In the Bitcoin world, half the wealth belongs to the 0.1 percent

From the Washington Post‘s Brian Fung, the key figures that everyone should know about Bitcoin’s inequality effect, which is worse than society’s general average inequality:

1.

“the drawback to consolidation is that those benefits will be concentrated in the hands of a relative few. That dynamic is already playing out among individual holders of Bitcoin, with a growing gulf between the Bitcoin-rich and the Bitcoin-poor. According to Risto Pietilä, a Finnnish entrepreneur, the overwhelming share of Bitcoin wealth is held in just a few dozen wallets. Half of all bitcoins belong to around 927 “individuals.” If those figures are right, then half of the world’s 12 million or so bitcoins is held by a tenth of a percent of all accounts. That’s a stunning statement of inequality, since in the real world 46 percent of the world’s wealth belongs to 1 percent of the global population. The Bitcoin world, then, is even less equal than the real world.”

2. Market investment is equally skewed:

“North America has twice the number of Bitcoin-related, venture-backed businesses that Asia does. Overall, Canada and the United States account for 60 percent of such companies, according to a study released last week by Coindesk. Seventy percent of all Bitcoin venture capital goes to U.S.-based firms.”

In an earlier study (september 2013), Rick Falkvinge had studied spending patterns:

(newer studies of the ‘real value’ of the coin have estimated it at $4 to $10)

3. Rick Falkvinge:

“we look at the different economies making up bitcoin today. There are about 11.7 million bitcoin in circulation today. Out of these, a staggering 2 million bitcoin are gambled every year on the SatoshiDice site alone, and another, PrimeDice, 1.5 million.

To put these numbers in perspective, if translated to the global economy, it would mean that people bet the entire production of the USA at one single betting site, and the entire production of Europe on another. But as we have seen, these numbers do not contribute to the money supply pool in any meaningful way in a functioning economy. They are not funds in lockdown, or at least not for more than a few minutes. For all intents and purposes, the velocity of internet-based gambling money is infinite, or at least so much larger than other funds that it can be discarded.

That leaves us with drugs, read Silk Road, and for lack of a better word, normal products and services. A recent estimate says that Silk Road has two million USD in monthly turnover. This is real money that contributes to the money supply. A fair estimate could assume a two-month lockdown on such funds.

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The answer came quickly – “a couple of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is currently no measurable bitcoin economy outside of drugs and gambling.

This gives us enough data to calculate the value of the money pool, and derive the value of one bitcoin from there. If Silk Road has 22 million USD in annual sales, let’s be very generous to err on the safe side, and divide that by the United States’ money velocity, which is 1.67 on average instead of the 6 estimated above.

This generous estimation gives us a total bitcoin money supply value of 13 million USD.

The observant will note that this estimation of bitcoin’s total money supply value, while obviously a ballpark number, is less than two magnitudes smaller than the bitcoin money supply’s current valuation of 142 USD x 11.7M bitcoin = 1.66 billion USD.

Dividing this value with the bitcoin supply to get the current value of one bitcoin, this means that the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is roughly one US dollar and twelve US cents. And that’s still a generous estimate.

It’s not hard to see why I use the words “vast overvaluation”, seeing how one bitcoin is currently trading at 142 USD. So how did we get here? Part speculation on future value, obviously, but there is something else going on too here. More interestingly, when looking very closely at the market for the past two months, there is ample and obvious evidence of price fixing.”

4. Robert Wenzel, in Forbes, has described illegal price fixing schemes by the bitcoin elite:

“[A]ccording to Boston University Finance Professor Mark Williams the price [of Bitcoin] has really been driven by an influential few. Just 47 people own 29% of all outstanding Bitcoins; 930 own 50%. Another 10,000 folks bring the total owned by the largest coin holders to roughly 75%, leaving a sliver to be split among about 1 million small-change Bitcoiners.

Williams, a former trader and bank examiner for the Federal Reserve, argues that in 2013 the 47 powers coordinated to push prices up. They counted on what economists call Greater Fools. Investors make money when someone is willing to pay a higher price for a security than you did — Greater Fool Theory states that there is always someone willing to pay a higher price. But Williams sees the broader market wising up to Bitcoin’s limitations and taking back control in 2014[…]

“If you hype demand the small incremental amount that is available for sale set the price,” says Williams. “That’s not an efficient market, that’s an inflated market, a market that is misled with false information. I think the market mechanism right now is being interfered with.”

As these facts and questions enter the wider consciousness, as they have begun to, Williams feels smaller Bitcoin investors will pull out. “When these million people stop buying at these high prices, that’s when the house of cards will start falling pricewise.”

5. Stanislav Datskovskiy, citing the earlier 2010 Shamir study, made the following comments about the distribution issue:

“The most damning fact revealed in the paper is not the extreme top-heaviness of the Bitcoin ownership pyramid, but rather the elaborate lengths to which the hoarders went in order to conceal their existence from “rank and file” users. Think of it! Hundreds of thousands of shill accounts, with vast rivers of wealth moving back and forth – for one purpose only: to deceive. None of it was done by accident.”

2 Comments In the Bitcoin world, half the wealth belongs to the 0.1 percent

  1. Mike Riddell

    “Hundreds of thousands of shill accounts, with vast rivers of wealth moving back and forth – for one purpose only: to deceive. None of it was done by accident”

    Correct!

    Is it true that Satoshi what’s-his-face is actually an ex Goldman’s investment-banker from Manhattan, NYC?

  2. Rassah

    You apparently missed that when 1% owns 46% of the world’s wealth, that DOESN’T MEAN that they own 46% of all US dollars. It just means that everything they own, be it money, stocks, property, or whatever, comes out to about 46% of the total wealth, whatever currency you measure it in. So claiming that there is wealth inequality in bitcoin because a few people ow bitcoin and the rest of the world does not, is about as stupid as claiming that since only a small percentage of the world owns a Subway franchise, that those owners are ridiculously rich, or are contributing to inequality, because most people around the world don’t own a Subway franchise.

    Also your WordPress choice for “normal products and services” was a horrible pick. Try asking Gyft, which is used by bitcoiners for normal sopping almost ever day. Or Overstock (sold over a million in bitcoin transactions). Or better yet Coinbase and BitPay merchant processors, who have overseen tens (maybe hundreds) of millions in bitcoin transactions for “normal products and services.”

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