Rich-Get-Richer Effects in BitCoin Trading
This article discusses how the rich-get-richer effect appears in BitCoin trading. To those unfamiliar, BitCoin essentially dominates the realm of digital currency, where various users can make secure, direct online transitions with each other. According to the article, the phenomenon of exchanging BitCoins emerged in 2009 and began to rapidly grow in popularity after 2011. A group at Eotvos Lorand University compiled a “complete list of transactions and reconstructed the entire financial history of each account on the market” in order to better understand how the currency circulated, and their findings proved quite interesting. The study was conducted by creating many nodes, each representing a specific BitCoin address, and simply linking two nodes if there “was at least one transaction between them.” The links were applied chronologically in order to show the development of the trade over time.
The article articulates how the researchers started noticing trends after BitCoin’s popularity began to take off. More specifically, they noticed that nodes with a large amount of preexisting transactions (i.e. those that were linked to) were more “likely to attract more links than a node with only a few links.” This is a clear example of the rich-get-richer effect, and we can draw a parallel between the findings of this study and what we have discussed in class. Popular addresses with more links (transactions) to their name are also likely to amass greater wealth at a faster rate than those who do not have as many previous transactions. This is not simply because the former already have a lot of links pointing to them, but also because new arrivals into the trading network will more likely find one of the more affluent, “active” nodes than one that is more obscure (i.e. has few links pointing to it). This can be from arbitrarily stumbling upon the active trader or by copying somebody else who has already linked to that individual.
Overall, from the results of this study and concepts from class, we can conclude that those who are the most likely to profit from trading digital currency are those who have already made a substantial mark in the market.