Bitcoin and the Concentration of Wealth and Power
Written By Jim Craig — 10/29/2021
Time Magazine recently published an article titled Bitcoin Is Still Concentrated in a Few Hands, Study Finds. In which they describe a small concentration of individual investors controlling most of the coins in circulation, and the majority mining power. Are these points something to worry about? Here we will examine that.
First — the concentration of mining power. Time says this in their article
The concentration of miners is even more profound, data show. NBER found that the top 10% of miners control 90% of the Bitcoin mining capacity, and just 0.1% (about 50 miners) control 50% of mining capacity.
Let us quickly put this one to bed by saying that the concentration of mining power was expected by satoshi when designing Bitcoin and that it is not necessarily a cause for concern to the network. Coindesk has an article by Hasu published on February 20, 2020 titled No, Concentration Among Miners Isn’t Going to Break Bitcoin, which directly quotes Satoshi saying in the Bitcoin whitepaper
The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favor him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.
Hasu goes on to say This is the key to bitcoin’s assurances and at the same time the most widely misunderstood aspect of bitcoin’s design.
We think with this said, we see the concentration of mining power as not a great risk to the network.
Now, let’s examine the concentration of Bitcoin holders as a potential issue. A quick google search for ‘Bitcoin Rich List’ leads us to a page on bitinfocharts that has a great graphic showing how Bitcoin is concentrated among holders.
This graphic shows us that ~2% of the Bitcoin holders hold ~94% of the token supply. The top 0.04% holding almost 63% of this.
We’ll also note that Bitcoin is likely more spread out than this graphic depicts. Due to a majority of the largest Bitcoin accounts belonging to Centralized Exchanges. These exchanges are custodially holding Bitcoin for their investors who have not decided to take self-custody of their tokens.
Bitcoin is a relatively new technology. Having been released in 2008, Bitcoin has seen some of the fastest adoption of any new technology. We conclude that is because investors find Bitcoin has some incredible monetary properties that will lend it the ability to be a great store of value over time, and potentially one day a useful money.
As with any technology you experience the ‘Technology Adoption Lifecycle’ where you see a normal distribution (Bell Curve) adoption phenomenon. Innovators getting in first, early adopters next, so on and so forth. We reckon that we are still in the Early Adopters if not still Innovators phase of this life cycle.
Now — back to the point, is the current distribution of wealth in Bitcoin tokens too concentrated and could that be a bad thing? Well, we don’t think so.
What makes Bitcoin unique is that it’s monetary policy is known. Only 21 million Bitcoins will ever be released and that schedule at which they come onto the market is measurable over time. No one can influence the supply of Bitcoin because the network would never agree to change it. Governments, corporations and the global elite wish they could change this fact but it is next to impossible.
As time goes on, the large holders of Bitcoin will have incentives (increase in value of their holdings) to sell their Bitcoin to do things in the real world, and contribute to the overall economy in some way. Whether that is buying a house, starting a business, purchasing something they are fond of. It doesn’t matter. As the price of Bitcoin rises people will want to sell portions of their holdings to accomplish greater goals. The Bitcoin system is designed to, and allows them to do this. NGU, ‘Number go up’.
This is why we expect the distribution of Bitcoin wealth to become more spread out over time. As the top holder experiences the greatest and earliest benefit they will want to realize gains, and will sell some coins. Thus distributing their holdings down to those with less, and who want more.
This is unlike other monetary systems throughout history where the money was centrally controlled and thus manipulated to allow a few to have most of the money. With Bitcoin the reason a few have most of the coins is because they saw the opportunity earlier than anyone else, and decided to take a risk. This has nothing to do with manipulation of the money, it simply has to do with good timing and a high risk tolerance allowing them to get in early.
Bitcoin is constantly under attack by the mainstream media because it seeks to change the underlying systems in which the power is currently held. Its censorship resistant immutable public ledger can not be cheated by anyone and with wide adoption could allow for a more fair economic system.
We are not trying to brush over that yes, most of Bitcoin today is held by just a few. We just believe that because of Bitcoin’s clear monetary policy, this distribution of wealth will spread out over time, and become a system where money works for people, and not against them.
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