A summary of the inequality critique directed at Bitcoin, summarized from a very commented article at Ouishare, from Stanislas Jourdan:
“Bitcoin faces two types of criticism. The first is technical: Bitcoin is an anonymous and authority-less currency, which is eventually of great help to drug dealers, weapons sellers and anyone operating on the black market. Dropis’ founder Sebastiano Scròfina also listed several others criticisms, but the most crucial one is more economic than technical: it is related to Bitcoin’s design as a currency.
“Bitcoin is designed by people who believe in a certain type of economy, it is designed to be like gold, privileging hoarding” Michel Bauwens, P2P Foundation
Bitcoin can be described as a deflationary currency, or even a mere (virtual) commodity. Like gold, bitcoins are valuable because of their scarcity — Bitcoin’s money supply is limited to 21 million of units. A feature, according to libertarians and gold standard advocates, yet a bug for many.
The prominent Greek economists Yannis Varoufakis recently posted a very smart paper explaining the problem this causes:
To put it simply, if bitcoin succeeds in penetrating the marketplace, an increasing quantity of new goods and services will be traded in bitcoin. By definition, the rate of increase in that quantity will outpace the rate of increase in the supply of bitcoins. In short, a restricted supply of bitcoins will be chasing after an increasing number of goods and services. Thus, the available quantity of bitcoins per each unit of goods and services will be falling causing deflation.”
Which is bad, Felix Salmon says:
Inflation is bad, but deflation is worse. The reason is that in a deflationary environment, no one spends money — because whatever you want to buy is sure to become cheaper in a few days or weeks. People hoard their cash, and spend it only begrudgingly, on absolute necessities. And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.
Another way to put it: since bitcoin units are being created at an increasingly slower pace while more and more users join the currency, the value of each unit can only rise. Thereby, new entrants only have a smaller share of the Bitcoin monetary mass — unless they are rich enough to buy more bitcoin against official foreign currencies.
Bitcoin is about creating asymmetry and inequality where there is none,” concludes Financial Times’ journalist Izabella Kaminska, ”It’s a system designed to create bitcoin millionaires.
The Bitcoin elite: 78 entities
Those Bitcoin millionaires are not a myth. By examining the entire Bitcoin graph (pdf) as of July 12th 2011, researchers Dorit Ron and Adi Shamir have found very insightful results. First, they estimated that 59.7% of the Bitcoin coins are dormant, which means the majority of the coins are saved rather than spent in the system. Second and more interesting, they found that 97% of Bitcoin accounts contain less than 10 bitcoins, while a handful of 78 entities are hoarding more than 10,000 Bitcoins. Last but not least, the researchers identified only 364 transactions with more than 50,000 Bitcoins. “All these large transactions were descendants of a single transaction which was carried out in November 2010,” their paper concludes.
So basically you have a group of happy few people controlling the vast majority of all Bitcoins. But who could these guys be? Well, some further research led by Sergio Lerner suggests that one of those bitcoin millionaires is the mysterious Satoshi Nakamoto, the alleged inventor of Bitcoin. Since Nakamoto was most certainly the first Bitcoin user to make a transaction, Lerner could trace all of his account’s activity and found that he must own about 980K Bitcoins, which equal about 110 million dollars with today’s exchange rate.
If you are unsure what to think of this, here is Wikileaks’ Julian Assange’s take on the issue:
That means that you should get into the Bitcoin system now. Early. You should be an early adopter. Because your Bitcoins are going to be worth a lot of money one day. — Julian Assange, June 2011
‘How would Bitcoin help the Greeks?’
“How would Bitcoin help the Greeks?” asks Scròfina cynically. In terms of wealth inequality, one could expect better from an alleged ‘P2P currency’.
The Greek economist Yanis Varoufakis draws the conclusion that the idea of a “de-politicised currency capable of ‘powering’ an advanced, industrial society” is a fantasy.
Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects while tilting the balance from speculative to transactions demand for bitcoins? To do so we would need a Bitcoin Central Bank, which will of course defeat the very purpose of having a fully decentralised digital currency like bitcoin.”
Does it mean the idealistic project of a decentralized currency is dead? ”
This must-read article then looks further into alternatives.