Bitcoin: Fear of losing, hope of winning

Bitcoin’s blind spot

E.L. Tankred

Published in

Coinmonks

12 min readFeb 6, 2023

Or: Why Bitcoin won’t stop the concentration of wealth.

(Klicke hier für die deutsche Version.)

The following thoughts arose from a discussion about the article “3 Arguments for Bitcoin, 1 Problem”. It discusses those characteristics of Bitcoin that promote an extreme uneven distribution. Building on this, we* add socio-economic factors. They also come to the conclusion that Bitcoin will be concentrated in the hands of a few in the future.

* This article was developed in cooperation with bitcoin-bill.org. We thank @Bontii, @DasPie, @HODLer and @MurMur from the Blocktrainer forum [1] for their arguments and criticism on the first thesis.

We do NOT want to tell you that Bitcoin must be equally distributed. We reject that. Rather, we want to make you aware of the danger of its lopsided distribution under a Bitcoin standard. History shows that a concentration of wealth has always been met with riots, insurrections, revolutions, or even wars. From slaves to feudal peasants, people with fear for the future fought in the name of justice [2]. Even present developments remind us of these historic times.

In our consideration we distinguish between:

Equal distribution: does not provide incentives for innovation
Unequal distribution: provides incentives for innovation and wealth
concentration of wealth: provides incentives for revolutions

The ultimatum game

As a boundary between inequality of distribution and concentration of wealth, we would like to refer to the ultimatum game [3]. With it, game theory finds application in economic and behavioral research. Ultimatum games investigate the level of altruism and egoism in decisions.

Ultimatum games divide the decision-making power among the participants. The first participant may decide on the division of a sum of money. However, only the second participant’s agreement to this division leads to both of them being allowed to keep the money. In the case of a refusal by the second participant, both go empty-handed.

The results of the ultimatum game lead to the conclusion that the demand for fairness increases with the wealth of a society. In societies with low wealth, subjects accept more unfair distributions (80:20) than in wealthy cultures (60:40).

In general, percentages below 30 percent lead to rejection. We take this as evidence that money does not replace norms — as the Austrian school claims.

So what is the evidence for our conclusion that 20 percent of the richest will own 80 percent of bitcoins?

Bitcoin is the best money in the world

Without a doubt, Bitcoin can become the best money in the world. As money without a central bank, it is better than fiat money which can be and is created out of nothing. But that doesn’t mean Bitcoin can’t be improved.

We say that even though we reject socialism (and communism). History proves its failure because it never worked in practice. Although socialists and communists alike preach that all people would be equal, their functionaries have always put themselves in a better position. That alone shows that competition for the best position in society is in people’s genes.

Capitalism, on the other hand, recognizes the desire for competition exhibited by many. Not all people are motivated by competition. But too many, to disregard them when choosing our society system.

The human predilection for competition now meets Bitcoin. The peer-to-peer digital money contains no code against the concentration of wealth, which is caused by

the certainty effect,
our search for value stores, and
the characteristics of the economic system.

Let’s start with the certainty effect.

The certainty effect

The certainty effect was discovered by Maurice Allais. He asked his subjects a series of questions on choice problems like the following [3, 4]:

Most people decide in favor of A1 and B2. In doing so, they violate the logic of rationality. What would be rational is most easily illustrated by drawing winning and blank balls. In variant A, out of 100 balls, (1) 39 or (2) 37 are rivets. Close to a lucky draw (50% chance of winning), each winning ball counts (63 instead of 61) in order not to get a blank. For B), (1) 98 winning balls out of 100 would be sufficient, because it is much less likely to draw two blanks when there are 98 winning tickets.

Every choice problems with countless subjects all come to the same conclusion and confirm the certainty effect. It states that in case of almost certain events people concentrate on avoiding losses more than seems statistically appropriate [5].

People systematically violate rationality

In practice, this means that the fear of losing one’s possessions increases with increasing wealth. This is because as wealth increases, so does awareness of the extent of the potential losses.

Reality confirms these research findings. Rich people donate relatively less of their wealth (1%) than poor people (2%) [6] because the former overestimate the probability of loss and the latter underestimate it.

