Distribution of wealth in Bitcoin and other cryptocurrencies.
Wealth control often mirrors power control. Until now, the distribution of wealth has been challenging to track. People often hide their wealth or the actual amount of assets they own. Cryptocurrencies have made a big leap in the transparency of wealth distribution. This is an entirely new class of assets that allows you to thoroughly analyze the distribution of supply from the very inception.
Given that all crypto transactions (except for some anonymous coins) are transparent, verifiable, and easy to analyze, blockchain data can be used to calculate the balance of any address. Subsequently, we can estimate the overall distribution of supply by examining the balances of individual addresses. In today’s article, we would like to focus on this topic in more detail.
Global distribution of wealth
Let’s start with the traditional financial system and see how fair its wealth distribution is. In May 2020, the World Bank predicted that after the pandemic is over, the number of people living on less than two dollars a day will increase by 60 million. Many articles on the distribution of the world’s wealth were written over the past ten years. The figures in these articles are mostly taken from the annual reports of the Credit Suisse bank. Consider the following figures from their 2019 report, released earlier this year:
- Total global wealth is estimated at $361 trillion.
- The number of dollar millionaires is around 47 million.
- The average for every adult is close to 71,000 in dollar terms.
- The forecast for total global wealth for 2024 is $459 trillion.
The uneven distribution of wealth is calculated using the Gini coefficient. Over the past 20 years, this indicator has improved worldwide from 91.9% to 88.5%, which represents a gradual progress towards a more honest economy. Although 1% of the wealthiest population still owns almost half of the world’s assets.
Is Bitcoin worse?
According to Bitinfocharts, as little as 0.5% of addresses own more than 85% of all BTC, which would seem to be quite uneven. But everything is not that simple. First of all, the largest wallets in the Bitcoin network are cold wallets of exchanges storing their users’ funds, and it is not correct to take them into account. It is also not entirely accurate to consider the majority of addresses holding very old unspent outputs (2011 and earlier). According to experts, most of the coins held on these addresses will not move again. In addition, it is well established that roughly three percent of all coins are lost for various reasons.
That is why the presented data is not entirely fair. Which is the more accurate picture then? The one that is more transparent and understandable?
The CoinMetrics report comes to the rescue; in this report, analysts excluded long-spent addresses, as well as the ones created for business purposes, and only concentrated on the addresses with the equivalent of more than one ten-billionth of the total supply or $20.5 at the time of the writing. The analysts found that the number of addresses that hold more than one-thousandth of the total circulation as a percentage has decreased from 33% to 11% of all BTC between 2011 and 2020. The same applies to the rest of the fairly large holders (more than one ten-thousandth, more than one hundred-thousandth), their values are decreasing. At the same time, the number of small deposits in the network is growing. It turns out that over time, the distribution of wealth in the Bitcoin network gradually becomes more even.
What do other cryptocurrencies have to offer?
Let’s take a look at other crypto assets to compare and understand if this analysis holds its ground. According to the initial distribution, most of the coins on the Ethereum network originally belonged to a limited number of individuals (developers, ICO participants, and the team). In Ethereum’s case, the percentage of holders of more than one-thousandth of a share also decreased from 60% to 40% over time. It turns out that wealth distribution gradually evens out over time as well. This makes total sense because the Ethereum network works with a large number of products, and ETH is actively used. That is why large long-term holders, the so-called “whales”, have to part with their wealth and more and more users with small deposits appear on the network. In addition, Ethereum runs on an Account-Based model, as opposed to Bitcoin, which utilizes the UTXO model. UTXO is basically a model of inputs and outputs, and the Account-Based model is somewhat similar to a banking mechanism for tracking balances. An analogous situation can be seen in the Litecoin network, where the significant share of whales has almost halved over time from 80% to 40%.
As for the BTC forks, we see the opposite picture in Bitcoin Cash — we can see the number of “whales” increase over time, which is an argument against the network’s versatility, and therefore a low level of interest in its coins, created for the personal enrichment of its creators. The same can be said about Bitcoin SV: broadly speaking, no new users join BSV, and it is the network’s leading members who accumulate coins. On the XRP network, we see about 80% of the users own over one-thousandth of the stock. This interestingly aligns with the recent study that showed that as little as 18 accounts on the Ripple network are responsible for more than 50% of transactions that, frankly speaking, look like spam. This is due to the fact that banks do not use the XRP coin, and the distribution graph of wealth in XRP itself is very similar to the distribution of global wealth according to the reports of Credit Suisse. To be fair, it is worth noting that, similar to the global economy, the situation also improves slightly over time. Stellar has exactly the same situation, where more than half of the coins are in the hands of the Stellar Development Foundation.
The situation with USDT is more interesting. The situation has definitely changed for the better on the Omni blockchain. But the USDT ERC-20 is indeed becoming a payment method as the distribution has become much more even in just one year. The share of addresses with less than one-thousandth has increased tenfold. In USDT TRC-20, the concentration is much worse, fair distribution is off the table in this case. Zero transfer fees is the only upside of USDT based on the Tron blockchain. However, USDT TRC-20 was introduced recently (May 2019); therefore, it is relatively new for such analysis.
Crypto asset allocation provides a clearer understanding of wealth distribution than any previous asset class and brings some interesting insights and metrics into the transparency of the system itself. The growing distribution of assets such as BTC and Tether is a positive sign that these assets may find real use cases and eventually end up in the hands of a higher number of individual users. In general, the above data suggest that Bitcoin may act as a base for a more honest economy. We will continue to analyze the supply distribution and report our findings in the future.