Distribution of bitcoin wealth by owner

[rpietila]

What happens if you change some of your assumption parameters?

Seconded. When we do financial projections, we typically include best-guess scenario, and also include best-case and worst-case. Can you provide something like this with a list of parameters that would change? Also, did my explanation of my own situation help with the BTC1,000+ calculations any?

I am currently thinking to reduce the model to two parameters:
- number of users
- top-heaviness (number of bitcoins owned by people who own BTC10k or more)

Everything else would be according to the distribution model that I have derived and which corresponds to Silvervault behavior.

Then by allowing 3 values for each parameter, we would have 9 scenarios:

- Minimal top-heaviness would be that apart from Satoshi (BTC980k and possibly more with machines using another software) there would be only a few holders of BTC10k or more. Perhaps BTC2.5M (incl S) would be a realistic lower limit.

- Medium top-heaviness would be that 4 million coins are in this category.

- In steep top-heaviness, there would be many large holders who have all along wanted to own the largest number of coins possible, individually or in concert. The number would be BTC7.5M (leaving only BTC4M to everyone else, since we assume that 0.4M is lost).

- Minimal number of users I could say is 100,000

- Base case is the 350,000 that I derived in my last post.

- Upper limit would be maybe 1.5 million. This would require figures from webwallets and exchanges to verify.

[Rassah]

Minimum number of all users, or minimum number of users in the top brackets? Because we know we've had over 100,000 bitcoin users since Summer of 2011.

[rpietila]

Let's see it from the other side. Could the distribution become fair?

Can you compare it with 2009 / 2010 / 2011 / 2012 Rptiela?

It is possible to reconstruct the distribution in any past (or future, for that matter!) date with this model. After all the parameters are estimates anyway with wide tolerances. If somebody would take the time, we would have a nice series on how the coins are being distributed over time.

As for fairness, I assume you would like the coins to be distributed in a much more equal way than they are. That is completely unnatural and not observed in any economy. It is somewhat possible to equalize the income of people and the governments are doing it as much as they can (not that they cared about the poor but it is an end-all to be able to control as much economic activity as possible, which can nicely be achieved by excessive taxation and redistribution). But it is totally impossible to equalize people's wealth, since most people are unwilling/incapable of wealth accumulation and will therefore always own almost nothing, regardless of income. Even governments cannot do anything to the distribution of wealth, which is by nature a logarithmic phenomenon, obeying its own distribution. If governments aggressively go after private wealth, they aggravate the inequality, since the wealth is just collected in even larger stashes and middle class is destroyed.

Bitcoin distribution is the fairest when people have easy access to buy and sell them without hindrances. Then everybody can own as many as they deem fit. Satoshi will still own a million and most (currently: 99.99%) will own zero.

[rpietila]

I calculated 3 scenarios, which I deemed most important to find the upper and lower limits for number of holders in each holding bracket. I did only the extreme cases, and got results that in my estimation were each unrealistic in their own way, so they serve well as limits, within which the reality falls.


Case I. Very top-heavy distribution and 100,000 users.

#People	#Bitcoins	#TotalBitcoins
125	BTC10k+	7.5M
640	BTC1k-10k	1.8M
4900	BTC100-1k	1.4M
22k	BTC10-100	0.7M
36k	BTC1-10	0.1M
27k	BTC0.1-1	0.0M
10k	BTC0-0.1	0.0M

Case II. Very top-light distribution and 1.5 million users.

#People	#Bitcoins	#TotalBitcoins
42	BTC10k+	2.5M
875	BTC1k-10k	2.5M
8570	BTC100-1k	2.4M
75k	BTC10-100	2.3M
408k	BTC1-10	1.6M
778k	BTC0.1-1	0.4M
233k	BTC0-0.1	0.0M

Case III. Very top-light distribution and 100,000 users ("middle class model").

