What Happens to “Lost” Bitcoin?

Bitcoin is renowned for its decentralized and secure nature. However, one intriguing aspect often overlooked is the phenomenon of “lost” bitcoin.

What happens to lost bitcoin, and how does it impact the overall Bitcoin ecosystem? In this article, we will delve into the reasons why bitcoins are lost, the total supply and how much of it is lost, the possibility of recovery, and notable cases of significant losses.

How Can Bitcoin Be “Lost”?

A bitcoin itself can never be truly lost, but to access and spend it, a user must securely protect their private key. Due to the secure and unforgiving nature of Bitcoin’s cryptographic protocol, losing access to this private key results in the effective loss of the bitcoin it controls. Here are the main ways bitcoin can be “lost”:

1. Forgotten Private Keys: Bitcoin ownership is secured by private keys, which are essentially complex passwords. If a user forgets or misplaces their private key, they lose access to their bitcoin forever.
2. Hardware Failures: If bitcoin is stored on a physical device such as a hard drive or a hardware wallet, failure of the device without a backup can result in loss of access.
3. Lost Devices: Devices holding the bitcoin private keys can be lost, stolen, or destroyed, resulting in the permanent loss of the coins stored on them.
4. Death of the Owner: If the owner passes away without sharing the private keys or the method to access them, access to that bitcoin is effectively lost.

How Many Bitcoins Are There and How Many Are Lost?

Bitcoin has a finite supply, with a maximum of 21 million coins that can ever be mined. As of 2024, around 19.5 million bitcoin have been mined.

However, a significant portion of this supply is considered lost. Estimates suggest that between 3 to 4 million bitcoin are irretrievably lost, accounting for roughly 17-20% of the total supply.

This substantial amount impacts the Bitcoin market by reducing the circulating supply, effectively increasing the value of the remaining coins.

Source: River (Feb 2024)

Can Lost Bitcoin Ever Be Found?

The recovery of lost bitcoin is generally deemed impossible due to the immutable nature of the blockchain and the stringent security protocols. Once a private key is lost or forgotten, there is no way to recover it.

Unlike traditional banking systems, there is no centralized authority to reset passwords or reclaim lost assets. Thus, when bitcoin is lost, it is effectively removed from circulation forever.

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Who Lost Them?

Bitcoin can be lost by anyone, from individual users to large institutions. Early adopters of Bitcoin, who might have stored their coins on now-obsolete devices or forgotten about their investments, are particularly susceptible.

Furthermore, those unfamiliar with the importance of securely backing up their private keys can also fall victim to this issue. High-profile losses include:

• James Howells: A British IT worker who accidentally discarded a hard drive containing 8,000 bitcoin.
• Stefan Thomas: A programmer who lost access to 7,002 bitcoin after forgetting the password to his IronKey, a secure USB drive.

James Howells, who ‘threw away’ 8,000 Bitcoin

Source: Independent

Apart from individual losses, there have been significant losses within the broader Bitcoin community. Some notable incidents include:

• Mt. Gox: In 2014, the Mt. Gox exchange — which handled 70% of Bitcoin transactions at the time — was hacked, resulting in the loss of 850,000 bitcoin. Although a portion was recovered, the majority remains lost.
• QuadrigaCX: In 2018, the Canadian exchange QuadrigaCX lost access to its cold wallets containing 26,500 bitcoin after the sudden death of its CEO, Gerald Cotten, who was the only person with access to the private keys.

How Many Bitcoins Are Truly Lost?

Determining the exact number of lost bitcoin is challenging. While the estimate of 3 to 4 million lost bitcoin is widely accepted, the actual figure could be higher. This estimate includes:

• Early Mined Coins: Many of the coins mined in Bitcoin's early days are believed to be lost due to forgotten private keys or lost devices.
• Inactive Wallets: Wallets that have not shown any transaction activity for over 10 years are often considered to hold lost bitcoin.
• Burned Coins: Some bitcoin have been intentionally sent to addresses with no known private key, effectively removing them from circulation.

Conclusion

“What happens to lost bitcoin?” is a question that underscores the importance of secure key management.

Lost bitcoin, which likely amounts to millions of coins, significantly impacts the total supply and market dynamics of Bitcoin.

While these lost coins are likely irrecoverable, they serve as a cautionary tale for both current and future bitcoin holders about the critical need for secure storage and backup practices.