The Lorenz curve of Bitcoin is crooked, how to make it straight?

Bitcoin has far surpassed the expectations of most when it comes to overcoming stumbling blocks that are in its way. Forks and technical weaknesses have been addressed. Regulatory issues are being discussed on reasonable terms with public hearings and expert opinions from all sides being heard. However, the distribution of coins themselves still lie in the hands of the few.

The data comes from John Ratcliffs Bitcoin blockchain parser to analyse the top 150,000 public addresses by value. The chart shows what economists refer to as the lorenz curve which gives a sense of the distribution of assets amongst a population. The green line shows what perfect equity would look like. In this case, it would be represented by all 150,000 addresses holding approximately 79 Bitcoins. The purple line depicts the actual distribution. This provides only an approximation for the distribution of coins amongst users as we know that one user can create new addresses without cost and the system was originally intended to be used in such a way.

For much of the 20th century the distribution of income and wealth was ignored in standard macroeconomics. The recent crisis and new evidence has brought the word inequality back onto the economic and political agenda. In Bitcoin, it is particularly important that the distribution of coins becomes more even to fulfil its role as currency and payment network. With approximately only 25,000 miners globally, the distribution of coins is likely to only change through exchange with government currencies or goods and services.

Luxury companies such as Virgin Galactic, private jet charters and luxury car dealerships have all realised the opportunities of tapping into this market. This aids the distribution of coins as it is usually transferred from one individual through a merchant processor who needs to offset their currency position in the exchange markets. This releases coins into circulation but will not be sufficient to change the overall concentration of wealth.

Adoption will drive the distribution, but distribution will also drive adoption. The use of Bitcoin as a medium of exchange will facilitate a greater distribution of coins. As more merchants such as Overstock support the currency, adoption amongst users will increase. However, Bitcoin’s use as a store of value will depend on the underlying distribution of coins. Too much concentration of wealth and this will create unease around the stability of the value. With the power concentrated in the hands of a few, the investment in Bitcoins is still high risk and depends on the motivations and incentives that these users face.