#People	#Bitcoins	#TotalBitcoins
50	BTC10k+	3.0M
1250	BTC1k-10k	3.5M
12500	BTC100-1k	3.5M
47k	BTC10-100	1.4M
28k	BTC1-10	0.1M
9000	BTC0.1-1	0.0M
2000	BTC0-0.1	0.0M

(I did not do the simulation of top-heavy and many small users, since it was the most unrealistic of all - and its datapoints would still have fallen inside the limits set by the other scenarios).


Therefore.... T h e   r e a l i t y

#People	#Bitcoins	#TotalBitcoins
42-125	BTC10k+	2.5M-7.5M
640-1250	BTC1k-10k	1.8M-3.5M
4900-12500	BTC100-1k	1.4M-3.5M
22k-75k	BTC10-100	0.7M-2.3M
27k-407k	BTC1-10	0.1M-1.5M
9k-778k	BTC0.1-1	0.0M-0.2M
2k-233k	BTC0-0.1	0.0M

With 80-90% confidence I think all the values fall within the limits above. The limits are extremely wide in smaller holdings, since I have less undisputable facts concerning them. But the nearer the top we go, the less variance there is.

It seems to be easiest to deduce the BTC1k-BTC10k bracket, for it is the narrowest. No matter what we assume concerning the other parameters, there is a sizable number of bitcoins owned by people in this bracket, and the number is bound by the distribution model so that no great variance exists.

[rpietila]

If your holding is...

BTC10,000 => TOP-125 (42)
BTC1,000 => TOP-1300 (760)
BTC100 => TOP-13800 (5700)
BTC10 => TOP-85000 (28000)

Safe figures (optimistic figures in parenthesis, reality likely in between)

[johnyj]

Now FBI has climbed on the top of the list, they have a good reason to promote bitcoin now  

[RationalSpeculator]

Very interesting analyses rpietila, thanks for sharing.

[rpietila]

Copied this from another thread. It took 2 hours to write, enjoy! (I have written a book about monetary history in Finnish)

What will the price of BTC be when 22 million people know that bitcoin is not gold and that there are many altcoins which work exactly like bitcoin?

What will the price of BTC be when the major exchanges like MtGox, Btcchina & co. add other coins on their platform?

Why is gold much more valuable than silver, despite that it has way less actual uses? Why is dollar more valuable than gold, even though everyone knows that it is a unit of unpayable debt from a bankrupt government?

Marketability. Salability. Hoardability.

You can use dollar everywhere, whereas gold you must sell and convert, and that happens differently in every country, involving hassle and fees. With silver, the situation is pathetic, and despite being the layman's money for 25 centuries, it does not function as currency anywhere today.

In The Art of War, Sun Tzu tells that 50 kilograms of silver is enough for upkeep of a 100,000-strong army for one day. Today that same amount has a purchasing power of mere $35k. I venture to guess that 35M is required today. This is an illustration that monetary elements' valuation can change over time when changes in their monetary properties occur.

As a investment silver merchant, I am very much aware that silver is "poor man's gold". For a rich man the difficulty of obtaining a large holding of silver is prohibitive. Buffett bought silver in the 1990s, and it took years for him to receive it, for the sellers had difficulty procuring it from the market. Silver price and silver lease rates shot up 50%. He was instructed to sell the holding before it caused more disruption to the silver market. Then I know a person who owned a few million$ worth of silver, and had to do it via banks due to the lach of physical merchants. He too was swindled out of his holdings. I am pretty much the "highest" guy who can own silver free of government intervention. Even if this wasn't the problem, the problem is the fact that buying and selling so much is a large international operation. Even for people less wealthy than me, silver is often too much of a hassle especially as most of its attributes are found in gold, you essentially trade some leverage for marketability. The largest practical silver holding is less than $100k and do not expect to trade it because dealers will suck you dry. Something that sucks so bad in hoardability cannot be money. (Silvervault is my creation that is designed to empower physical silver to work as money; currently it has not succeeded in the main mission but is well functioning as a depository.)

