In recent years, many institutions and companies have published data showing that there is a massive asset concentration in Bitcoin. In an otherwise decentralized network, less than five percent of all Bitcoin addresses should hold about 95% of all Bitcoin. A study published by How Much in 2017 even shows that 1 percent of the addresses already had more than half of the available bitcoin. Is Bitcoin distributed fairly?
We want to take two perspectives in today’s analysis. On the one hand, we ask ourselves how it fits together that in a decentralized network the fortune is so concentrated and on the other hand we want to compare how the wealth distribution in Germany and the US stands.
2% of Bitcoin addresses control 80% of available BTC
The current study to which we refer has been created by TruStory. TruStory is a platform that pursues an interesting goal. More fact-based debates in the web, arguments instead of personal defamation and statements based on data rather than subjective sentiments.
The founder and CEO of the startup, Preethi Kasireddy, shared the results on Tuesday via Twitter. Specifically, the distribution of the assets of Bitcoin was investigated. The results show that 2% of Bitcoin addresses easily control over 80% of BTC’s offer.
Bitcoin wealth distribution: 2% of addresses control 80% of the wealth.
— Preethi Kasireddy (@iam_preethi) August 13, 2019
Lorenz curves and the Gini coefficient: the study results in detail
The statistics and the resulting report were written by Saurabh Deshpande, an analyst at TruStory. He used the Lorenz curve as the starting point for his conclusions on the distribution of assets by BTC. One or the other might know the term Gini coefficients and the Lorenz curve from the lectures in economics – the Lorenz curve here is a graph that graphically represents a statistical distribution ( in our case the distribution of wealth) and in this case the ( in ) equality of a distribution (= disparity) .
How is such a graphic read and interpreted?
A Lorenz curve shows the corresponding relative concentration (on the y-axis) for each value along the x-axis. In concrete terms, this means that, for example, we consider the value 75% on the x-axis and look at which associated y-value results. The red curve has an approximate y value of 5-7% at an x value of 75%. (The fact that the division of the values along the y-axis is only very coarse makes it difficult to determine an exact value).
We interpret the result as follows: 75% of bitcoin addresses control 5-7% of the total bitcoin count. The blue line represents as contrast, an equal distribution.
Do not trust statistics that you did not fake yourself
As part of publishing the results, Deshpande also admitted that he had omitted some parameters that would have allowed a better picture of the distribution of wealth. So Exchanges hold a large number of Bitcoin in Cold Storage. So he has this Bitcoin of the addresses “removed” and “mentally” distributed to addresses, each holding up to a 1 BTC.
The BTC would like to be in their hardware wallets.
However, he has allowed himself more “degrees of freedom” in the design of his statistics. For example, he did not use data about the addresses that have between 10 and 100 BTC because, according to him, no data would be found. All these changes and adjustments ultimately lead to the Lorenz curve we just showed. If you want to understand exactly what assumptions and adjustments were made when creating the graphic, you can read the original article by Desphande on medium.
He commented on the result of the Lorenz curve as follows:
Though this wealth distribution is better than the first one, I presume the reality might be slightly better. Despite this, the distribution is nowhere close to being ideal. I hope the scenario changes and the distribution gets better as time passes. Till then, one of the greatest threats to bitcoin is this curve.
Criticism of the study results are sufficient
Considering the “statistical precision” that precedes the work, it is clear that Deshpande and TruStory have been strongly criticized for their conclusions on the distribution of Bitcoin assets. For example, Ari Paul, CIO of the investment firm BlockTower Capital, says that the ratio “percent of Bitcoin addresses” is not meaningful.
Because such a number would be extremely easy to manipulate – just imagine what the statistics would look like if millions of new wallet addresses were generated, each containing small amounts of BTC. The result would immediately be a much, much more even distribution of wealth. In other words, there would be more Bitcoin addresses on which Bitcoin would be and the distribution would thus be “stretched”.
So Paul put the open question in the room:
The problem is that denominator is kind of a nonsense number. What does the total number of addresses mean or matter?
His proposal would be to introduce a kind of lower limit, so that such manipulation attempts will not be recorded in the statistics. Specifically, he says:
A more meaningful measure is something like # BTC.
2/ a more meaningful measure is something like # of addresses with at least 0.1 BTC. Still doesn’t tell us much, but at least here an “address” has some meaning.
— Ari Paul ⛓️ (@AriDavidPaul) August 14, 2019
On the other hand, Deshpande’s report also finds support. Civic.com CEO Vinny Lingham, for example, says that those who have been mine since the beginning of the “Bitcoin era” have been able to collect millions of BTC and have a lot of control over the network. He also goes into the number of non-moving Bitcoin, which he currently estimated at 3 million. If you want to know more about this topic, then we recommend our article Bitcoin Number in the fact check: How many BTC are lost forever?
Three million coins have not moved, and they are still in the hands of a few people.
How is the assets distributed in Germany and the USA?
To round off this discussion, we also want to take the second perspective. Now that we know that there is also a concentration of power or wealth in the Bitcoin distribution, it would be interesting to see how the assets are distributed in Germany and the US.
Is there a similar inequality or does the distribution of wealth look even more uneven?
The United States of America – the land of opportunity?
Let’s start with the USA. Often there is talk of the “American Dream” and the associated idea that everyone (with enough diligence and discipline) can make it from bottom to top. One might think that the fortune in the US would be fairly evenly distributed. After all, there is a broad middle class and a high standard of living in the US. But reality tells us something else: puff pie. Because according to the chart below, the 10% richest percent of the population in the US owns 77.1% of the total cake. The “lower” 50% currently comes to a total of 1.2%.
Germany – the country of the social market economy
Well, that lives in the US many milliards is already known. As a result, it may not come as a surprise to some that US wealth is unevenly distributed. But what about Germany?
For this I could not find any direct statistics (like the one above). Nevertheless, I would like to name an indicator that can give us a good relation: the Gini coefficient. This indicates how equal or unequal assets are distributed. The value is normalized and always in the interval [0,1]. A value of 0 means perfect equal distribution and a value of 1 would mean that 1 person owns everything.
Germany has a Gini coefficient of 0.79 . Pretty uneven, then. To put that in perspective, the US has a Gini coefficient of 0.86.
The permanent problem of inequality
As today’s article has (hopefully) shown, inequality is a phenomenon that has always existed in modern states. Inequality exists both in socialism and in capitalism. Fortune concentrates and “more will quickly become even more”. We could see that the number of Bitcoin is not evenly distributed. This is a serious problem because centralization of wealth and capital always means centralizing power and influence. But not only to put Bitcoin in the pillory, it should be noted that there is also in the US, in Germany and around the world, an enormous unequal distribution of assets.
Image via Shutterstock