Our search for value stores

Another reason for wealth concentration is found in the store of value. To understand this, simply ask yourself the question: where are the values in an inflationary and in a deflationary system [7]?

Inflation causes fiat money to lose purchasing power. People counter this by investing in tangible assets such as companies/shares or houses. The growing demand for them increases the value of tangible assets as opposed to the value of fiat money, which loses purchasing power.

Bitcoin, as the only limited commodity in this world, will be deflationary due to our technological advances. The reason for this is competition. It forces companies to lower their costs and prices. Because these market conditions do not tend to preserve the value of tangible assets, they flow into money. Bitcoin is gaining purchasing power.

Like any human being, the rich prefer to avoid loss more than to make profits. If their values are in Bitcoin, the prospects of making a profit must be higher than the risk of their investment by a factor of 2.5 to 3.5 [3]. So, without a valid reason, they will not convert their values from Bitcoin to non-cash assets.

The characteristics of the economic system

The third argument for wealth concentration among a few super-rich is provided by the sugar simulation of Epstein & Axtell (1996) [8]. They developed it as an abstraction of the economy. In the simulation, 250 castaways are stranded on an island. The only infinite resource is sugar.

Each castaway has to choose one of three options when it is their turn:

search sugar, or
move, or
eat sugar

Castaways who find more sugar than they need are able to save sugar. Those whose sugar balance remains negative starve to death.

The result of all simulation runs was always the same:

The rich get richer

At the beginning of each simulation the sugar supply was normally distributed, at the end 20% of the castaways called 80% of the sugar their own.

Epstein and Axtell gradually added sexuality and family formation as well as trade and credit to their simulation. Because this changed the dynamics of the simulation, but not its outcome, the authors concluded:

“Inequality of distribution is a collective and emergent property of the system — a macrobehavior of the population as a whole that emerges from the collective micro behavior of individual actors.”

Bitcoin vs. Resources

As an attentive reader, you might now object that the sugar in the simulation is inflationary. This does not fit Bitcoin and its deflationary properties. The counter to this is that the simulation results apply independently of money. Neither Bitcoin nor fiat money changes the way resources (e.g. sugar, rare earths, knowledge) are distributed in our world.

Bitcoin helps those who are rich in resources. Customers express in monetary terms which value these resources have for them. The rich can protect this value in Bitcoin without losing purchasing power. With Bitcoin you can buy resources like sugar (copper or knowledge) even centuries later. So Bitcoin does not change the results of the sugar simulation. Quite the opposite.

Fiat money vs. Bitcoin

What if the Cantillon Effect** of fiat money is simply replaced by Bitcoin’s deflationary effect? Fiat money enriches the rich because of the Cantillon effect. Bitcoin enriches because savings increase in value. And the fact that every Sat spent diminishes one’s wealth corresponds to the purchasing power devaluation of fiat money.

** Cantillon effect: The increase in the money supply does not act uniformly in all areas of an economy. New money is created every time credit is extended. Borrowers are the first to benefit from the money supply expansion because they can invest with current purchasing power. As debt money gradually spreads, it loses purchasing power. Savers are hit hardest by inflation.

Today, the rich multiply their wealth through fiat loans to invest in tangible assets. Under a Bitcoin Standard, the savings of the wealthy appreciate through deflation until they invest them. So those who have to live from hand to mouth do not enjoy Bitcoin’s gain in purchasing power.

For the sake of completeness, you need to know that the advantages of fiat money are greater for rich people than for poor people. In contrast, the disadvantages of fiat money are greater for poor people than for rich people. The rich can afford to borrow more to invest in physical assets in order to preserve their wealth. The poor are denied this path. In addition, price increases respectively losses in purchasing power hit their savings.

Here, Bitcoin offers only one advantage. No one can gain purchasing power advantages through credit. Unlike fiat money, Bitcoin’s deflation depends solely on the productivity of the entire economy.

Deflation is a collective achievement

However, the advantage of the rich remains. In a Bitcoin world, they benefit twofold, unlike the poor. First, the rich can invest some of their wealth in businesses to create revenue streams beyond normal salaries. The investments of the wealthy can even help minimize entrepreneurial risk. Through market research, prototyping and evaluation, they can verify the real needs of the market and adapt their products and services to meet them. Companies hire suppliers and employees with the aim of increasing their productivity. The contribution of employees to increased productivity is thus a collective effort that makes deflation possible in the first place.