Gold fares a little (2 orders of magnitude ) better, because you can pack 100 times the value of silver in the same space. Market does not collapse if you try to buy and sell $1 million worth of physical gold, it is always available (well not always, but that is again those behind-the-scenes things, which are not the main issue here). Even countries have gold reserves, but gold is currently so cheap that the largest players who want gold (China, Russia) cannot buy it from the market since the largest holders (international bankers) are not selling. Even a humble request to get back the gold that you own (Germany, from USA) is turned down. Finland knows better to not even ask for its reserves. (When Bank of Finland was questioned this, the answer was that they are happy that gold is safely stored in London and other places. My interpretation: no chance to ever see the gold.)

The basis of dollar's value is in its monetary attributes. If it was not so ubiquituos and accepted everywhere, I highly doubt that it would be able to reach its current dominance. After 150 years of dirty tricks, assassinations, coups, puppet governments, wars with millions of deaths, and the building of a socialist system that constitutes 50% of the economic activity, it has this role, though. Companies that produce stuff and have been profitable for decades in a row, do not enjoy the same credit rating and must pay higher interest. The reason is that companies are smaller and the marketability of their debt is thus weaker. Midsize corporations also have the political risk of running into adversities if they do not conform to the unwritten rules of their domicile, no matter how solid the business was. "Democratic" governments cannot default on their debts, this was by the way a major reason why England gained dominance in 1700s - interest rate was lower, boosting investment. In the continent, kings needed to pay more, since the successor did not always assume their debts.

That some good gains a monetary status (that it acts as money) is not an everyday occurrence. In very early times it has been hypothesized that salt and cattle were used as money. When metals became available, they became the money par excellence, not always available to the public due to their high price, but being the unit of value, medium of exchange in large purchases, and especially store of value. This has continued until present day, only in the 20th century has the common perception of what is money, changed from metal to numbers of an abstract unit.

That some good gains a dominant monetary status, does not happen in once per millennium. There is no explicit evidence that this has ever been occurred before the coercion-induced switch from gold to fiat in the 1900s. (It is debatable whether silver was dominant to gold prior to 1800s, because the values of their monetary stocks ("market caps") were in the same ballpark.) The reason why a money cannot gain dominance over another, is that a good money has the least possible inflation. To have a 1.2% inflation of gold today, the money supply would only about triple in 100 years. But if it grows so slowly, you never get started with your new money! There needs to be a stock to begin with, and it must grow at maximum very slowly.

Ripple is an example of model, where money supply is fixed, but distribution is according to the whims of a soviet.

Bitcoin is an example of model, where money supply is fixed, and distribution happens over more than 100 years according to a predetermined model where everyone can participate in a free market fashion.

Ripple has at times been more valuable than Bitcoin, so the jury is still out. If people continue to buy ripples and keep the exchange rate up, it does not matter how OpenCoin distributes the stash. But I doubt that the fad will last, because XRP as a currency is hardly any improvement over USD, and is currently a terrible underdog in acceptance. (Can you buy anything with XRP?)

Bitcoin, on the other hand, is a genuine improvement over both gold and USD. It is the most hoardable, since you can store and move an arbitrary amount of wealth as easily as you buy a sandwich. It has transactional capabilities which, when fully implemented, outdo all that Visa and PayPal can even dream of in their dollar economy.

And it has a 2-year (2 orders of magnitude) lead over the nearest competitor, Litecoin. Even if you consider Litecoin to be technically superior to Bitcoin (I don't), it is a minor tweak and not a generational improvement. At present I cannot imagine anything which would be so much superior to Bitcoin than Bitcoin is to U.S. Dollar, and therefore it is not just improbable, but outright impossible that an altcoin would take over Bitcoin.

