Study finds third of Bitcoin controlled by small group of whales


A store in Berlin, Usultan Department, in the nation of El Salvador, where the cryptocurrency has been declared legal tender.

A store in Berlin, in the department of Usultan, in the nation of El Salvador, where the cryptocurrency has been declared to be legal tender.
Photo: Alex Peña (Getty Images)

For all the speeches of democratize finance, the vast majority of Bitcoin continues to be owned by a relative handful of investors.

As reported by Bloomberg, newly published data by the National Bureau of Economic Research (NBER) shows that only 10,000 individual investors control about a third of Bitcoin in circulation. This research advanced on previous studies by distinguishing between intermediaries such as cryptocurrency exchanges, traders and brokers who process large amounts of Bitcoin for clients, and accounts held individually. Intermediaries control around 5.5 million Bitcoin at the end of 2020, while individuals control around 8.5 million Bitcoin. The top 1,000 investors, who are popularly known as “whales”, controlled around 3 million Bitcoin tokens.

To put it another way, at the Jan. 1, 2021 price of $ 32,203.64, middlemen controlled $ 177 billion in Bitcoin, while according to the same metric, individuals controlled nearly $ 274 billion. Those 1,000 investors controlled roughly $ 96.6 billion in Bitcoin, somewhere in the very rough range of $ 96.6 million each on average. To reach this number, one must of course ignore that moving so much Bitcoin would move the market and affect the cryptocurrency. value (a Bitcoin is worth nearly $ 62,400 on Tuesday). It is also probably underestimating the degree of control, because no one has a reliable record of who is behind those 1,000 accounts.

More probably, the people behind these accounts are individuals who managed to accumulate huge stocks of Bitcoin early and just kept get richer and richer, perhaps by using the sheer weight of their assets to manipulate prices. Crypto enthusiasts might not care as long as their own financial trajectories mirror those of whales on a smaller scale.

“To the best of our knowledge, we have the most comprehensive information on crypto entities that have been used in academic research so far,” wrote authors Igor Makarov of the London School of Economics and Antoinette Schoar of MIT Sloan School of Management. in the report. “Our data covers 1,043 different entities. These include 393 exchanges, 86 gaming sites, 39 online wallets, 33 payment processors, 63 mining pools, 35 scammers, 227 ransomware attackers, 151 dark net markets, and illegal services.

Identified scams and others criminal activity on the Bitcoin network are considerable, but perhaps not at scale authorities claimed, according to the report.

“We calculate that there is approximately $ 550 million circulating to addresses that have been identified as scams, approximately $ 16 million in identified ransom payments and over $ 1.6 billion in payments and services. of the dark net, ”the authors wrote. “In addition, approximately $ 1.7 billion goes to gaming affiliate addresses and an additional $ 1.4 billion in mixing services.”

The authors warned that “the concentration measurement is most likely an understatement as we cannot rule out that some of the larger addresses are controlled by the same entity.” As Bloomberg noted, one example is the 20,000 separate addresses controlled Satoshi Nakamoto, the pseudonym of the person (s) who developed the cryptocurrency and disappeared without withdrawing their profits. These accounts were measured as belonging to 20,000 people distinct by the process used in the study.

Miners, the computer farms that generate new Bitcoin, are even more concentrated according to the NBER estimate, with the richest 10% controlling 90% of mining capacity and only 0.1% controlling 50%. This follows the increasing difficulty of mining new Bitcoins over time, which ranges in terms of computational demands and therefore power and resulted in large-scale bitcoin farms the use of huge stocks of dedicated equipment being the main means of generating new units.

This “inherent concentration makes Bitcoin susceptible to systemic risk and also implies that the majority of gains from subsequent adoption are likely to fall disproportionately on a small number of participants,” the researchers wrote.

Bloomberg noted that this could leave the Bitcoin network vulnerable to a “51% attack” – the only way a malicious party can get hold of it is to take control of more than half of the miners working there. Such an attack would be on an unprecedented scale and seems pretty unlikely, at least outside of a nation-state or James Bond villain scenario.

The full study is available for reading at NBER here.

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