hodlers, miners and exchanges prove it

Bitcoin decentralization (BTC) is on the rise. This is evident after analyzing various indicators such as the dispersion of funds, the distribution of mining power and the emergence of new exchanges.

Decentralization is important because, as will be seen below based on a study from CoinMetrics, provides guarantees regarding network security and resistance to attempts to manipulate factors such as the price of Bitcoin.

Bitcoin dispersion: small hodlers on the rise

An uneven dispersion of funds, that is, many BTC concentrated in few directions, could give a small group of users a significant influence on the price of the cryptoasset.

But, for the moment, the trend that CriptoNoticias reported just over a month ago: Bitcoin whales are poorer and smaller ones are increasing hodlers. There are more and more addresses with small amounts of BTC that comprise an increasing portion of the total supply.

This growth of addresses with small amounts reaches such a point that more than half of the BTC addresses have an amount equivalent to less than USD 100.

values ​​exchanges dates year
Most BTC addresses have the equivalent of less than $ 100. Source: coinmetrics.io

Also active Bitcoin addresses are on the rise and their number is close to a million. The analytics company CoinMetrics calls “active addresses” those with movements in the last thirty days.

With its remarkably dispersed supply between addresses, Bitcoin differs from crypto assets that grant large amounts of tokens to the founding team or to those who participate in a pre-sale or ICO.

That was, for example, the case of XRP, which was launched with a large part of its pre-mined tokens in the hands of the company Ripple, which is responsible for selling them. This company, by increasing or decreasing the flow of tokens it distributes, could influence the price of the cryptoasset.

Dispersion of Bitcoin’s Mining Power

The need to use increasingly advanced hardware to mine BTC made the activity somewhat unprofitable for those who had less powerful devices or in small numbers. That’s how large farms arose and pools mining, to the detriment of the decentralization of this activity.

However, there is a dispersion of the power of mining. This is critical to the effective decentralization of Bitcoin, which is dependent on the distribution of computing power, or hashpower of the miners.

The graph that is presented below shows that, with the arrival of new mining groups, the hashpower is distributed in more and more parts.

cryptocurrency computing power miners

cryptocurrency power computing miners

Over time, the mining power of Bitcoin was spread over several pools miners with the consequent increase in decentralization. Source: coinmetrics.io

Bitcoin depends on miners to validate and group network transactions, and then add them to the blockchain. This process, in addition to generating new coins, provides security to the network and, therefore, not being concentrated in a few hands is important.

It was in 2014 when the GHash.IO mining pool came to concentrate the mining power of the network. The spokesmen of the pool they had to clear out that they weren’t interested in provoke any kind of attack since that would harm themselves. That was not enough to generate trust in the community and little by little the miners were withdrawing from that pool.

computing power percentage miners

computing power percentage miners

He pool mining company GHash.IO came to control 51% of the hashpower of Bitcoin in 2014. Source: rollingalpha.com

Bitcoin Exchanges: Gateway and Exit to the Cryptoeconomy

Finally, Bitcoin exchanges also have a certain impact on the decentralization of this cryptoactive. The influence of the main markets in which Bitcoin is acquired and used is significant, for example, in its price.

The graph below shows how the large exchanges divide the market.

bitfinex binance coinbase kraken

bitfinex binance coinbase kraken

More and more exchanges are taking a share of the market, although the number remains small. Source: coinmetrics.io

Here the Herfindahl-Hirschman (IHH) index can be applied, which increases as a market becomes more monopolistic. IHH is calculated by squaring the market share percentage of each company that competes in a market (in this case, exchanges), and then adding the resulting numbers. You can give a number between 0 and 10,000.

CoinMetrics applied this index to the Bitcoin market over time and showed that the market is currently “moderately consolidated”.

exchange house btc exchanges

exchange house btc exchanges

The Herfindahl-Hirschman index shows that there is no great inequality in the market volume grabbed by large exchanges. Source: coinmetrics.io

Although the market is more dispersed, as shown by the aforementioned index, it must be taken into account that, in any case, there are few large players that move most of the market. Binance, Bitfinex, Bitstamp, Coinbase, Gemini, and Kraken take almost the entire spectrum.

Although Bitcoin was thought of by Satoshi Nakamoto as a P2P electronic cash system, currently exchanges are the main connection between cryptocurrencies and fiat money. For this reason, the influence they can exert is considerable.

Although perhaps currently exchanges influence the price of altcoins more than that of Bitcoin, just as Explain finance expert Andrew Bloomenthal: “The more popular an exchange becomes, the easier it can attract more participants to create a network effect. And, by capitalizing on its influence in the market, it can set rules that govern how other currencies are added. ”

Conclusion: cautious optimism

After analyzing the distribution of supply, the distribution of mining power and the distribution of volume handled by exchanges, CoinMetrics calls Bitcoin’s state of decentralization “cautious optimism”. He particularly objects to exchanges that, although there are several that share most of the market, are still a small group.

In any case, he clarifies that this analysis “is far from exhaustive and several other metrics such as the node count and the market share of hardware manufacturers should also be considered when evaluating the health of the network.”

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