Summary: Nothing prevents the public from buying gold or even silver, if they like. Altcoins will remain in niche applications, but the market cap ratio between Bitcoin and best altcoin will be on average 50:1, as is the market cap ratio between gold and silver, its nearest competitor.

[vokain]

Copied this from another thread. It took 2 hours to write, enjoy! (I have written a book about monetary history in Finnish)

Great, I just started reading this too!
http://www.pdf-archive.com/2011/12/28/creature-from-jekyll-island-by-g-edward-griffin/creature-from-jekyll-island-by-g-edward-griffin.pdf

I need to catch up in history

[rpietila]

New base case, with the following parameters:
- Number of large holders is small (no "hidden premine" by Satoshi's friends, governments, malicious entities etc.)
- Number of bitcoin users is moderate (350,000, an educated guess after consulting many sources with low precision)
- Distribution model as previously
- I will update these to the OP also

#People	#Bitcoins	#TotalBitcoins
50	BTC10k+	2.9M
1100	BTC1k-10k	3.1M
12k	BTC100-1k	3.3M
58k	BTC10-100	1.8M
110k	BTC1-10	0.4M
110k	BTC0.1-1	0.1M
57k	BTC0-0.1	0.0M

[Inedible]

When 400 people are just one :
https://blockchain.info/address/1FfmbHfnpaZjKFvyi1okTjJJusN455paPH

Wait - I don't read blockchain very often so I'm not entirely sure what i'm looking at here.

Is that 144K Bitcoin and does it all belong to one person? (i.e. the US gvmt)

[rpietila]

When 400 people are just one :
https://blockchain.info/address/1FfmbHfnpaZjKFvyi1okTjJJusN455paPH

Wait - I don't read blockchain very often so I'm not entirely sure what i'm looking at here.

Is that 144K Bitcoin and does it all belong to one person? (i.e. the US gvmt)

I don't get the "400 are 1" part, but this address likely is part of the FBI seizure. Address belongs to feds, but the coins belong to their rightful owners unless and until those owners are found guilty of crimes that result in seizure of property.

It is cool - in the current monetary system the money masters see everyone's account, but don't need to divulge their own accounts, and can create money at will. In Bitcoin, the small guys can see and tag the government's accounts, but not the other way round, and nobody can cheat in money creation. I <3 Bitcoin!

[calian]

New base case, with the following parameters:
- Number of large holders is small (no "hidden premine" by Satoshi's friends, governments, malicious entities etc.)
- Number of bitcoin users is moderate (350,000, an educated guess after consulting many sources with low precision)
- Distribution model as previously
- I will update these to the OP also

#People	#Bitcoins	#TotalBitcoins
50	BTC10k+	2.9M
1100	BTC1k-10k	3.1M
12k	BTC100-1k	3.3M
58k	BTC10-100	1.8M
110k	BTC1-10	0.4M
110k	BTC0.1-1	0.1M
57k	BTC0-0.1	0.0M

It's funny because if you go back and read old threads from 2010 and early 2011 you'd think the categories would be:

BTC500k+
BTC100k-500k
BTC50k-100k
BTC10k-50k
BTC1000-10k
BTC0-1000

My experience has been that most miners don't really believe in bitcoin. I met a guy who had mined thousands of coins and sold almost all at $1. He doesn't have even a single coin now.

You've gotta love this bull though. Wonder if he's Satoshi? http://www.reddit.com/r/Bitcoin/comments/1bhhjg/any_bitcoin_millionaires_here_on_reddit_if_so/

