Bitcoin

Bitcoin’s “1%” Controls the Lion’s Share of Cryptocurrency Wealth

Bitcoin's "1%" Controls the Lion's Share of Cryptocurrency Wealth

It’s good to be bitcoin 1%. Top bitcoin holders control a larger share of the cryptocurrency than the wealthiest US households control in dollars, 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, equivalent to around $232 billion.

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

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

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

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

“Despite being around for 14 years and increasing the hype, it is still a very concentrated ecosystem,” Ms. Schoar said of Bitcoin.

Bitcoin was unveiled in 2008 as an open-source software project intended to be an electronic form of physical cash with no custodians. 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 exploded 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%, originate 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 second are transactions sent between wallets by the same user trying to conceal their identity, a common tactic for those seeking anonymity.

The recent surge of Shiba Inu Coin, and the resulting decline in value, is part of a growing trend of meme coins that rival some of the largest digital tokens in the world. WSJ retail investment reporter Caitlin McCabe explains why investors are pouring money into this meme-based cryptocurrency. Photo: Amber Bragdon/Getty Images

Of the remaining 10% of volume, what researchers call “real volume,” trading dominates. Transactions between exchanges and trading desks accounted for about 75% of 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 so than with physical money, because bitcoin runs on a network that records every transaction in a publicly visible ledger. Although user identities are not tied to these transactions, it is still possible to track and analyze these transactions, determine their usage, and determine whether the accounts represent institutions or individuals.

Write to Paul Vigna at [email protected]

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