument.

I won't bother attacking the irony that cryptocurrencies are the "ultimate source of equality for the people", akin to a present-day digital Robin Hood, robbing from the rich and graciously giving to the poor. I know nobody is actually making that argument. But seriously though, some people are.

But let's at least acknowledge that cryptocurrencies are just like fiat currencies, derivatives such as options, and a game of poker in the sense that they are a zero-sum game. This means when a cryptocurrency transaction occurs, no actual value is created. Wealth is only transferred from one person to another, assuming there is a rise or fall in price. In the case of bitcoin, a horrendous amount of resources are used and capital spent in order to produce the asset.

Bitcoin Holdouts: We Are the 99 Percent!

The fact that 2.5% of bitcoin owners own 95.8% of bitcoin is a massive understatement if you're going to compare it to the entirety of wealth in the US economy. So let's go toe-to-toe with this analogy. What about the more than 300 million Americans, not present in my previous 'bitcoin owners' calculation, who own absolutely no bitcoin whatsoever? Is the plan for them to wait until bitcoin usage becomes ubiquitous and force them to adapt to the new currency, spending a million times more than early adopters to convert US dollars to bitcoin? Why do early adopters have the edge, anyway? Realistically they have done nothing to earn such a wealth advantage with this new currency (a currency, by the way, which is actually a quite arbitrary implementation of blockchain technology). This doesn't seem very fair at all!

But economics doesn't have to conform to any standard of fairness. It simply is what it is... a regulated buyer's and seller's market. I concede that. But you're asking for trouble when your new unregulated digital currency, heavily favoring early adopters, comes storming in to supplant government fiat currencies. Especially when some of the biggest, baddest dudes in the investing world are saying cryptocurrencies will end poorly.

How Much is a Bitcoin Really Worth, Anyway?

Another reason we can't compare bitcoin wealth distribution to total wealth distribution is that total wealth is nearly always diversified across multiple asset classes. Those asset classes have a value based on more quantifiable future returns and productivity. The market is efficient in the sense that it will always seek to price an asset based on it's expected returns and/or future consumption.

A company produces a tangible return in the form of future profits for its shareholders. If there is an inequitable distribution of ownership in a profit-generating company and a majority shareholder decides to sell, this decision will most certainly take a toll on the stock price. This impact will only be temporary, however, because other investors will swoop in to purchase the undervalued company shares when they consider the future profits the company expects to produce versus the purchase price of the stock.

Cryptocurrency returns, on the other hand, are purely speculative. The value of a bitcoin is only determined by what a buyer is willing to pay for it. It produces no value on its own. It is much harder (or even impossible) for bitcoin's price to recover from a blow when majority holders sell off their large stashes. Bitcoin does not generate profits, therefore there is no reputable quantitative valuation for the efficient market to recover towards.

Conclusion

I'll conclude by saying that I am an advocate of blockchain technology. It serves a purpose in cryptocurrencies. I think it will inevitably have an impact on our futures. Having said that, I'm not a fan of zero-sum speculation and the taking advantage of other people for monetary gain. Bitcoin is unfortunately at the center of much of that, and I don't think this was the intention of its creators. It might just end up being one of the biggest asset bubbles in history, but I hope that's not the case.