I'm one of those early ones. I read the original paper, thought about it for a few hours and decided that this is going to become bigger than Jesus. Bought a lot of mining equipment (took a lot of risk with my money, at this point there was not any kind of marked price/exchange or anything) and mined like there was no tomorrow. I have not sold many coins, had to sell a few to prove to my wife that I was not completely insane, she was not satisfied until she saw USD appear in her account. I have no plans to sell anytime soon, I'm fairly certain this is only the beginning. Sure there will be ups and downs but in the end I would be very surprised if the price didn't reach several thousand USD per coin or more. In which case i will be in the global 0.000001% for sure. I also gave away about half of my coins to a friend and a few to other friends. I was pretty well off even before this, very close to independently wealthy, but the bitcoin's have definitely tipped the scales. I'm not in this to become rich and buy a lot of "things", from the very start I was politically motivated, as are many others of the very early adopters although with a little bit different alignments. I have a conviction that bitcoin will be the liberator for the worlds poor giving them access to the global marketplace on a scale never seen before. If bitcoin can give market access to that many people the entire planet will experience an upswing comparable to the industrial revolution, only stronger. I will save my coins until the price is of such a magnitude that I can begin investing in freestate projects enabling such a future to become reality. Buying a nice car or house is not even tempting, i have that already, what we are talking about here is how the world my children will grow up in will look like and making us a space faring species - nothing else will suffice selling out towards. This is as far as I can see the best shot in my lifetime to contribute towards this reality, if it turns out to go to zero i will not regret holding on to the end. This is all or nothing. Governments have spent hundreds of years fighting for power with little other than misery to show for it. Politicians preach altruism for the masses convincing them to sacrifice their lives for the greater good which always turns out to be a monster. Bitcoin is for the people by the people. Revolution is at hand (i hope).

[rpietila]

I'm one of those early ones. I read the original paper, thought about it for a few hours and decided that this is going to become bigger than Jesus. Bought a lot of mining equipment (took a lot of risk with my money, at this point there was not any kind of marked price/exchange or anything) and mined like there was no tomorrow. I have not sold many coins, had to sell a few to prove to my wife that I was not completely insane, she was not satisfied until she saw USD appear in her account. I have no plans to sell anytime soon, I'm fairly certain this is only the beginning. Sure there will be ups and downs but in the end I would be very surprised if the price didn't reach several thousand USD per coin or more. In which case i will be in the global 0.000001% for sure. I also gave away about half of my coins to a friend and a few to other friends. I was pretty well off even before this, very close to independently wealthy, but the bitcoin's have definitely tipped the scales. I'm not in this to become rich and buy a lot of "things", from the very start I was politically motivated, as are many others of the very early adopters although with a little bit different alignments. I have a conviction that bitcoin will be the liberator for the worlds poor giving them access to the global marketplace on a scale never seen before. If bitcoin can give market access to that many people the entire planet will experience an upswing comparable to the industrial revolution, only stronger. I will save my coins until the price is of such a magnitude that I can begin investing in freestate projects enabling such a future to become reality. Buying a nice car or house is not even tempting, i have that already, what we are talking about here is how the world my children will grow up in will look like and making us a space faring species - nothing else will suffice selling out towards. This is as far as I can see the best shot in my lifetime to contribute towards this reality, if it turns out to go to zero i will not regret holding on to the end. This is all or nothing. Governments have spent hundreds of years fighting for power with little other than misery to show for it. Politicians preach altruism for the masses convincing them to sacrifice their lives for the greater good which always turns out to be a monster. Bitcoin is for the people by the people. Revolution is at hand (i hope).

wow

[rpietila]

Minimum number of all users, or minimum number of users in the top brackets? Because we know we've had over 100,000 bitcoin users since Summer of 2011.

I need your (plural) help in estimating the current number of users. It is a subtask much better suited to someone else than me.

[C. Bergmann]

Let's see it from the other side. Could the distribution become fair?

Can you compare it with 2009 / 2010 / 2011 / 2012 Rptiela?

It is possible to reconstruct the distribution in any past (or future, for that matter!) date with this model. After all the parameters are estimates anyway with wide tolerances. If somebody would take the time, we would have a nice series on how the coins are being distributed over time.

