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.
If you liked this article, follow us on Twitter @themerklenews and make sure to subscribe to our newsletter to receive the latest bitcoin, cryptocurrency, and technology news.
What you say of bitcoin could be applied to precious metals or precious anything.
There will be other coins that become more suitable than Bitcoin for day to day trading for goods and services (ByteBall is one I’m keeping an eye on).
Also lets not forget that these cryptos are hugely divisible. I don’t personally know anyone that has a couple of Kg bars of gold hanging around (implying that 1BTC may one day be 1Kg gold). There just isn’t enough (depending on who’s figures you believe) for every man woman and child to have a few bars, but even if they did, it wouldn’t make them wealthy since wealth is a relative thing. Even when I was a kid $1million dollars was the stuff you imagined superstars to have, now I think it would just about get me through a fairly colourless life.. What would it have been 200-300 years ago to have such wealth? What do you do then, buy some ships and an army and go conquer for more of the same to create an empire that will be a footnote in the back of some book in the future?.
Then there is usable land – same applies. Equal wealth distribution would still lead for the majority to end up in very few hands on no time at all on a generational scale. Some people just haven’t been taught or sussed for themselves how to live within means in the western world. In areas where survival it a huge daily challenge the same game applies on a different scale.
A few millibits per person earned by working, and not taxed away can be re-used over and over again with sweat equity.
I see some ‘smart’ economists talking about the need for ”growth’, but the only growth is the sun air water that grows the orchard, everything recycles and the game starts again. We haven’t learnt to beat the ultimate casino (universe or whatever name you prefer).
Who would want to be a multibillionaire 100 year old with multiple organ shutdown imminent when you can be homeless happy and healthy? The definition of wealth is very flexible.
Absolutely, spot on!
I do not think you fully understand how the technology behind bitcoin works and thus you do not understand the threats that Bitcoin actually faces. Articles like this really do a lot of harm to the public and their understand of this tech.
For example:
“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.”
So far, Bitcoin has halved 2 times. Neither of these halving caused pools to close stop operating. Why? Because every miner knows years ahead of time ruffly when it will happen and if they can withstand the halving. People rushing out of the market on news is largely in the fiat market because the future of Fiat is so unknown. We literally have to wait to see what the chairman of the Fed will do. Bitcoin has the benefit of everybody knowing, decades ahead of time, what the currency supply will be. Farms will not quite at the halving. They will quite years before the halving if they will quite at all. What is most likely to occur, as it has every time so far, is the price will go up to make up for the supply drop.
The market function that creates the “Oligarch” is the fact that inflation forces anybody who has only a little to save to gamble with their saving in the stock market. Forcing them to participate in a system they do not have time to understand effectively. Thus, giving those who already have a lot a competitive advantage. Also, forcing the little guy into a system that has been created and controlled by lobbyist to give an advantage to the big guy. Bitcoin, that has hard deflation, allows the little guy to only have to worry about securing what he currently has because it will gain in value. It will incentivise saving which helps the little guy. This means Savings are actually SAVED for future use. This comes down the same age old debate between Lord Keynes and Hayek. If you buy into Kaynes’ world view, printing money is good and if you buy into Hayek, then printing money is the problem. I stand by Hayek because, when you look at history, any time Kaynes’ policies are put into place, Oligarchs thrive.