Bitcoin and other cryptocurrencies offer a decentralized system of payments and store value outside the traditional nexus of government scrutiny. The blockchain technology that underlies Bitcoin replaces the reliance on a few centralized record keepers, such as banks or credit card networks, with a large set of decentralized and anonymous agents.
Without proper regulation, Bitcoin will be a dangerous place for many retail investors. They can get scammed easily. If it happens so, you can go to different authorities for a bitcoin trace.
Bitcoin Data Recorded:
A typical bitcoin transaction contains a list of senders and recipients represented by pseudonymous addresses. The number of bitcoins sent and received and a timestamp of the transaction is recorded.
Different types of public and proprietary sources are used to link Bitcoin addresses to real entities to build a database documenting the evolution of the Bitcoin market from 2015 to 2022. They downloaded blockchain data using open-source software, and other tools are used to Bitcoin Trace and do analysis.
The Behaviour of Bitcoin’s Market Participants:
The researchers then developed algorithms that used the semi-public nature of the Bitcoin blockchain to extract information about the behaviour of Bitcoin’s market participants. Doing so allowed them to:
- Analyze transaction volume and the network structure of the prominent participants on the Bitcoin blockchain.
- Document the concentration and regional composition of miners. These are the people who verify the legitimacy of Bitcoin transactions.
- Analyze the ownership concentration of the largest holders of Bitcoin.
While the research is specific to Bitcoin, some of what the experts found also applies to other cryptocurrencies.
Illegal Transactions Are A Small Percentage of Overall Bitcoin Activity:
Illegal activity is a small fraction (3%) of what goes on in the Bitcoin blockchain.
Because the Bitcoin blockchain is a public ledger, all payments flowing between addresses are observable. However, some Bitcoin users adopt strategies to impede tracing by moving their funds over long chains of multiple discourses and splitting expenses. The authors developed algorithms to filter out this spurious volume to trace economically meaningful payments between real entities on the Bitcoin network.
In doing so, the bitcoin trace experts found that about 80% of Bitcoin volume in an average week can be traced to exchanges or exchange-like entities, such as online wallets, over-the-counter trading desks, and large institutional traders.
1. Support For illegal Transactions:
While many have worried that illegal transactions have supported Bitcoin’s price, experts said unlawful activity is just a tiny fraction (3% by the researchers’ estimation) of what goes on in the Bitcoin blockchain.
It doesn’t mean that illegal activity isn’t problematic. It’s just saying that demand for unlawful activity cannot be supporting the Bitcoin price because it’s such a tiny fraction of what goes on in the blockchain.
2. Bitcoin Ownership is Among The Rich:
The experts found that participation in Bitcoin is skewed toward the elite. Their research showed that at the end of 2020, there were 1,000 “clusters” controlling 2 million bitcoins.
The authors clustered addresses so that all addresses that sent bitcoins in any single transaction were deemed to belong to the same entity. It often happens for the sole purpose of obfuscating the origin of funds. In addition, the top 10,000 clusters owned more than 4 million bitcoins, about a quarter of all outstanding bitcoins. It has important implications for market stability.
Somebody who can easily spend a hundred million dollars worth of Bitcoin and sell it or buy it can have a massive price impact on the market. That’s typically a situation we don’t like because it means you might suddenly find yourself x percent down as a regular retail investor because of massive volatility. It might be created by a few large investors randomly deciding to sell some of their holdings.
3. The Interconnectedness of The Blockchain Makes it Difficult To Crack Down on illegal Activity:
Once funds arrive at these exchanges, they get mixed in with other flows, become virtually untraceable, and can be sent anywhere. The anonymous nature of Bitcoin makes it difficult to track down offenders, even if some places try to curb it with KYC (“know your customer”) rules that require verification of a customer’s identity, usually by a financial institution. It is a problem throughout the industry, not just with Bitcoin.
Just imposing KYC norms on individual institutions will not help regulators or the public prevent. These illegal transactions from returning to the white economy. It is a vast global network, so interconnected that you can’t just monitor one tiny part of it.
4. Miners Are Hugely Concentrated:
Miners are the individuals who process and verify Bitcoin transactions and add them to the blockchain ledger. They are hugely concentrated, with around 60% –70% worldwide.
For their work, miners are rewarded with newly created Bitcoins. The authors were able to identify individual miners by tracking the distribution of mining rewards from the most significant 16 mining pools to the miners that work for them. Having miners concentrated in one specific country can easily create volatility.
If a particular country decides it doesn’t want to allow mining anymore. It can lead to a lot of upheaval in the Bitcoin ecosystem. Without proper regulation, this will be perilous for many retail investors.
The concentration of miners goes up when the Bitcoin price drops. It looks like some miners drop out of the game altogether because maybe it’s not worth their while or they’re not interested anymore. And then the capacity becomes even more concentrated.