As for fairness, I assume you would like the coins to be distributed in a much more equal way than they are. That is completely unnatural and not observed in any economy. It is somewhat possible to equalize the income of people and the governments are doing it as much as they can (not that they cared about the poor but it is an end-all to be able to control as much economic activity as possible, which can nicely be achieved by excessive taxation and redistribution). But it is totally impossible to equalize people's wealth, since most people are unwilling/incapable of wealth accumulation and will therefore always own almost nothing, regardless of income. Even governments cannot do anything to the distribution of wealth, which is by nature a logarithmic phenomenon, obeying its own distribution. If governments aggressively go after private wealth, they aggravate the inequality, since the wealth is just collected in even larger stashes and middle class is destroyed.

Bitcoin distribution is the fairest when people have easy access to buy and sell them without hindrances. Then everybody can own as many as they deem fit. Satoshi will still own a million and most (currently: 99.99%) will own zero.

Yes, your're right, I would like the coins to be distributed in a much more equal way than they are. I didn't talk about fairness.

That is completely unnatural ...

This quote about is the core of every issue I disagree with libertarians.
What's natural? Be naked, living in caves, dying with 45, loosing you teeth with 30, rape innocent women, killing your neighbour, eating raw meat, being in a state of allday war ...
Being natural has in no way any value. The opposite. Everything we call civilization is a product of human genius to overcome things that are natural.

I am the last to say everybody in the world should have the same amount of money or coins. I don't mind if satoshi has millions and others have bitcents, and I don't want the state to take your bitcoins and give it to me. This could be the goal of sovjetcoin.
I just think it would be better, if the coins are distributed more equal. Too much money in one hand is dead money. It destroys the ability of money to build wealth in the same degree as the equalification of the state.
If this is fair or not, is another story. It depends if you define "fairness" by mechanism or outcome.

[molecular]

rpietila, thanks for your great piece about gold/silver.

might be off-topic here, but still, found this on /r/bitcoin:

As of October 4, 2013, the US Government was one of the top 500 holders of Bitcoin in the world. See:
http://www.reddit.com/r/Bitcoin/comments/1nr36r/us_government_is_now_of_the_top_500_holders_of/
With today's seizure (discussed here: http://www.reddit.com/r/Bitcoin/comments/1p7cl7/fbi_says_its_seized_285_million_in_bitcoins_from/), we can update the math and conclude that the US Government is now one of the top 70 holders of Bitcoin in the world:
Total BTC in circulation: 11,900,675 BTC (from http://blockexplorer.com/q/totalbc)
Total BTC in address thought to contain seizure of Silk Road users' coins: 29,657 BTC (from https://blockchain.info/address/1F1tAaz5x1HUXrCNLbtMDqcw6o5GNn4xqX)
Total BTC in address thought to contain seizure of some of DPR's coins: 144,336 BTC https://blockchain.info/address/1FfmbHfnpaZjKFvyi1okTjJJusN455paPH
11,900,675 / (29,657 + 144,336) = approximately 68
Thus, the US Government is now, at worst, the 68th largest holder of Bitcoin in the world
Again, this worst case rank occurs if there an even distribution of BTC across the top 68 BTC holders. Of course, this is not the case, so the US Government is likely ranked much better than 68.
Another way to look at it: The US Government now holds 1 out of every 68 Bitcoins currently in existence!

[rpietila]

That is completely unnatural ...

This quote about is the core of every issue I disagree with libertarians.
What's natural? Be naked, living in caves, dying with 45, loosing you teeth with 30, rape innocent women, killing your neighbour, eating raw meat, being in a state of allday war ...
Being natural has in no way any value. The opposite. Everything we call civilization is a product of human genius to overcome things that are natural.
 
I just think it would be better, if the coins are distributed more equal. Too much money in one hand is dead money. It destroys the ability of money to build wealth in the same degree as the equalification of the state.
If this is fair or not, is another story. It depends if you define "fairness" by mechanism or outcome.

