“There are three classes of people: Those who see. Those who see when they are shown. Those who do not see.”
(Attributed to Leonardo da Vinci.)

It is widely understood that early adopters of Bitcoin, who showed up on the scene in the days when mining difficulty was low, are sitting pretty, and will continue sitting pretty without ever having to do much of anything ever again. And so, skeptics often describe the system as a Ponzi scheme. The Bitcoin FAQ addresses this accusation thus:

I do not deny that the creators of Bitcoin deserve some reward for taking the trouble to create an elegant and, for the most part, mathematically-sound decentralized cryptocurrency. Yes, they "bought Manhattan for a quarter." And some people find this off-putting. But such objections are rooted mainly in envy. Everyone wishes that they, rather than the founders, had pulled off the early land grab. Debates about how much the founders "deserve" to profit from their foresight are largely an exercise in pointless bickering. Count me out.

But the real problem with Ponzi schemes - and the reason why they are considered a legally-actionable type of fraud in every civilized country - is not the abstract unfairness of some clever fellow getting "something for nothing." Rather, it is the fact that such schemes come with a built-in self-destruct mechanism, whereby at a certain point, those who sit on the apex of the pyramid decide to cash out, pocketing nearly all of the meatspace wealth previously invested into the system.

A Ponzi scheme is generally agreed to be a Bad Thing, and most Bitcoin enthusiasts do not like the idea of being involved in one. They vigorously deny the possibility that Bitcoin has a removable "floor," which might one day "fall out" and permanently transfer ever penny's worth of traditional money, precious metal, alpaca socks, cocaine - and everything else which has been exchanged for bitcoins - into a handful of pockets.

Unfortunately, the facts speak for themselves. One of the world's greatest cryptographers published the following analysis:

By the nature of the system, the ownership history of every bitcoin in existence is public.  Ron and Shamir found that a sizeable bulk of the Bitcoin transaction history to date consisted of shell game switcheroos, designed to conceal certain inconvenient facts.  And it should surprise no one that, once the fog of deliberate obfuscation clears, we see the following distribution of ownership:

Most bitcoins are, in fact, in the hands of a very few people. Are you surprised? I'm not.

We also learn that, of the approximately 9 million bitcoins which currently exist, less than 2 million actually circulate - that is, change hands with any appreciable frequency:

And it would appear that most of the non-circulating coins are in the hands of a very small number of people - who, one may reasonably suspect, were involved from with building and propagandising Bitcoin from its very beginning. So, who are the lords of Bitcoin?

Who, one might wonder, is "A" ? Satoshi Nakamoto? I doubt that we'll ever know for sure. And I'd bet serious money that "R" and "S," with their astronomical transaction frequencies, are botnets specializing in the theft of CPU/GPU cycles for mining (and unguarded Bitcoin wallets.) These are known to exist.

But the most damning fact revealed in the paper is not the extreme top-heaviness of the Bitcoin ownership pyramid, but rather the elaborate lengths to which the hoarders went in order to conceal their existence from "rank and file" users. Think of it! Hundreds of thousands of shill accounts, with vast rivers of wealth moving back and forth - for one purpose only: to deceive. None of it was done by accident.

And perhaps the most interesting thing to be learned here is not in the paper itself, but rather in the reaction of the Bitcoin user community. This, in short, is summed up by the reply of a suspect in a stereotypical "whodunit" story, who, when confronted with an accusation of murder, often says: "He ain't dead, and if he is, I didn't kill him, and if I had, the bastard had it coming."

Hundreds of people are busy pointing out largely-imaginary flaws in Ron and Shamir's paper. They conveniently ignore the fact that the data set is entirely public, and if they disagree with the stated conclusions, they are welcome to perform a similar analysis and try to produce different ones. But no one has done so, and I dare to predict that no one will. On the other hand, those who acknowledge the revealed facts are busy insisting that the hoarders could not possibly harm other users by dumping their coins on the market in the future. All right, maybe you can't do arithmetic. Brain damage happens, and we should feel sympathy for you. But some of us can. And arithmetic doesn't lie.

Some people are incensed by "hoarders" - not I. I don't give a damn. At least Bitcoin hoarders never had to kill anyone to obtain their wealth, unlike those who control land and other natural resources. The problem here is a much more concrete one: Bitcoin turns out to be something other than the fully-decentralized, unkillable network which so many imagined it to be.

People who have invested serious time and wealth in Bitcoin ought to feel angry.  Not from any abstract sense of fair play, but from the simple fact that Ron and Shamir's findings reveal a serious - and quite mathematically-certain - flaw in the sytem. The total number of bitcoins in actual circulation is much smaller than previously believed. If the early adopters were to cash out and place their hoards on the market, the exchange rates (as denominated in anything) would dive through the floor, never to recover. The hoarders, in effect, possess an off switch for Bitcoin.

Whether and under what circumstances they would press the switch, I cannot say. But the Bitcoin kill switch exists.

So, what, if anything, could be done about it? Unfortunately, the one solution which I can think of (other than the idiotic head-in-the-sand solution of not giving a damn, which the Bitcoin user community seems to favour) is a rather unlikely one, and would be quite distasteful - on a gut level - to most users. I am speaking, of course, of proscription.  If the Bitcoin community - or a reasonable subset thereof - agreed that the kill switch ought to be neutralized by any means possible, it would be a fairly straightforward matter to declare the hoarders persona non grata and collectively agree to use modified Bitcoin clients (let's call them Bitcoin-P) which act as if the particular coins currently held by A, C-F, H-K, and M-S were not bitcoins at all. And that such pseudo-coins will never be accepted as genuine in trade for any good or service. In effect, they would be retroactively shitcoined for all time.

This act would not require cooperation from every single Bitcoin user, or the imposition of any kind of governing authority. If even a minority of users were to move to Bitcoin-P, operating separate exchanges and the like, said users would be forever immune to the effects of a future market glut resulting from hoarders cashing out. Users of conventional Bitcoin would feel the effects in full, suffering the loss of most if not all of their purchasing power.

But I am under no illusions that Bitcoin-P will ever happen, given the libertarian bent of most Bitcoin users. They will mutter of dekulakization and the like. Fine, lose your hard-earned wealth to a pyramid scheme operator at some unspecified future date. But if you like the idea of decentralized cryptocurrencies without built-in kill switches, think hard about Bitcoin-P.  Anyone who wants to can start using Bitcoin-P right now, without having to wait for others to be convinced of its merits. Just compile a list of the Satoshi gang's bitcoins, and start pretending that they aren't coins at all. It really is that simple.

Or better yet, consider the possibility of entirely novel mathematical schemes for "digital gold," which have yet to be discovered. The field has a delightfully rich history, and perhaps great things await the honest and enthusiastic amateur cryptographers willing to take on the challenge.

Edit: Apparently people still think that I have some sort of religious problem with "hoarders" per se. I couldn't care less whether you sit on your coins or spend them, or how many you presently have. The problem with the Satoshi gang's hoard in particular is not simply the size of the latter. It is rather that Satoshi and his friends never had to put U.S. dollars, gold, cocaine, alpaca socks, etc. into the system in order to obtain their coins. They are collectively sitting on top of a massive cheque that the Bitcoin economy probably could not ever cash without bleeding to death. So if this handful of people were to decide that they're done with Bitcoin, then Bitcoin will be done with itself.

And in the interest of full disclosure, I presently own a total of ~0.1 BTC. (If you're willing to take my word for it.) I mined the damn stuff with a Xilinx "Virtex 5" FPGA. It was a total waste of time, but writing the miner made for good Verilog / general logic layout skills practice.