Bitcoin’s inequality problem puts the dollar to shame

Image: Yuri Cortez (Getty Images)

Cryptocurrency enthusiasts have long been in favor of the decentralize and democratizing effects the technology supposedly encourages, but new research detailed in The Wall Street Journal suggests that inequality problems are worse than the United States’ disgraceful performance under the dollar. An Incredible Achievement Given Income Inequality in 2020 America was the highest of all G7 countries, according to data from the Organization for Economic Co-operation and Development seen by Pew research.

That illustration, of a disappearing small bitcoin financial elite, was revealed in a new study from the National Bureau of Economic Research, authored by professors from the MIT Sloan School of Management and London School of Economics. It found that of the 19 million bitcoin currently in circulation, only 0.01% of buyers hold about 27% of the total supply. That 27% figure equates to about 5 million bitcoins, which in turn adds up to about $232 billion USD. By comparison, the 1% richest American individuals own “only” about a third of all the nation’s wealth, the Journal notes.

The professors conducted their research by mapping and analyzing every bitcoin transaction for the first time over its 13-year history. Because the identities of users on the blockchain are not directly linked to their transactions on the blockchain, the professors were not able to get too much information about who exactly benefits the most from bitcoin. Instead, the study paints a picture of how bitcoin’s economy works in general. This small concentration of so much wealth means that the bitcoin rich will likely only get richer if the cryptocurrency continues to rise in value. It also means power is less dispersed, which could make bitcoin more susceptible to “systemic risk”.

Those findings don’t exactly bode well for the long run of cryptocurrencies enthusiasts who has preached the perceived ability of technology to reduce inequality. The argument here goes that something along the lines of cryptocurrency will democratize finance by redistributing power away from global governments and the wealthiest power brokers on Wall Street.

That argument was never foolproof per se, but it arguably carried more weight in the early days of bitcoin, where the cost of access was low, and almost anyone could reasonably afford to mine their own bitcoins with a simple, accessible rig. However, the overall landscape has changed dramatically, especially in the past two to three years as the price of bitcoin increased. Through that process, bitcoin has not curtailed inequality at all. If there is something, it replicates it.

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At the same time, there are experts and academics who have sounded their own alarm bells about the potential inequality that bitcoin is causing tendencies. in a interview with CNBC Cornell University, professor of economics and author of: The future of money Eswar Prasad has admitted that cryptocurrencies can make digital payments more accessible, but said this does not guarantee a reduction in inequality.

“Due to existing inequalities in digital access and financial literacy, [cryptocurrencies] could exacerbate inequality,” Prasad described bitcoin as a bubble. “In particular, financial risks arising from investments in cryptocurrencies and related products can ultimately be especially hard on naive retail investors.” Prasad also warned that bitcoin and other cryptocurrencies could contribute to monetary and financial instability, a problem that could be made much worse if they exist in a largely unregulated system without reinforced investor protections.

Despite all this, the mentions of “decentralization” and “democracy” and “independence” regarding crypto abound as a new wave of web3 investors and enthusiasts spend millions lock in NFTs and forms DAOs to make collective purchases.

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