Bitcoin was founded on a principle of resistance to the abuses we have been seeing on Wall Street and other financial centers around the world aided and abetted by a corrupt, bought-and-paid-for political class. Libertarianism is built into the heart of Bitcoin, and now, as we see a variety of Bitcoin related companies try to enter the traditional financial system as ‘regulated’ and ‘compliant,’ we are seeing the some of the old-guard crying out against the corruption of Bitcoin.
This is the purpose of recent article on The Huffington Post entitled “Bitcoins Belong to the People, Not the 1% Super Rich” by Behzad Mohit. The argument is that the current financial system allows the superrich to make money simply through interest – and because of the way compound interest works, they have been accruing a greater and greater share of the world’s wealth to the point where a mere 85 people now own wealth equivalent to the wealth of the bottom 3.5 billion people on the planet.
Bitcoin, he says, was intended to destroy this system: a limited supply currency not controlled by anyone will force people to trade honestly and make money honestly. No more, he implies, will the super wealthy be able to earn millions simply by lying next to a pool. If Bitcoin did become the default currency, the whole system of governments borrowing money now only to engineer inflation so that they can pay that principle back in devalued currency in the future will be destroyed. The destruction of that system would benefit everyone, since what you save today would still have value 10, 20, or 30 years later when you retire. In the case of Bitcoin, rather than losing value, it would tend to increase in value over time, meaning that what you save today will be worth more when you retire.
Mohit, though, sees this virtuous cycle being endangered by the creation of exchanges and funds like Coinbase’s recent rollout and the Winklevii’s proposed EFT. Accepting regulation, and especially encouraging the turning of Bitcoin into a commodity like any other for the enrichment of people like the Winklevii, he says simply perpetuates the current system. The answer, Mohit suggests, is to create a new ‘Freecoin’ that would never be exchanged for money and thus would replace the current financial system without being corrupted by it.
There are a couple of flaws in Mohit’s reasoning. The first is the notion that Bitcoin is a truly democratic coin that will discourage the existence of a super wealthy class. From its inception Bitcoin has seen vast wealth disparity, and to this day, the founder, Satoshi Nakamoto, appears to have a million bitcoins sitting in their original wallets. If Satoshi still has those keys, and if Bitcoin’s market cap tips into the trillions, then he, she, or they will be master of the world – or more probably bring the world down in a fiery blaze. Many suggest that those keys have already likely been destroyed as Satoshi has already had ample opportunity to take profit and hasn’t done so –indicating that being master of the world was not his, her, or their intention. Even still, the wealthiest Bitcoin address is currently north of 78,000 BTC – which even at current prices is a considerable amount of money.
The concentration of bitcoins in individual hands is something that is likely to ameliorate as market cap grows. As prices rise, bitcoins will get spent or sold, and we’ll see a slow depletion of the number, though probably not the value, of coins held by individuals. More and more coins will find their ways down into the hands of the smaller holders, and then as Bitcoin becomes a truly useful currency, onto the phone of the world’s unbanked. There will still be a vast disparity in wealth, but when we reach this stage, the poor, simply by virtue of saving, will be able to increase the value of their holdings and the quality of their lives – something impossible for them to achieve now due to inflation.
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My main quibble with Mohit, though, is the notion that Bitcoin companies interacting with the current, corrupt system will corrupt of dilute Bitcoin. Bitcoin companies accepting regulation or using Bitcoin as an investment vehicle is not a dilution, it is a necessary step in the evolution of Bitcoin. If a cryptocurrency is not tradable for cash, it won’t see adoption in the real world, and if it’s used at all, it will remain the fringe anomaly that most institutions want to think Bitcoin is now. No, it’s through playing nice with regulators and investment firms that Bitcoin will see an influx of talent and resources that will continue to build the infrastructure we so desperately need and raise the market cap to a point where everyone will start to want to know how to get and use Bitcoin.
In this scenario, Bitcoin is a fire and the current financial institutions are the fuel. As the fire grows hotter, institutions will be compelled to rush in to take their profits, and so be consumed. In the end, even companies like Coinbase and Bitpay will need to find new business models as people will no longer need payment processors, they’ll simply accept Bitcoin. When we hit this stage, Bitcoin will be beyond the ability of governments to regulate it; they will instead need to find ways to work with it to keep their national currencies viable. We may at this point start to see national currencies pegged to the value of Bitcoin, meaning the virtues of Bitcoin will push out the abuses of the past.
Now, I admit myself that this vision is a bit pie-in-the-sky. There are going to be a lot of twists and turns in the development of Bitcoin – but at least, I think, I can say with confidence that regulation will not be the end of Bitcoin.
Do you have a different view of how this is all going to happen? Let me know in the comments!