I have been reading an eye-opening paper by mathematicians Dorit Ron and Ami Shamir, looking at the entire transaction history of the Bitcoin network. For those unfamiliar with Bitcoin, it is a cryptographic currency that was created with the stated intention of generating a decentralised payment system for the Internet era (my earlier take on the idea here). It has proved popular with computer enthusiasts, and specially with libertarians who see it as a perfect antidote against fiat monetary systems. So far Bitcoin has been riddled with security issues, theft, fraud, hacking and other problems that have meant that the scheme has failed to become popular outside of a core following of rabidly faithful enthusiasts.
The paper contains some truly insightful figures that help to assess the Bitcoin experiment fully. There are 1,851,544 different Bitcoin owners. Given that at the time of writing there are a total of 10.1 million BTCs in circulation, this would give an average of 5.5 BTCs per each user, which does not seem to encourage an active economy, and certainly would not justify the current price of $12 USD per BTC.
But some of the real interesting information comes from the data about centrality. From the data collected, it seems clear that there is some large accumulation of the bulk of Bitcoin activity, for example, one single user had 156,722 different addresses. This was identified as Mt.Gox, the largest Bitcoin exchange, which is responsible for an astounding 90% of all of the total BTC transactions recorded. This indicates that BTC is not being used as a payment system, but as a commodity where users exchange bitcoins for cash and vice-versa. This is further evidenced by the fact that the actual number of BTCs in circulation is considerably smaller than it was previously thought, with an almost 78% of the entire BTC reserve (7,019,100 BTC) being placed in “saving” addresses. So, of all of the Bitcoins ever created, there are only 22% in circulation.
To my mind, this seems to confirm the suspicion that many of us had when Bitcoin started getting popular, and it is that the system encourages hoarding and accumulation, which make it uniquely unsuitable as a currency. This is corroborated when one considers that a large number of transactions seem to consist mostly of operations between the same owner, where the coins are moved from one address to the other.
The most revealing statistic is the astounding amount of wealth accumulation in the BTC network, something that had also been guessed at by critics, but that is confirmed by the data. The study comments:
“Another interesting finding is that the total number of Bitcoins received by most owners is negligible. As can be seen from Table 2, 36% of all owners received fewer than one BTC (currently worth about 12 USD) each throughout their lifetime, 52% received fewer than 10 BTC’s and 88% fewer than 100. At the other end of the distribution there are only four owners who received over 800,000 BTC’s and 80 owners who received over 400,000.”
Furthermore, currently 97% of all owners have an amount of less than 10 BTCs, and during the entire history of the scheme, 88% of all users have never owned more than 10 BTCs. This again hints at a vast wealth of coins being hoarded by a few people, probably developers and early adopters. This is further evidenced when reading the list of BTC owners, where there is a single unidentified user with 2,886,650 coins, or more than a quarter of all BTCs issued so far. The second largest owner is unsurprisingly Mt.Gox.
The paper ends with a discussion of the largest Bitcoin transactions, and it seems like there has been a concerted effort by one party to try to hide wealth accumulation by breaking up a large chunk of Bitcoins and moving it around in thousands of smaller transactions. The authors are very factual about their findings, but to me it seems clear that there is something not right going on.
I encourage people interested in Bitcoin to read the paper. To me it is clear evidence that the current version of a decentralised payment system is not working as intended. Unless you’re a conspiracy theory and believe that Bitcoin is an attempt to get rich quick, in which case it might well be working for some of the minority which hold most Bitcoins.
Interestingly, I think I might still have 0.10 BTC lying around in a wallet somewhere.
Edited to add
Welcome Redditors. There are some comments that claim that I misread the paper, and that there is no evidence of hoarding. I have read it again, and it is clear that there is, at least to me. There are two types of wallets studied, let’s call them savings and current. There are owners that can be identified as managing current accounts, such as exchanges. But the large majority of wallets are savings, namely, they have incoming but not outgoing transactions, which means that they are not being used as currency, but for hoarding. There is one user who controls a large number of such accounts, which makes it different to “current” users such as Mt.Gox. We may argue about the extent of hoarding, it might not be a single 25% user, but this seems consistent with what is otherwise seen in the Bitcoin economy.
Adding decimal points does not fix the problem of inherent hoarding built into Bitcoins. I, for one, will not be participating. You may not care that a random blogger is not willing to participate. However, I believe that I am representative of the type of user that needs to be won over for BTC to take off as a real currency: someone just off the mainstream with a little bit of technical knowledge who likes the idea of decentralised systems. If you cannot convince the likes of me, Bitcoin will remain the domain of libertarian geeks.