The poor cannot afford to invest in meaningful revenue. Lacking the resources for market research, prototyping and evaluation, they are more likely to simply try their luck. This approach comes at a high price, however, because for every successful company there are countless others that have failed. Moreover, deflation increases the purchasing power of their savings only insignificantly compared to that of the rich:

Bitcoin: wealth concentration or freedom?

The fact that Bitcoin’s rules apply to everyone and, contrary to fiat money, does not make an exception for the rich, invalidates neither the search for the best store of value nor the research findings on the certainty effect or the sugar simulation. All three arguments necessarily suggest that resource-based wealth always culminates in a lopsided distribution. Moreover, Bitcoin conserves wealth much better than sugar or other resources. The result is wealth concentration in favor of the few. Historically, enormous inequality of distribution has led to riots, uprisings, revolutions, or even war. The present is no exception. Most people suffer from the concentration of wealth in favor of a few.

Predator-prey relationship

A look at nature reveals how the concentration of wealth and its negative consequences can be avoided. In nature, there is a dynamic interaction between a predator population and its prey population [9]. The population size of the prey determines that of the predator. The fact that the population of the Canadian lynx adapts to the amount of snow hares with a time lag is therefore no coincidence. Rather, there is a complex natural law behind it:

Population dynamic:

a) growing resource (e.g. hares, assets, knowledge) → growing population

b) dwindling resources → shrinking population

c) growing population → dwindling resources (very simplified)

The secret of nature, then, lies in dynamic self-regulation. With Bitcoin, we can apply this to programmable money for the first time. We can counteract living at subsistence level as a result of natural wealth concentration. Dynamic difficulty adjustment*** is incorporated into Bitcoin’s code to prevent infinite monetary expansion and the resulting overreaching. Unfortunately, Bitcoin lacks the code to prevent living at subsistence level. It inevitably results in dependence on a job, which most people use to try to regain some of their self-determination.

*** Each new block of the Bitcoin blockchain must be validated by computing power. This takes place on average every 10 minutes. The difficulty adjustment ensures that faster mining hardware does not speed up the clock for new blocks. As computing power increases, the difficulty for validating new blocks increases. As computing power decreases, the difficulty decreases [10].

Nature’s self-regulation would lend itself to flexible wealth redistribution to resolve dependencies:

a) Rising productivity / revenues → More redistribution

b) Declining productivity / revenues → less redistribution

c) the relationship between productivity (a) and distribution volume (b) has a dynamic relationship, as the population of predators depends on that of their prey

The dynamic relationship means that basic needs can sometimes be met better and sometimes worse. But more than healthy food, a roof over one’s head and clothing is also not necessary to enable every person to lead a self-determined life. Self-determination is freedom. How many Einsteins 2.0 were denied to the world because they had to take care of their next meal?

With Bitcoin, freedom is also in your hands

Bitcoin is powerless against the certainty effect, our search for stores of value, and the characteristics of our economic system. That is why even the best money in the world can fail because of the human factor.

We are not saying that wealth must be distributed equally. Rather, we would like to suggest that every person be given the freedom of a self-determined life. This freedom presupposes that the basic needs of every person (food, housing, clothing) are met. That they therefore enjoy a basic freedom.

Currently, many people are hesitant to believe in Bitcoin. Perhaps this is because they sense an impending doom (and do not understand money sufficiently). This is supported by the persistence of the belief that Bitcoin’s unfair distribution is an unsolvable problem. FUD (Fear, Uncertainty, Doubt) can be invalidated by arguments, the belief in Bitcoin’s unequal distribution cannot.

The good news is that Bitcoin is freely accessible. No one can be excluded from its network. Anyone can develop second layer solutions for Bitcoin, just as anyone can choose to use them or not.

Which requirements Bitcoin’s code has to fulfill to avoid a concentration of wealth is to be discussed. A first suggestion can be found in the article 14 Reasons Why Bitcoin Leads to Unconditional Basic Income.

***

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