On the Bitcoin Trickle down Effect

Journalist:
June 2, 2016

Venture Capitalist firms have taken a liking to Bitcoin and invested millions of dollars into the industry in 2015, including some of Silicon Valley’s best-known venture firms.

The question is: Has there been a Bitcoin trickle down effect? But, first, let’s define a Bitcoin trickle-down effect. It’s not like Reaganomics, in the low tax, political sense.

Rather, a Bitcoin trickle-down effect is whatever the opposite of a few people accumulating and controlling all the coins and never spending them on anything that’s a net positive for anyone other than themselves.

With few people holding onto the greatest hoard of bitcoins, do those coins ultimately find their way in the hands of Bitcoin’s “poor? (who are probably actually quite rich all things considered).  In other words, are those users who do not have a bunch of coins truly making considerable money or are the Bitcoin riches being enjoyed solely by VCs, owners and so on.

The data is scarce. What I can find is only anecdotal, having spoken with numerous people who work in the space. Most people are indeed receiving money from their own projects, the entrepreneurs. But, in terms of those people looking for gigs and jobs, the workers, Bitcoin velocity is slow.

It seems that there is no trickle down effect in Bitcoin thanks to Gresham’s Law, an economic principle that states: “When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.” People want to send PayPal payments instead of Bitcoin transactions.

This is, even more, the case when the price of Bitcoin rises, which leads people to hold onto bitcoins as opposed to spending them.

Some posit that, because Bitcoin is innately deflationary, people with the most Bitcoin will automatically become richer meaning “they won’t have any reason not to” give back. This will depend on the individual, and time will tell how the percentages of altruistic vs. selfish Bitcoin whale’s plays out. Remember, Bitcoin is a taxless system. In the absence of taxes, a community must choose a charity, value exchange and employment or stall and be overtaken by other players.

For the poor bitcoiner, who cannot hold onto bitcoins for long enough to enjoy the theoretical appreciation, the deflationary nature of Bitcoin means nothing.

Most startups fail within 18 months, even if they get money. The money misallocated and eventually many startups go bankrupt. In a lot of cases, unless the startup pays very well, the only ones who benefit monetarily from the failure of the startup are the investors and owners. With this in mind, there’s no “trickle-down” Bitcoin-style.

For now, those who enter the Bitcoin space are dependent upon those who have already been in the space. These so-called “workers” depend on the holders of Bitcoin to pay liquid Bitcoin (or fiat in many cases as ironic as that may be) while you’re working on building out the ecosystem (or not) in whatever way that may be. For all the discussion that Bitcoin is going to replace the traditional banking system, it’s hard to ignore that the Bitcoin money velocity is not overwhelming – that Bitcoin is hardly a competitor. What’s more accurate is Bitcoin is a harbinger for projects emanating from banking.

Academics Dániel Kondor, István Csabai and Gábor Vattay of the Budapest University of Technology and Economics, and Márton Pósfai of Eötvös Loránd University, Budapest demonstrated that Bitcoin’s automatic evolution will likely benefit most the Bitcoin rich.

Thus, the fate of Bitcoin is up to those capstone wallet holders. To Incentivize or not to Incentivize? That is the question.

Featured image from Shutterstock.

Tags: Bitcoin