How the ‘1%’ of bitcoin controls the lion’s share of cryptocurrency

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It’s good to be 1% bitcoin. Major bitcoin holders control more of the cryptocurrency than US dollar-rich households, according to a study by the National Bureau of Economic Research.

The study showed that the top 10,000 bitcoin accounts hold 5 million bitcoins, which is the equivalent of about $ 232 billion.

With around 114 million people worldwide holding cryptocurrency, according to crypto.com, that means around 0.01% of bitcoin holders control 27% of the 19 million bitcoin in circulation.

By comparison, in the United States, where wealth inequality is at its most extreme in decades, the richest 1% of households own about a third of all wealth, according to the Federal Reserve.

The study, first conducted by finance professors Antoinette Schoar at MIT Sloan School of Management and Igor Makarov at the London School of Economics, mapped and analyzed every transaction in Bitcoin’s more than 13-year history. .

The ramifications of this centralization are mainly twofold, argues the document. First, it makes the entire bitcoin network more susceptible to systemic risk. Second, it means that the majority of the gains from higher prices and increased adoption go to a disproportionate group of investors.

“Despite the fact that it’s been around for 14 years and the hype it has generated, it’s still a very concentrated ecosystem,” Schoar said of Bitcoin.

Bitcoin was unveiled in 2008 as an open source software project intended to be an electronic form of physical money with no gatekeepers. Anyone could download the software, become a “node” on the network, and “mine” for bitcoin.

In practice, however, bitcoin has become very centralized. Most people who trade do so through exchanges. The costs of mining have become so high that only a small group of companies at the enterprise level can afford to do so.

The wealth of bitcoin miners and exchanges has skyrocketed over the past two years, with the price of a single bitcoin rising from $ 5,000 in March 2020 to $ 68,990 last month. The number of people holding bitcoins has more than doubled and now includes a number of well-known investors, hedge fund manager Paul Tudor Jones, entrepreneurs Elon Musk and Mark Cuban and celebrities like actress Maisie Williams.

Yet the vast majority of bitcoin transactions, around 90%, are derived from two activities that have no real economic function, the researchers said.

The first activity is simply how the network processes bitcoin transactions – think of it as the equivalent of giving change for $ 20 when you buy coffee. The latter are transactions sent between wallets by the same user trying to obfuscate their identity, a common tactic for those seeking anonymity.

Of the remaining 10% of volume, what the researchers call “actual volume,” trade dominates. Transactions between exchanges and trading desks accounted for around 75% of the total volume, they said.

By comparison, scams, gambling sites and other illicit uses, which rightly concern law enforcement and lawmakers, accounted for less than 3%.

This type of analysis is possible, more than with physical money, because bitcoin operates on a network that records every transaction in a publicly accessible ledger. While user identities are not tied to these transactions, it is still possible to track and analyze these transactions, determine their use, and determine whether the accounts represent institutions or individuals.

Write to Paul Vigna at [email protected]

This article was published by Dow Jones Newswires

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