Every year, millions of dollars worth of bitcoin and other digital assets are lost. In most circumstances, these coins cannot be retrieved and permanently exit the currency’s circulating supply. More often than not, lost coins can be traced back to user error, so let’s take a look at how to avoid costly mistakes.
Unlike fiat currencies like the US dollar, Bitcoin was designed to have a limited supply. While more bank notes can always be printed by the Federal Reserve, new bitcoin cannot be issued once all 21 million coins have been mined.
Lost and destroyed Bitcoin further shrinks the currency’s maximum supply. According to Cane Island Digital Research, 4% of available bitcoin is lost each year. Despite Bitcoin being designed with a limited supply of 21 million coins, Cane Island estimates that a maximum of only 14 million bitcoin will ever circulate due to the rate at which coins are lost.
A report cited by the New York Times states that, of the 18.5 million bitcoin mined so far, an estimated 20 percent appear to be inaccessible or lost. At the time of the NYT report, the value of this inaccessible bitcoin was somewhere in the ballpark of $140 billion USD. Proponents theorize that lost coins only serve to increase the value of the remaining currency, as they increase Bitcoin’s scarcity.
There are a few ways in which bitcoin can get lost or destroyed. The most common of these boil down to mistakes made when storing or sending the asset.
Bitcoin sent to fraudulent or inaccessible addresses
When sending bitcoin from one wallet to another, the user is asked for a string of 26 to 35 characters which serves as the recipient’s address. Most wallets are actually extremely robust when it comes to making sure that this alphanumeric string matches the public key of a cryptocurrency wallet that actually exists. In other words, sending Bitcoin to the wrong address due to a typo is exceedingly rare.
What is far more common, however, is sending bitcoin to the wrong wallet as a consequence of getting two addresses mixed up. A user might, for instance, send bitcoin to an address belonging to a fraudulent actor rather than the wallet address of a family member. They could also accidentally send bitcoin to a wallet they previously conducted business with rather than to the intended recipient of a new transaction. As long as someone has access to the receiving wallet, those coins should still remain in circulation.
Bitcoin can also be sent to burn addresses or wallets that people have lost access to. Since bitcoin is immutable, there is no way to undo these transactions. Burn addresses, in this context, are those which belong to wallets that are virtually impossible to spend coins from. Sending coins to these addresses is equivalent to putting money into a safe that no one will ever be able to open.
In some instances, cryptocurrencies are intentionally sent to burn addresses. This process is known as “burning”. Some crypto assets use unspendable addresses in order to prove they are limiting the supply of their own currency. There is even a consensus mechanism known as proof-of-burn built around this process.
Thousands of coins are lost each year due to improper storage
People frequently lose bitcoin due to how they store them. For instance, many people store their bitcoin online on exchanges. In doing so, they are relying on the exchange to keep their assets secure. While there are certainly reputable exchanges operating in the world today, there have been a plethora of cases throughout the last decade where exchanges have stolen their users’ assets or failed to prevent hackers from doing so.
According to Atlas VPN, blockchain hackers stole nearly $3.78 billion USD worth of digital assets across 122 attacks in 2020. These attacks included notable examples such as hackers stealing around $150 million USD in cryptocurrencies from an exchange in Singapore which stored a portion of its assets in hot wallets.
When you store a cryptocurrency like Bitcoin, you can either do so by storing your assets in a hot wallet or a cold wallet. The former refers to wallets which are internet-connected, offering increased accessibility. They can easily be used without any dedicated hardware and often take only a few minutes to set up. However, this storage method is vulnerable to breach.
Cold wallets, on the other hand, are ways of storing your cryptocurrencies offline. They are much more secure, as they prevent hackers from gaining access. However, not all cold wallets are equally user-friendly. A significant amount of bitcoin has been permanently lost due to people losing the private key which grants them access to their wallet. In addition, there have been many cases of hardware being misplaced or failing where the user didn’t create a backup, making the funds impossible to retrieve.
Every year, there are hundreds of stories about people losing their private key or throwing away a drive that had their Bitcoin wallet on it. This year, for instance, a programmer in San Francisco made headlines when he found himself locked out of an encrypted drive with a reported $220 million USD worth of bitcoin stored on it. According to the article, he only has two remaining attempts to input the correct password before his coins are permanently lost.
Billions of dollars worth of bitcoins are in limbo
Zombie coins are those with addresses that have not had any outgoing transactions for years yet could theoretically still be accessed. One such address is associated with the infamous Mt. Gox hack. This address has been holding 79,957 bitcoin since 2011, and no one knows for sure if those coins will ever re-enter circulation. It stands to reason that the owner may be deceased or have lost access to their wallet. At today’s bitcoin price, the current holdings of this wallet address are worth more than $4.8 billion USD.