It is natural in the same sense that any random sample of numerical data has about 30% of numbers having 1 as the most significant digit.

This can be used to reveal fake/colluded transactions, if the launderer uses another distribution (such as all numbers are equal).

Number of bitcoins a person has is not a stable quantity, rather it is a product of a dynamic economic process, a sum of all the choices that an individual has made concerning money. Even the governments have not found a way to increase someone's wealth, yet preserve his right to squander it.

Even dead money contributes to the economy in several ways, for example I derive great pleasure from the knowledge that Satoshi owns the largest stash, yet even that is only 5% of the total. This gives me confidence to purchase more myself. There are other matters such as autoregulation of the rate of interest etc. that can be researched from the gold standard era and applied here after fiat loses its grip.

If bitcoins would be distributed equally to all, it would not take long to reach the optimal distribution. The beauty in the current model is that the optimal distribution can be reached in concert with the process that proves that Bitcoin is money and ripple is not.

[RationalSpeculator]

Why is gold much more valuable than silver, despite that it has way less actual uses? Why is dollar more valuable than gold, even though everyone knows that it is a unit of unpayable debt from a bankrupt government?

Marketability. Salability. Hoardability.

You can use dollar everywhere, whereas gold you must sell and convert, and that happens differently in every country, involving hassle and fees. With silver, the situation is pathetic, and despite being the layman's money for 25 centuries, it does not function as currency anywhere today.

In The Art of War, Sun Tzu tells that 50 kilograms of silver is enough for upkeep of a 100,000-strong army for one day. Today that same amount has a purchasing power of mere $35k. I venture to guess that 35M is required today. This is an illustration that monetary elements' valuation can change over time when changes in their monetary properties occur.

As a investment silver merchant, I am very much aware that silver is "poor man's gold". For a rich man the difficulty of obtaining a large holding of silver is prohibitive. Buffett bought silver in the 1990s, and it took years for him to receive it, for the sellers had difficulty procuring it from the market. Silver price and silver lease rates shot up 50%. He was instructed to sell the holding before it caused more disruption to the silver market. Then I know a person who owned a few million$ worth of silver, and had to do it via banks due to the lach of physical merchants. He too was swindled out of his holdings. I am pretty much the "highest" guy who can own silver free of government intervention. Even if this wasn't the problem, the problem is the fact that buying and selling so much is a large international operation. Even for people less wealthy than me, silver is often too much of a hassle especially as most of its attributes are found in gold, you essentially trade some leverage for marketability. The largest practical silver holding is less than $100k and do not expect to trade it because dealers will suck you dry. Something that sucks so bad in hoardability cannot be money. (Silvervault is my creation that is designed to empower physical silver to work as money; currently it has not succeeded in the main mission but is well functioning as a depository.)

Gold fares a little (2 orders of magnitude ) better, because you can pack 100 times the value of silver in the same space. Market does not collapse if you try to buy and sell $1 million worth of physical gold, it is always available (well not always, but that is again those behind-the-scenes things, which are not the main issue here). Even countries have gold reserves, but gold is currently so cheap that the largest players who want gold (China, Russia) cannot buy it from the market since the largest holders (international bankers) are not selling. Even a humble request to get back the gold that you own (Germany, from USA) is turned down. Finland knows better to not even ask for its reserves. (When Bank of Finland was questioned this, the answer was that they are happy that gold is safely stored in London and other places. My interpretation: no chance to ever see the gold.)

The basis of dollar's value is in its monetary attributes. If it was not so ubiquituos and accepted everywhere, I highly doubt that it would be able to reach its current dominance. After 150 years of dirty tricks, assassinations, coups, puppet governments, wars with millions of deaths, and the building of a socialist system that constitutes 50% of the economic activity, it has this role, though. Companies that produce stuff and have been profitable for decades in a row, do not enjoy the same credit rating and must pay higher interest. The reason is that companies are smaller and the marketability of their debt is thus weaker. Midsize corporations also have the political risk of running into adversities if they do not conform to the unwritten rules of their domicile, no matter how solid the business was. "Democratic" governments cannot default on their debts, this was by the way a major reason why England gained dominance in 1700s - interest rate was lower, boosting investment. In the continent, kings needed to pay more, since the successor did not always assume their debts.

