The Great Bitcoin Wealth Transfer

As Bitcoin plunges below $7,000 (at $6,800 as of writing this), it looks like I was right yet again in predicting lower prices for Bitcoin. One can just look through the blog post history to see that have I been telling people to sell since January when it was at $15,000. This was after telling people to buy as early as 2013 when it was at $100.

But anyway, what is wrong with Bitcoin? It’s an interesting technology, but I have changed my outlook in that I no longer foresee Bitcoin being revolutionary but rather evolutionary, and filling niche market rather than changing the world.

At least I am telling people to sell while the prices are ‘high’ rather than being one of those losers who waits until the price is much lower and then with the aid of hindsight explains why it was ‘so obvious’ that Bitcoin would fall. That doesn’t do anyone any good when the price is low, but stroke your ego.

It has also occurred to me, that in a social Darwinist sense, Bitcoin (and other coins) represents a great wealth transfer to the tune of billions of dollars of wealth transferred from the naive, careless, and unintelligent into the pockets of the smart and cunning.

Since 2010 or so, an estimated 30% of all Bitcoins have been lost forever due to hacking, lost keys, destroyed hard drives, etc. People have had their wealth transferred due to:

1. having their computer hacked (such as Bitcoin-stealing trojans and key-loggers)

2. having their web wallet hacked (such as the 2013 Google Android Bitcoin wallet random number generator bug that allowed thieves to recreate private keys)

3. exchange hacks (MtGox is the most famous example)

4. get-rich-quick cryptocurrency scams (approximately 5,000 or more Ethereum has been stolen in the past five or so months due to ‘free ETH’ scams).

5. ponzi schemes, ICO fraud (fake ICO websites), ICO hacks (Bee Token hack for example)

6. massive wallet exploit bugs that steal the entire balance rather than individual accounts (parity multi-sig hack that stole $50+ million of Ethereum)

7. phishing (favorite targets include major exchanges such as Bittrex and Binance, but also wallets such as Coinbase, My Ether Wallet, and Blockchain.info)

In these examples, all of the victims had their wealth transferred to a more cunning thief.

Then there are lost keys, destroyed hard drives, and spent Bitcoin. This again is a more subtle form of wealth transfer because coins that are taken out of circulation make existing coins more valuable. Stories early Bitcoin miners accidentally throwing away hard drives and computers that contain millions of dollars worth of Bitcoin, are not that uncommon. Those who spend their Bitcoin, however, will at least get something out of it, unlike those who hold and watch the price keep falling and falling.

Contrary to the popular belief that one must be smart to speculate in Bitcoin, the opposite seem to be true in that most people who speculate in Bitcoin (and especially alt-coins) are pretty dumb, or at the very least very naive. The fact so many people have been hacked or phished is evidence for this. Or the stream of barely-intelligible posts on the popular bitcointalk.org forum that passes for discussion. Or how James Altucher sold so many subscriptions of his “Crypto-Genius” newsletters to the tune of $2,000 per year per member, and the timing could not have been worse given that James promoted his newsletter service heavily in Dec-February, just as Bitcoin peaked and subsequently had its steepest and biggest decline. Most of these people are morons who happen to have a lot of money, which despite the positive correlation between wealth and IQ, is not that uncommon. Look at all those dumb athletes who go broke for example. I remember one example where someone posted on Reddit that they got phished, but thought that the SSL certificate on the phishing site meant that the site was safe. He failed to realize that SSL only encrypts data as it passes from the browser to the server; the data can sill be read on the server (or else what would be the point of it). All it does it prevent packets of data from being read while in transit. Some of it , again, is due to carelessness not just low IQ, but I think people with IQs around 90-115 the most most common victims because they don’t understand the technology and the risks very well. They are smart enough to sign up and deposit money, but are helpless beyond that.

The final and biggest wealth transfer will be those who sell their Bitcoin (and others coins) while prices are still high. As a simple calculation showed, there are not enough lifeboats for everyone, meaning that it’s a mathematical certainty that most Bitcoin (and Ethereum, Litecoin, Monero, etc.) holders will go down with the ship even if they try or want to sell. Only maybe a couple dozen Bitcoin holders can sell at most a total of ten thousand or so Bitcoin above $2,000; most will have to settle for firesale prices. The market simply is not big enough to support many Bitcoin ‘whales’ selling. And this goes for all coins.