I understand the max bet part, but what if a player bets 1BTC and wins (way below a max bet). Do the 0.25% and 1% guy participate equally based on portion of the bankroll or does the 1% person get 4X more than the 0.25% investor?
People who run 100% kelly get 4 times the action of people running 25% kelly, yes. By definition, pretty much.
A says "I'm willing to risk up to 0.25 BTC". B says "I'm willing to risk up to 1 BTC". We sum those two, and present to the gambler "the site is willing to risk up to 1.25 BTC".
If the gambler comes back and says to the site "I'll take 50% of what you're offering", we say to each investor "he's taking 50% of your offer".
I don't see how any other way would be fair.
Okay, so I just thought of a great analogy of why you should use my option.
So say there are two investors. Investor A has invested 100 BTC. Investor B has invested 100 BTC also.
Right now the max profit is set to 0.5%.
If someone bets 0.1btc at 49.5%
Then they both are able to gain 0.05 btc. (or lose)
Now you implement your method. Investor B decides to risk 1% instead.
So now if someone bets 0.1 btc,
Investor A can win ±.33 and investor B can win ±.67.
This doesn't seem fair. Investor A is still okay with betting at this risk level. Why does investor B take some of his bet?