Friday, December 2, 2022

Is Bitcoin Wealth Too Centralized? In Reality, It’s Hard to Tell

Is Bitcoin Wealth Too Centralized? In Reality, It’s Hard to Tell

Every so often you’ll see someone claim that Bitcoin wealth is “too centralized”. Only a handful of people hold most of the coins, they claim — backing it up with links and charts of bitcoin address balances.

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Bitcoin Wealth ‘Centralized’ Among the 4%

We found another such claim today, via ZeroHedge and Just 4 percent own over 95 percent of bitcoin, they said. There’s a colorful graph that breaks it down further, highlighting that nearly all addresses hold just a tiny BTC balance.

On the surface, it looks like bad optics for a project which touts its decentralized nature as a key advantage.

In reality, charts like this aren’t very reliable indicators of who owns how much. Although bitcoin holdings are likely “centralized”, it’s not as simple as looking at simple blockchain data.

To an extent, acknowledges this — but still presents the chart as representing individual bitcoin wealth. ZeroHedge also hinted at the difference. However the media often (and maybe deliberately for effect) blurs the line between a bitcoin address, a bitcoin wallet, and an individual user.

They’re Not the Same

If you think of a Bitcoin address as being like an email address, then it’s like saying every email address represents one individual’s total communications. And we know that’s not true. Bitcoin CentralizedA Bitcoin address is often called a “Bitcoin wallet”. That’s probably due to earlier wallets using the one set of public/private keys. A “paper wallet” has just the one address. Both pro- and anti-Bitcoin promoters will use this confusion for their own purposes.

However the term “wallet” these days usually refers to the software application. Many wallets now create a new send and receive address for every transaction. There are forensic ways to connect multiple addresses together using external data, but it’s not easy to do.

This is also the main reason such a large number of addresses hold tiny amounts of BTC. Ergo, older addresses will hold larger balances, newer ones smaller amounts.

One individual could theoretically hold half of all bitcoins, but spread it between multiple addresses. That would be the more prudent thing to do, so we should assume many large holders spread it out like that. So there are probably more large BTC holders than a simple address glance shows.

Exchanges, Businesses and Shared Addresses

Exchanges, processors and online wallets and other business users may hold large quantities of bitcoin in a single address. But it doesn’t all belong to the same person. Multisig addresses make it possible for large groups to share a single set of keys — like a family, company, or trust.

What this all means is: some large-holding BTC addresses aren’t one person, and may not even represent coins that can be spent.

Largest Bitcoin transaction
The “largest bitcoin transaction ever” from 2011. Note also the tx fee. Who was it?

So Who Does Hold Most of the Bitcoin?

Now, this doesn’t mean bitcoin holdings aren’t centralized. Just that it’s hard to tell. In fact, it’s highly likely a large percentage of BTC belongs to a small number of individuals. Even if you take everyone in the world who holds any bitcoin at all, it’s a tiny percentage of the total population.

nChain Craig WrightIt’s a new technology. We still meet plenty of people who haven’t even heard of it yet. We meet plenty of people who “got into Bitcoin” when the price was under $100 USD.  A $1,000 investment in 2011 would have given you a lot more bitcoin than the same investment in 2017. So it’s logical early adopters would hold the lion’s share.

Estimates say Bitcoin creator Satoshi Nakamoto holds around one million BTC. That’s $3.9 billion USD today. It’s a lot of money for sure — but still not Bezos, Gates or Zuckerberg-level wealth. We don’t even know if Satoshi Nakamoto is real, or one person, a group of five, or even alive.

Cameron and Tyler Winklevoss are also presumed to be among the largest bitcoin holders, mainly because of their public desire to become so. But their exact BTC wealth isn’t known.

How Much Is in Your Bank Account?

Individual bitcoin wealth — like fiat currency wealth — is a touchy subject for many reasons. When asked by reporters how much bitcoin he has, evangelist Roger Ver typically replies with “How much money do you have in your bank account?”

Money Cash WealthLegal reporting obligations differ from country to country — but technologically, there’s no reason anyone should know anyone else’s total BTC holdings. If you want to make it more difficult to calculate then share it between multiple addresses, even in cold storage.

Since Bitcoin’s blockchain and address data are publicly viewable, many make assumptions about what this information reveals.

Once you start to understand Bitcoin better, though, you realize it’s completely different to the traditional monetary system. It’s not as though everyone has a single account and it’s available for all to see.

How much bitcoin do you have? Ha ha, don’t tell us. Or anyone. But please leave your thoughts in the comments.

Images via, Jon Southurst,

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