The news of Tesla’s Bitcoin purchase broke early on February 8th. Soon after, Bitcoin reached new all time highs. As always, I like to ask, why, why now, and whats next? Furthermore, I like to revisit old questions, with new context. That question is this.
Is the concentration of wealth a problem in Bitcoin?
My friend called hours after the news started making its way into the mainstream. She expressed frustration with the fact that Elon Musk was just going to hoard the Bitcoin.
Is the Concentration of Wealth a Problem with Bitcoin?
Numbers don’t lie. I like to base as many of my opinions on fact, rather than trust. This is keeping in line with an ethos of Bitcoin “Don’t trust, Verify”. In order to answer the question about wealth concentration, let’s start with a number.
21,000,000 (21 Million) = Total Supply
That is the number of Bitcoin that will ever be minted.
18,623,562 (88.6% of the Total Supply)
That is the number of Bitcoin currently in circulation.
Tesla just bought about 37,500 Bitcoin (The official number has not been released)
So therefore Tesla owns .17% of the Total Supply of Bitcoin.
Whether or not the supply of Bitcoin is decentralized is a multifaceted question so let us break it down.
What is Stopping Billionaires and Fortune 500 Companies from Owning All the Bitcoin?
The answer is simple. HODLers, and the design of Bitcoin.
There is less and less Bitcoin available on exchange to be purchased by these mega companies and ultra rich individuals. This is thanks to Bitcoin’s limited supply. In this letter, I’ve defined HODLers as the people who will never sell Bitcoin. Michael Saylor (CEO of MicroStrategy) is one of these individuals. The base of individuals that will never sell Bitcoin form the floor of Bitcoin.
The Floor - The price at which Bitcoin would not sink below
Since the supply of new Bitcoin entering the system is decreasing every four years (because of halvening events), there will be less and less Bitcoin entering the system for now, and forever. This combination of factors means that there is less and less opportunity for more big players to join the game in any meaningful way. The opportunity for wealth to concentrate with a few players is closing. Conversely, the window of opportunity for the retail investor and the “grassroots” individual to “get in early” is also closing.
Bitcoin is Decentralized, Through and Through
To hold the claim of being decentralized is a rather tall order. Whether or not something (like a cryptocurrency) is decentralized or not is multifaceted. It doesn’t just depend on the infrastructure, it also depends on governance, and supply. Putting the infrastructure and governance factors aside, this letter is only going to address the decentralization of its supply. Bitcoin’s largest concentrated supply is in the wallet of Satoshi Nakamoto. It has never been touched, and maybe never will be.
Satoshi’s Wallet Contains approximately 1.2 million Bitcoin
There is a limit to the amount of Bitcoin any entity can own, because there is a limit to the amount of Bitcoin. The problem we have with our current monetary system, is that the supply is infinite in practice, (finite at any one time). When more money is created, it is typically injected into the economy at the “top”. This is a well observed economic paradigm called the “Cantillon Effect”. 1 Then trickle down economics2 is supposed to take care of distributing the supply of money through the rest of society. Bitcoin bypasses this entire flaw in monetary administration by keeping the limit finite. As time progresses, more and more people are joining the network by purchasing Bitcoin. This act distributes the supply of Bitcoin throughout society. There are at least three ways to use Bitcoin, spending it, earning it, or HODLing it. All three of these increase the value offering, and potential as a monetary network.
Concentration is not a Problem
The reason why concentration is not a problem is because the hoarding of Bitcoin is essential for its maturation. Bitcoin gives me hope that we can build a better financial system from the ground up, that doesn’t have the same problems of wealth inequality. Although, after the last year in Bitcoin, several major players have started sucking up Bitcoin off the market into their reserves. To some, this is a corporate financial strategy, to others this is the hoarding of wealth.
Why?
Bitcoin is a good store of value.
This is the decade where Bitcoin will destroy the myth that it is not a good store of value. In order for there to be zero room left for doubt on whether or not Bitcoin is a good store of value, it will have to really impress people. I believe it will.
MicroStrategy, MassMutual, Square, and Tesla are among the first to make this move. One thing to notice about each of these companies, is that they all operate in separate domains. An electric car company, an insurance giant, a business intelligence platform, and a viral payments application. How long before a computer giant (Microsoft or Apple), a retail giant (Amazon), or a Social Media Giant (Twitter, Facebook) join the competition. There will come a day when the risk of NOT owning Bitcoin is greater than the risk of owning it. Tesla bought Bitcoin for the same reason MicroStrategy did. It was a good business decision. Bitcoin stores value through space and time better than any other asset in existence.
Why Now?
Elon Musk’s journey with Bitcoin was taken to the next level fairly recently with the follow tweet and reply.
Since then, Elon Musk has been all over social media talking about Bitcoin, and other cryptocurrencies such as Dogecoin. The conversation with Michael Saylor apparently went well. Well enough to convince Elon Musk to allocate 7.7% of Tesla’s liquid cash (1.5 Billion) into Bitcoin.
That tweet took place on December 20th, 2020. It only took 50 days for Elon Musk to consider the idea, decide to do it, rally the Tesla board, and execute the order. I highlight in the the MicroStrategy Case Study the fact that a multi-hundred-million dollar Bitcoin purchase is not something that may be unilaterally achieved. It is a complex financial transaction that requires permission, and disclosures.
What’s Next?
In Tesla’s disclosure document to the SEC, they also mention their intent to accept Bitcoin for payment. This means that people with Bitcoin may purchase Tesla cars. They may or may not liquidate the Bitcoin upon receipt. This again, is a smart business decision. The ability to accept Bitcoin for your services is simply having the ability to accept another completely viable and legitimate form of money. It is trivial to turn Bitcoin into Dollars. It is not trivial to account for it within a company. It requires a knowledge of new technology (Wallets, Keys, Security) within the accounting department. It is therefore an important business decision for any business to understand how to accept Bitcoin as a form of payment.
What happens next might surprise us all. It is not clear which companies will be next. Will Apple or Microsoft buy Bitcoin first? Amazon or Google (alphabet)? Facebook or Twitter (It’ll be Twitter).
If you’re interested in knowing how your business (no matter how big or small) can preserve the buying of your cash reserves, I recommend reading our case study on MicroStrategy, and then following up with an email to us!
All The Best,
Keegan Francis
P.S. I write a private newsletter every week with an analysis on crypto products and strategies. Subscribe now for an early bird discount.
Cantillon Effect - https://www.aier.org/article/cantillon-effects-and-money-neutrality/#:~:text=The%20Cantillon%20Effect%20refers%20to,flow%20path%20through%20the%20economy.
Trickle Down Economics - https://en.wikipedia.org/wiki/Trickle-down_economics#:~:text=Trickle%2Ddown%20economics%2C%20also%20known,large%20in%20the%20long%20term.