Tuesday, March 11, 2014

Do Early Bitcoin Adopters Deserve Their Wealth?

If bitcoin is successful as a currency it will take market share from other currencies. This means that its price will continue to go up while the price of other currencies such as the dollar will go down. What bitcoin gains in purchasing power comes roughly at the expense of the dollar and other national currencies.

In the extreme case, if bitcoin were to completely take the place of the dollar, the entire wealth in the economy would shift from holders of dollars to holders of bitcoins. The earlier people buy bitcoins the more they can profit from this price increase and the longer people hold on to dollars and other currencies, the more they will suffer from its depreciating value.

Bitcoin's success then implies a massive transfer of wealth from late adopters to early adopters.

Is such a redistribution of wealth and power fair, if it is based on nothing but the order in which people adopted bitcoin? Can it be justified?

The Start-Up of Bitcoin
One typical way in which the gains for early bitcoin adopters are justified is through a comparison with the founders of and early investors in companies that later become successful. Many people would agree that such founders and early investors are entitled to the great rewards that the success of their companies brings them because they took on a lot of risk and spent a lot of time and energy trying to make the company successful.

Something similar would then be the case for early bitcoin adopters: They should be allowed to reap the benefits of the risk they took and the wisdom, vision and judgement they demonstrated by buying bitcoins when bitcoin seemed little more than a crazy idea.

Does this analogy work? Should people who agree that founders and early investors are entitled to the great rewards that come with the success of their companies also think that the earliest bitcoin adopters are entitled to the great rewards that come with the success of bitcoin?

In this article I argue that the analogy does not work: the two situations are too dissimilar for the same justification to apply.

1. The sheer size of it all
There is a huge difference in the amount of wealth that we're talking about. Founders of successful companies may become multimillionaires or even be worth tens of billions of dollars. But if bitcoin becomes a big success - if in the extreme case bitcoin comes to replace the dollar  for example - one bitcoin will be worth well over the equivalent of a million dollars today. That means that some of the early adopters of bitcoin, those who mined or bought tens or hundreds of thousands of bitcoins will be vastly wealthier than even the wealthiest people we know today. Satoshi could well be the first trillionaire.

Even if we were to grant that early adopters should be allowed to reap the rewards of their work, the sheer size of these rewards in the case of bitcoin would already be a reason to think that there is also a moral difference between the two situations and that the massive transfer of wealth in the case of bitcoin may not be fair or may otherwise be undesired.

2. Not really as risky
Moreover, although it seems fair to say that back in 2009 the chances of bitcoin becoming a huge success were considerably smaller than even that of any new tech company becoming the new Dropbox or Google, it does not seem unreasonable to say that the amount of risk taken by founders of and early investors in companies is still much more significant than the risk taken by early bitcoin adopters. The latter did indeed take a risk by buying this strange new currency early on, but they bought in at a very very low price so that their actual monetary investment was typically very very low. Just recall the 10,000 BTC pizza.

3.  No sweat
Furthermore, early adopters who simply bought and then held bitcoins are hardly similar to founders who put in a lot of time and energy to make their business a success. (The comparison with investors in startups would however be more appropriate)

4. Right place, right time
Many early bitcoin adopters were 'simply' at the right place at the right time. If you lived in a rich country and were interested in cryptography, libertarianism or other matters related to bitcoin you had a much greater chance of learning about bitcoin early on. True, only a small percentage of those people who heard about bitcoin early on then actually took the risk and bought some, and this might justify their gains compared to those who heard about it but didn't take the risk, but does it also justify their gains compared to those who were working in entirely different fields in which they simply never encountered bitcoin?

As a comparison, just imagine that somehow something with the same huge potential as bitcoin first emerged not in cryptographic or computer science circles, but in say some specialized area in the shoemaking industry or in the Guyanan fishing industry: would people who work in those industries and thus had early access to whatever this new innovation is (even when they had nothing to do with its discovery or creation) be entitled to such grandiose wealth simply because they happened to be working in those fields?

5. The rich get richer and the poor get poorer
This issue of early access becomes even more important when we consider that as a result of institutional, technological, economic and other advantages, people in rich countries will typically have earlier opportunity to learn about and buy bitcoins than people in poor countries. (The same may be true within individual countries: richer people may have more opportunities to buy bitcoins than poorer people in the same country).And given the logic described above this means that there will be a de facto massive transfer of wealth from people in poor countries whose currencies will be worth less and less in bitcoin terms to relatively rich people in Western countries whose bitcoins will become worth more and more.