That some good gains a monetary status (that it acts as money) is not an everyday occurrence. In very early times it has been hypothesized that salt and cattle were used as money. When metals became available, they became the money par excellence, not always available to the public due to their high price, but being the unit of value, medium of exchange in large purchases, and especially store of value. This has continued until present day, only in the 20th century has the common perception of what is money, changed from metal to numbers of an abstract unit.

That some good gains a dominant monetary status, does not happen in once per millennium. There is no explicit evidence that this has ever been occurred before the coercion-induced switch from gold to fiat in the 1900s. (It is debatable whether silver was dominant to gold prior to 1800s, because the values of their monetary stocks ("market caps") were in the same ballpark.) The reason why a money cannot gain dominance over another, is that a good money has the least possible inflation. To have a 1.2% inflation of gold today, the money supply would only about triple in 100 years. But if it grows so slowly, you never get started with your new money! There needs to be a stock to begin with, and it must grow at maximum very slowly.

Ripple is an example of model, where money supply is fixed, but distribution is according to the whims of a soviet.

Bitcoin is an example of model, where money supply is fixed, and distribution happens over more than 100 years according to a predetermined model where everyone can participate in a free market fashion.

Ripple has at times been more valuable than Bitcoin, so the jury is still out. If people continue to buy ripples and keep the exchange rate up, it does not matter how OpenCoin distributes the stash. But I doubt that the fad will last, because XRP as a currency is hardly any improvement over USD, and is currently a terrible underdog in acceptance. (Can you buy anything with XRP?)

Bitcoin, on the other hand, is a genuine improvement over both gold and USD. It is the most hoardable, since you can store and move an arbitrary amount of wealth as easily as you buy a sandwich. It has transactional capabilities which, when fully implemented, outdo all that Visa and PayPal can even dream of in their dollar economy.

And it has a 2-year (2 orders of magnitude) lead over the nearest competitor, Litecoin. Even if you consider Litecoin to be technically superior to Bitcoin (I don't), it is a minor tweak and not a generational improvement. At present I cannot imagine anything which would be so much superior to Bitcoin than Bitcoin is to U.S. Dollar, and therefore it is not just improbable, but outright impossible that an altcoin would take over Bitcoin.

Summary: Nothing prevents the public from buying gold or even silver, if they like. Altcoins will remain in niche applications, but the market cap ratio between Bitcoin and best altcoin will be on average 50:1, as is the market cap ratio between gold and silver, its nearest competitor.

Thanks for another very interesting post

I really like that you point out the dramatic fall in purchasing power silver has experienced over the millennia. That separates you from the goldbugs.

I'm thinking the same will happen with gold now that bitcoin is here. And due to faster evolution it will probably not take hundreds of years but tens of years. What are your thoughts on that?


Why do you think the market cap of altcoins will be on average 50:1 ratio?  

Currently the market cap of altcoins is 3% of bitcoin so that is not 50 times less but only 30 times less. Do you think altcoins are overvalued vs bitcoin right now?

If I remember correctly Litecoin succeeded in going to a market cap of 8% of bitcoin a few months back. Currently it is 2%. Do you think 8% will come back the coming 1/3 years?

[LorenzoMoney]

It really does not matter if a few people are hoarding large amounts of bitcoin.

What is more important is commerce.
If someone only ever has 1 bitcoin in his wallet, but has bought clothes, jewelry and music online with bitcoin, and bitcoin flows in and out of his wallet, that is what is more important.

Bitcoin is not just a way to speculate and store wealth, but really is a medium of international, borderless exchange.