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.
No, because low risk investors are just as okay as high risk investors for lower bets. They're okay with it. But, they're not okay with betting more than 0.25% in one shot. That is the definition of kelly.