The distribution of ownership in digital currency is useful for deciphering the digital currency landscape and providing a sense of what the average investor is in for or up against.
Surprisingly, digital assets are not held in the same decentralized fashion as the computer networks that support them. Compared to traditional assets, digital currencies may look like the legacy wealth which only privileged participants hold in large size.
For all the community-minded proponents of decentralized digital currencies, few people realize just how concentrated coin ownership is. For instance, out of about 26 million total bitcoin addresses, only about 1500 own 40% of the bitcoin in circulation.
We can’t know the precise breakdown per person, because although addresses are publicly visible, they are pseudonymous, so the owner behind each address may be obscured. One person may have many wallets, and wallets may have many addresses, so a per capita picture is difficult to paint.
Furthermore, these large holders, or ‘whales’, often know each other from the early days of digital currency. Before it was cool to own digital assets, many of these folks acquired bitcoin for pennies or earned massive block rewards through early mining.
These long time ‘HOLDers’ speak with each other, and can coordinate any moves they deem fit.
To put ownership distribution in perspective to old-school, analog wealth; the top 20% of Canadians own about 67% of total wealth, while about 25% of Bitcoin addresses own 99.95% of total bitcoins.
Wide price swings with centralization
Based on digital currency’s founding principle, this concentration runs counter to the decentralized and libertarian resiliency of digital assets.
From an investing dynamics point of view, it makes the young asset class subject to even wilder price swings. Observers see increasing market volatility, such as the massive drop in bitcoin price during the last week of December 2017.
Should a whale decide to unload their coins, the public has to absorb those sell orders. If big players coordinate the move, the effect magnifies.
This may make intuitive sense given the massive bull run we’ve seen across the entire market in December, there were impressive profits to take off the table. In Bitcoin’s case, whales could have had their cake and ate it too: selling futures on the CME or CBOE, and dumping real bitcoin on the market, locking in their sales price, and perhaps able to do it all over again.
Identifying smart money through distribution of ownership
The optimistic counterpoint is that the big players have held firmly this long. Theoretically, they will continue to do so in the future, both out of commitment to its philosophical foundations and for more expected profits. With strong hands holding steadfast, enthusiasts claim that only the weak hands will fold.
Another hopeful interpretation is the belief that we can identify the whales, or at least their addresses, and follow the ‘smart money’, precipitated by watching their transactions on the blockchain. Following their footsteps may work in theory, but in practice, timing and execution may be out of reach.
If a hefty account is seen making large transactions on the blockchain, it is also possible that whale is simply splitting it into different addresses they own. Or, if it is a trade, with any luck, it may be a private transaction, whale to whale, precluding any mark to market pricing.
Centralized wealth on the rich lists
With public equities, owners must report their stake if they are insiders, or own a 5% stake or greater. Digital asset ownership is perfectly visible on the blockchain no matter your stake.
So called ‘rich lists’ on a blockchain may show that, like early stage companies, a good portion of ownership is often held by founders and early team.
Some digital assets have ownership distributions that make bitcoin look egalitarian. While the top 100 bitcoin addresses control 16.65% of the issued currency, the top 100 ether addresses control about 40% of the supply, and smaller altcoins often have top holders who control more than 90%. The greater concentration of ownership combined with smaller market caps leaves these coins especially susceptible to large moves.
A major selloff
On both a broad asset class and currency specific basis, ownership distribution matters. When the public waits at the mercy of an empowered few, markets swing from manic to panic. This is not new, and is simply a feature of most market structures. It’s poignant this time around since digital currencies seek to lessen state or corporate actors.
Unpopular opinion: a major sell-off with prolonged consolidation at a lower level would be the healthiest thing for crypto. <50 million people own any at all today. I'd love to see broader ownership.
— Ari Paul (@AriDavidPaul) December 22, 2017
Still, the average investor hopes that the whales will hold forever. This could happen. However, it’s important to remember that ‘whales’ are people too, with personal incentives at stake.