Cryptocurrency enthusiasts have long espoused the decentralizing and democratizing effects the technology supposedly encourages, but new research detailed in The Wall Street Journal suggests its inequality problems are worse than the United States’ disgraceful performance under the dollar. An incredible feat considering income inequality in 2020 America was the highest of all G7 nations according to data from Organization for Economic Cooperation and Development viewed by Pew Research.
That illustration, of a vanishingly small bitcoin financial elite, was revealed in a new National Bureau of Economic Research study written 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, just 0.01% of buyers control around 27% of the total supply. That 27% percent figure amounts to around 5 million bitcoins, which in turn comes out to about $232 billion USD. The top 1% wealthiest U.S. individuals, by comparison, control “only” about a third of all the country’s wealth, the Journal notes.
The professors conducted their research by, for the first time, mapping out and analyzing every single bitcoin transaction over its 13 years of existence. Since users’ identities on the blockchain aren’t directly tied to their transactions on the blockchain, the professors weren’t able to gain too much information on who exactly is benefiting the most from bitcoin. Instead, the research paints a picture of how bitcoin’s economics operates on the aggregate. This tiny concentration of so much wealth means the bitcoin rich will likely only get richer if the cryptocurrency continues to increase 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 line of crypto enthusiasts who have preached the technology’s perceived ability to curtail inequity. The argument here goes something along the lines of cryptocurrency will democratize finance by redistributing power away from global governments and the richest power brokers on Wall Street.
That argument was never necessarily foolproof, but it arguably carried more weight in bitcoin’s early years where the costs to entry were low, and just about anyone could reasonably afford to mine their own bitcoins with a basic, accessible rig. The overall landscape has changed dramatically though, particularly in the last two to three years as the price of bitcoin surged. Through that process, bitcoin hasn’t curtailed inequality at all. If anything, it’s replicating it.
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At the same time, there have been experts and academics sounding their own alarm bells around bitcoin’s potential inequality-inducing tendencies. In an interview with CNBC Cornell University, economics professor and author of The Future of Money Eswar Prasad granted cryptocurrencies may make digital payments more accessible but said that doesn’t guarantee any lessening of inequality.
“Because of existing inequalities in digital access and financial literacy, they [cryptocurrencies] could end up worsening inequality,” Prasad described bitcoin as a bubble. “In particular, any financial risks arising from investing in cryptocurrencies and related products might end up falling especially heavily on naïve retail investors.” Prasad also warned bitcoin and other cryptocurrencies may contribute to monetary and financial instability, an issue potentially made far worse if they exist in a largely unregulated system without fortified investor protections in place.
Despite all of this, mentions of “decentralization” and “democracy” and “independence” in relation to crypto abound as a new wave of Web3 investors and enthusiasts spend millions locking in NFTs and forming DAOs to make collective purchases.