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Research: Is cryptocurrency supporting financial inequality?

Bitcoin was created to offer people of the world equal financial opportunities. Cryptocurrencies were developed with the world’s unbanked population in mind, offering them a convenient alternative that omits the need for greedy middlemen. However, during the past few years, cryptocurrencies, especially bitcoin, have greatly deviated from their ultimate goals.

A recently published paper analyzes how inequality is currently being exhibited in the world of cryptocurrency, namely as evidenced by the concentration of most of Bitcoin’s wealth in the hands of a small number of owners. The analysis correlates this fact to the concept of cryptoanarchism which entails that cryptocurrency represents a novel way to democratize wealth via distributing it widely among a large number of autonomous participants. Relying on data obtained from Bitinfocharts, the paper proposes that the concept of cryptoanarchism is being hindered by the real picture which is marked by concentration of the crypto wealth causing inequality associated with the traditional global economic model.

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The growing interest in cryptocurrencies has produced a plethora of research studies into the potential of the blockchain technology at multiple scales. One of the most attractive features of cryptocurrencies lies in its strong support of wealth democratization via a trustless system compromised of a large number of autonomous users. This feature has enticed a large number of investors who believe in the philosophy of cryptoanarchism. This segment of investors abandoned the traditional financial system because it is associated with inequality of wealth distribution. This observation is especially accurate in the age of cryptocurrencies, secondary to the striking inequality seen in most of today’s societies.

Concentration of Bitcoin wealth:

Due to the fact that a considerable percentage of cryptocurrency investors believe in the concept of cryptoanarchism and democratization of economic participation, this ideal should be questioned thoroughly. Via studying the data obtained from Bitinfocharts concerning concentration of the overall Bitcoin wealth, we can question whether or not democratized economic participation does not take place any more in the blockchain based economy.

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Figure (1): Bitcoin wealth addresses and thresholds

As shown in figure (1), only 575 bitcoin addresses, out of a total of around 20 million addresses, include funds that exceed $10 million. Moreover, around 14 million wallet addresses have a value ranging between $1 and $99. The distribution is quite dramatic, as only around 4 million addresses have a value ranging between $100 and $999, while only around 300,000 wallet addresses have a value between $10,000 and $99,999. Interestingly enough, only five addresses included around 600,000 BTC, which is equivalent to around $1.98, at the time of writing of this article, representing around 3.4% of the overall bitcoin wealth. Collectively, around 1% of bitcoin addresses hold over 50% of the current total number of bitcoins.

Reproducing inequality of the conventional economic model:

Does not this resemble the inequality seen in the conventional economic model? During the past few years, and especially following 2008’s global financial crisis, a considerable amount of attention has been directed towards the concentration of conventional forms of wealth in the hands of around 1% of the world’s population. The degree of inequality keeps worsening, which is described by politicians and civil community groups as a frustrating global economic status. However, does the cryptocurrency economy manifest a different status? As shown, a hypothetical analysis at the concentration of bitcoin wealth in a small number of wallet addresses proves that inequality is being reproduced in the cryptocurrency based economy as well.

How can this be remedied with the philosophy of cryptoanarchism which strongly supports democratization of wealth distribution and economic participation? There are multiple problems that can challenge this reconciliation. Firstly, cryptocurrencies represent a relatively new form of assets; thus, they cannot be directly compared to traditional forms of capital. Moreover, the bitcoin wallets of early adopters piled up mined bitcoins in a manner that is extremely different from conventional assets because staggered adoption of this new form of capital spanned over a period of ten years until now. Also, conventional capital has approached a level of near entirety of each community it affected, whereas participation in the cryptocurrency economy is essentially a voluntary decision. These problems illustrate the striking discrepancy between the philosophy of cryptoanarchism and the reality of wealth concentration.

Final thoughts:

Bitcoin, and cryptocurrencies in general, have greatly deviated from the purpose they were innovated for. Further research studies are needed to analyze the aftermath, both within the cryptocurrency community and global society in general, of reproducing economic inequality via a novel form of assets which were thought to strongly support democratic economic participation.

One comment

  1. Welp, even in the cryptoworld, there’s no such thing as a “democracy” that hasn’t killed itself yet. Also, when there are people within the hype (and under it) that want stacks and stacks, it shouldn’t take long for such inequality to emerge.

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