How Bitcoin Is Like North Korea

Citigroup currency analyst Steven Englander is out with a long Sunday note talking about everyone's favorite topic: digital currency.

In it, he makes an important observation about the extreme inequality in the Bitcoin world:

Best estimates are that there are about one million holders of Bitcoin; 47 individuals hold about 30 percent, another 900 hold a further 20 percent, the next 10,000 about 25% and another million about 20%, with 5% being lost. So 1/10^th of one percent represent about half the holdings of Bitcoin and 1 percent close to 80 percent (http://www.businessinsider.com/927-people-own-half-of-the-bitcoins-2013-12). The concentration of Litecoin ownership is similar (http://litecoin-rich-list.blogspot.com). Most of the big wallets have been in place from early on, so sitting back and watching your capital grow has been a very successful strategy. The distribution of Bitcoin holdings looks much like the distribution of wealth in North Korea and makes the China's and even the US' wealth distribution look like that of a workers' paradise. There are estimates of a Gini coefficient of 0.88 for Bitcoin, but if anything the estimates are low if big holders own multiple wallets and the overall concentration of Bitcoin wealth is greater than in the sample used to estimate the coefficients (http://bitcoin.stackexchange.com/questions/86/is-it-possible-to-estimate-the-gini-coefficient-for-bitcoins-and-if-the-trend-is). The most recent estimate of Gini coefficients of wealth concentration does not show any country above 0.85 (http://en.wikipedia.org/wiki/List_of_countries_by_distribution_of_wealth), but this sample did not include North Korea.

The uneven distribution of Bitcoin wealth may be the price to be paid for getting a rapid dissemination of the Bitcoin payments and store of value technology. If you build a better mousetrap, everyone expects you to profit from your invention, but users benefit as well, so there are social benefits even if the innovator grabs a big share.

How problematic is the unequal distribution of Bitcoin?

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If you harbor the notion that Bitcoin is an alternative to the US Dollar/Fed system (as many diehard Bitcoin true believers do) then this seems very problematic, as a world where Bitcoin became the primary unit of exchange would be a severely unequal one.

But if you see Bitcoin as just a payment system that augments the US Dollar - but doesn't replace it - then it's not clear how bad it is. Severe inequality in any given country has social problems because there's no easy escape from that world. Nobody is forced to live within the Bitcoin system, so it's not going to create the same kinds of social problems. This is a bit like the concerns that Bitcoin is deflationary, because the supply is fixed. This would be a problem if a country adopted Bitcoin and everyone were forced to use it... then that would create an incentive for everyone to horde, and commerce would grind to a halt. But since participation in Bitcoin is a fluid things (you can quickly enter into and out of Bitcoin participation) the deflationary aspect is there. As we've argued before, holding Bitcoin is in some sense holding equity in Bitcoin (even though it's not exactly a company). Thus talking about the Gini coefficient might make as much sense as talking about the Gini coefficient of, a public company, which has a combination of ultra-large individual and institutional shareholders and then a series of irrelevantly tiny minnow shareholders. Does that unequal distribution matter? Eh, not that much.