Bitcoin inspires hope among many of its owners, investors, and users. Its culture is deeply steeped in the hopes of “being your own bank” and not having to rely on third parties such as government and financial institutions to guarantee, protect, and transfer your wealth. However while I love Bitcoin and want to believe in these sort of ideals as well, more and more I feel like Bitcoin may suffer some very similar problems that fiat economies have.
The Problem of Wealth Disparity
This is one of the most troubling aspects of Bitcoin that I can think of. We’re approaching having mined into existence about 80 percent of the 21 Million Bitcoin hard limit. Even though that limit will not be hit until about 2140 well beyond my and everyone reading this article’s death -barring some insane medical advancements-, the percentage of new coins that will be made available will be lower and lower.
I do not think that I am the only one who thinks that Bitcoin’s price will continue to explode as the available supply dwindles either. That is where the heart of this problem may be for me: Larger concentrations of coins will be in the hands of fewer people.
I believe that the individuals who have the fortitude and insight to be hodling onto their coins deserve to be rewarded for their risk. It is also my hope that I am hodling more coins if/when the price skyrockets. This will create Bitcoin oligarchs though. Those who bought in or mined early will become immensely wealthy and powerful.
Regardless of good intention, concentration of power like that historically has not worked out well. We also see large wealth disparity in our world today -which is still mostly dealing in fiats- and the levels of civil unrest that it engenders. I think that Bitcoin may share this problem and may even have it worse considering how low the population of Bitcoin users is.
The Issue of Centralized Institutions
Miners are necessary for processing transactions and bringing new coins into the economy. However the increasing difficulty of blocks and the insatiable thirst for electricity creates situations where only large mining farms and pools are even able to put up the hashrates needed to grab those blocks.
This is centralized. I’m far from the first person to realize or point this out, but it does mean that the Bitcoin network is starting to form these sorts of things it meant to free us from. We’re trending toward having very few holding the (metaphorical) keys to the coins.
As reward halving continues, even more of these pools and farms will shut down, again leading to even more centralization of the network. It would lead us closer to a system not too far from what we have today.
A Problem Unique to Bitcoin
While Bitcoin has many similar problems to the current prevailing financial systems it also has a very unique one: Lost Coins. This is when a wallet private key is lost and the coins in that wallet are unable to be accessed, even by the owner. While projects like the Large Bitcoin Collider may be looking for ways of cracking keys, it is generally agreed that these coins are gone until the private key is found or remembered. This adds a dynamic to Bitcoin that Banks and Governments do not really have: hard deflation. Governments and banks can always print more money. Bitcoin will only have 21 Million. Ever. So any lost coins or fraction of coins will be 21 Mill minus that amount. This could even lead to a further exacerbation of the wealth disparity problem I outlined before.
Bitcoin is a radical take on what economies should look like: trustless, secure, and reliable. However it still seems to have to address and move away from the pitfalls that our current financial system has created. To continue further without trying to address these would be foolish in my opinion.
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