Part of Bitcoin's appeal is the idea that nobody controls it, but a recent study found that 0.1 percent of the network's top contributors—just 50 miners—controls 50 percent of Bitcoin's mining capacity. Zooming out to the top 10% of miners finds that they control 90% of mining capacity. Traditional currencies are managed by central banking systems, international organizations, and well-established financial service providers; cryptocurrencies are managed by their networks. But a recent study from the National Bureau of Economic Research (NBER) found that a few entities account for a significant portion of the Bitcoin ecosystem.
Bloomberg reported that the NBER study, which is titled "Blockchain Analysis of the Bitcoin Market," found that the "top 10,000 individual investors in Bitcoin control about one-third of the cryptocurrency in circulation." The study's authors said that 14 million BTC were in circulation at the end of 2020. Of those, 8.5 million were controlled by individual investors, and 5.5 million were controlled by intermediaries.
But the authors, Igor Makarov and Antoinette Schoar, also said that "this measurement of concentration most likely is an understatement since we cannot rule out that some of the largest addresses are controlled by the same entity." Bloomberg said the most noteworthy example is the attribution of 20,000 addresses believed to be owned by "Satoshi Nakamoto" to 20,000 people instead of just one.
NBER's findings regarding Bitcoin mining are even more worrisome for the cryptocurrency's enthusiasts. The study found that 0.1 percent of the network's top contributors—just 50 miners—controls 50 percent of Bitcoin's mining capacity. That proportion grows to 90 percent of the cryptocurrency's mining capacity when the top 10 percent of miners are taken into account.
"Our results suggest that despite the significant attention that Bitcoin has received over the last few years, the Bitcoin ecosystem is still dominated by large and concentrated players, be it large miners, Bitcoin holders or exchanges," Makarov and Schoar said. "This inherent concentration makes Bitcoin susceptible to systemic risk and also implies that the majority of the gains from further adoption are likely to fall disproportionately to a small set of participants."
That systemic risk includes the possibility of a so-called 51 percent attack through which a group of Bitcoin miners could take control over the network. That group would be able to double-spend BTC, reverse transactions, and halt further usage of the cryptocurrency. NBER's findings suggest that just 51 of Bitcoin's top miners would have to work together to conduct such an attack on the entire network.
The findings also indicate that Bitcoin critics who say the cryptocurrency is essentially a vehicle for making a relatively small number of people incredibly wealthy might be on to something. Bitcoin's increasing popularity isn't affecting most people, but those who bought into the ecosystem when it was still young are becoming richer and richer, especially as the price of BTC continues to rise.
These claims track with Bitcoin's development over the years. It makes sense for a small number of operations to account for the vast majority of production now that mining Bitcoin requires dedicated hardware and massive amounts of electricity. The cryptocurrency's rising price also makes it more difficult for the average person to amass the same amount of BTC as someone who started hoarding it in 2009.