Iron-carbon interactions play an important role in various industrial activities such as liquid fuel production by the Fischer-Tropsch process and carbon nanotube synthesis by chemical vapor deposition. In both cases, catalytic activity is confined to a subset of catalyst nanoparticles. Despite the large number of experimental and theoretical studies on the activity of Fe nanoparticles, very little is known about the difference between the active and inactive particles. We use in situ environmental transmission electron microscopy to elucidate the differences between active and inactive nanoparticles with respect to carbon nanotube formation. We present direct evidence that nanoparticles with the cementite (Fe3C) structure are active for nanotube growth (C-C bond formation), while carbon-rich particles with Hagg (Fe5C2) structure are inactive. Density functional theory calculations suggest that reduced activity may be due to lower carbon mobility and higher C-C bond formation energies on the surface of nanoparticles with Fe5C2 structure. Published by Elsevier Inc.