Beyond Whales: Bitcoin's Positive Role in Wealth Inequality
Thinking about inequality in a recent presentation reminded me that critics often argue that bitcoin is merely held by and controlled by whales. These critics posit that A) bitcoin is a cornered market and B) the idea that bitcoin can contribute positively to inequality is far-fetched. The ongoing consolidation in bitcoin provides a great opportunity to display the data which shows that bitcoin is becoming more equitable over time. Despite all the challenges I remain confident that we are working towards a fairer more resilient financial system. First, a couple of market updates.
Gold Strength in the Face of Rising Rates is Telling
Gold strength in the face of higher interest rates tells us that Developed Market governments are too indebted to manage the interest burden. Governments have no alternative but to monetize debt through monetary expansion and inflation. This bodes well for store of value assets that serve as monetary alternatives like bitcoin.
Harris Profligacy Supports Macro Cycle
Kamala Harris' improvement in the polls through August ahead of the November US Presidential elections was interpreted negatively by the market. This is understandable given the pro-crypto stance Donald Trump has taken in the past 6 months.
We don’t know exactly what a Harris Presidency means for crypto because she hasn’t made her policies clear. However relative to Trump, Harris would probably maintain obstacles for the broader crypto industry as it pertains to securities and stablecoin regulation. This could place pressure on non-bitcoin crypto assets relative to bitcoin and might be what the market has been pricing in the past quarter.
However, it is important to bear in mind that Harris is likely to favour profligate fiscal policies, which could be very bitcoin supportive. Harris has been a strong advocate for the Green New Deal, Medicare for All, the Federal Jobs Guarantee and the Expanded Child Tax Credits programs all of which pose further risks to the deficit and debt levels.
All that being said, a Trump victory would certainly be a boost to broader crypto markets, and the odds of a Trump victory are rising again.
Beyond Whales: Bitcoin's Positive Role in Wealth Equality
Inequality is a pressing issue facing the world today. According to Credit Suisse's Global Wealth Report (2021), the top 1% of the world's population holds 43% of global wealth, while the bottom 50% collectively owns just 1% of global wealth. Oxfam's report "Time to Care" (2020) highlighted that the world's 2,153 billionaires have more wealth than the 4.6 billion people in the bottom 70% of the global population.
Despite the magnitude of this challenge, I agree with Jordan Peterson's rejection of equality as a societal goal. Inequality is largely an inevitable aspect of human existence and is rooted in both biological and sociocultural factors (two identical twins are not equal!). Myopic focus by modern politicians on inequality reduction has numerous unintended consequences. However, in my mind it is also clear that the current financial system exacerbates inequality, creating further motivation to investigate bitcoin's ability to create a fairer financial foundation.
The Flawed Financial System and Its Role in Inequality
The conventional financial system relies heavily on interest rates and debt to stimulate economic growth, contributing significantly to wealth inequality.
Wealthier, better-educated individuals, and those in positions of power can access debt at lower interest rates, enabling them to accumulate productive assets beyond their income. They also have the ability to utilize debt more effectively. In contrast, poorer, less educated, and less powerful individuals may have access to debt, but at higher interest rates and shorter terms, often with less productive utilization of the borrowed funds. This disparity perpetuates the wealth gap.
Excessively loose monetary policies further exacerbate inequality through the inflation it creates. Wealthier individuals' asset and income appreciation often outpaces inflation, whereas poorer individuals do not hold appreciating assets and spend a larger proportion of their income on inflation-sensitive items like food, transport, and rent.
It now takes the average US worker more 4 times as many hours worth of work to purchase the S&P500 as it did in the 1970s and 1980s
Bitcoin's Unique Approach to Wealth Distribution
Critics of Bitcoin often point to the uneven distribution of the cryptocurrency, with a significant portion held by a small number of wealthy investors, known as "bitcoin whales." However, this criticism often overlooks crucial aspects of Bitcoin's distribution:
Skin in the Game:
In the early days of bitcoin, whales could probably have had a noticeable on price (market map was <$1bn pre-2013). However, with market cap >$1tn today, whales aren’t going to have a massive impact on long-term price. Perhaps they can flood an exchange in a stop-hunt and cause a short-term liquidation cascade, but their pockets are only so deep in an incredibly liquid market. Perhaps more importantly, whales have major skin in the game.
Warren Buffet and Charlie Munger have often emphasized the importance of having managers or controlling shareholders who behave as though they are stewards of their own capital, fostering a long-term focus. Bitcoin whales fit this bill. Their incentives are aligned with the health of the network. Any potential manipulation can only be short-term focused because in the long-term, they hold the asset in the expectation of price appreciation.
Evolving Equity:
Contrary to popular belief, Bitcoin's distribution is becoming more equitable over time. Glassnode data shows that the percentage of Bitcoin's supply held by entities with over 10,000 bitcoins is decreasing.
And the percentage held by entities with less than 1 bitcoin is steadily rising.
Fair Distribution:
Admittedly, bitcoin whales still hold a significant portion of supply. But I think there is a strong argument to be made that Bitcoin's distribution was uniquely fair from the start. Only a niche group of individuals interested in cryptography, finance, economics, and computer science were involved in its early days. Yes, many large holders 'got lucky' but how could bitcoin have been distributed better?
If you and I had received bitcoin in 2010, most of us would not have cared nor would we have had the technical know-how to mine or secure our bitcoin. We would likely have lost our private keys and lost the bitcoin.
While there are many early adopters who may have got lucky, many of these early adopters invested time in improving the network, technology, and educating others about its value.
The Role of Bitcoin in Reducing Inequality
Bitcoin's non-inflationary nature plays a crucial role in addressing wealth inequality. Anyone, regardless of their financial standing, can easily purchase small amounts of Bitcoin, knowing that its value is likely to increase over the next 3-5 years. This provides an opportunity for those with fewer resources to participate in a wealth-building asset, reducing their reliance on financial engineering to accumulate wealth.
In contrast, holders of fiat currencies are almost certain to see their purchasing power erode due to inflation over a 3-5 year time horizon. This constant pressure to maintain purchasing power disproportionately favors the wealthy, as they can leverage their assets to outpace inflation.
Conclusion
Inequality is a global challenge, but Bitcoin presents an opportunity to address it through fair distribution and a non-inflationary monetary policy. While critics point to the concentration of Bitcoin holdings, it is crucial to recognize the unique fairness of its early distribution and the evolving equitable nature of its user base. Bitcoin's growing role in reducing wealth inequality is a testament to its potential to lay the foundation for a fairer financial system in the future. By empowering individuals at all income levels to participate in a store of value, Bitcoin offers a path toward a more equitable global economy.