Bitcoin is often regarded as a technology that can be very beneficial for people in poor countries who currently don't have access to the banking system and/or who suffer from politicians devaluing their currencies. But even if such benefits in fact were to materialize they may simply be more than offset by the disadvantages that the poor will suffer as a result of their relatively late access to bitcoins.  So even though probably almost all bitcoin enthusiasts would exactly want bitcoin to benefit the poor, the unintended net result may very well be the opposite. (I wrote about this in an earlier article.)


What follows from this?
In this article I have argued that it is problematic to use the analogy with founders and early investors in successful companies to justify the massive transfer of wealth that would be involved if bitcoin were successful.

That doesn't mean, however, that there may not be other ways of justifying this transfer, of showing that it is fair or otherwise ethically unproblematic.

Also, even if no such good arguments can be given, even if there is no good way of justifying the enormous wealth of early bitcoin adopters, this in and of itself need not mean that therefore other people (governments or private persons) are entitled to take that wealth from these early adopters and redistribute it. An additional argument would be required to justify such an action.

Instead the recognition of a lack of justification for their wealth may simply prompt those early adopters to voluntarily give away part of their wealth. Alternatively, they may agree that their wealth is unjustified but decide to keep it anyway. Such inaction may then be considered immoral but that in and of itself does not mean that it should be punishable by force. 


  1. What missing from this analysis is dishoarding incentives.

    You'd have to be an insane true believer, especially in the early days, to keep more than about 10% if your net worth in bitcoin. If price growth made your initial investment grow to become more than 10% of your portfolio, you'd dishoard. Yet we are to believe these pizza millionaires are just "lettin' it ride" knowing they could be back living paycheck to paycheck if Bitcoin fails?

    As shown in numerous cases, and as came to a head in 2011 when the price fell 95% (pizza guy who still *somehow* has 30000 BTC goes from millionaire to only having $60000 and rapidly falling), volatility and radical future uncertainty have led to a very high average dishoarding rate as the price increases. This means very few people have managed the superhuman feat of holding onto their bitcoins all this time. Those who have managed to retain a sizable amount have mostly done so by literally forgetting about them or losing access to them in the meantime, or by being so rich from the start that the incentives mentioned above didn't apply to them. For those two groups we can indeed make a much more limited argument that some people got very lucky and there were some instances of rich getting richer (though the same is true of any investment - capital always begets capital, the first million is always the hardest, etc.). For the rest, like Nakamoto himself, holding out of sheer balls-to-the-wall ideological conviction, I would say they do deserve it. Nakakoto is almost a billionaire right now but is selling nothing, so he could go back to zero any time if a flaw in Bitcoin is discovered. Think of all the scares, the mining issues, the government crackdowns, the hard fork in March 2013, so many chances to lose all his money, but never sold. Could you do that? No normal person could. He either lost the keys or is a true believer of the noblest kind. If he were motivated by wealth he would have cashed out at least a few million long ago.

    A commonly cited statistic is that on average, for every doubling of the bitcoin price, long term holders sell 17% of their bitcoins. Run the numbers on this and find there is very little left of that 10000BTC pizza at that rate.

  2. Arthur SchopenhauerJune 19, 2018 at 9:02 PM

    You forget to answer the cardinal question: why would people who earned their wealth honestly need any more justification for their wealth? It seems that having earned your wealth honestly is justification enough, and no further justification is needed. Without answering this question first, the whole article is useless.

    1. “It seems that having earned your wealth honestly is justification enough”

      It may seem that way to you (and/or to principled libertarians in general), but it may not seem that way to other people who use different criteria for moral evaluations.

      For example, to those who find great inequality of opportunity and/or outcome morally objectionable.

      Or to those who object to the great role luck played in how early bitcoin adopters got wealthy: you had to have been in the right place at the right time to even have the opportunity to take advantage (through good decision-making) of bitcoin’s rise. Moreover, it will tend to have been the people who were already quite well-off and/or for example intellectually gifted enough who were in that position. A Vietnamese rice farmer or a single mother working a low income job will likely not have had the time and background to learn about bitcoin in an early stage in the first place or the money to invest in it.

      These are all factors that could play a role in evaluating the justifiability of the wealth of early bitcoin adopters.