By Josiah Wilmoth
Blockchain research firm Chainalysis has found that as much as $32 billion worth of bitcoins have been permanently lost — never to be recovered. This article explains how that happened and how to avoid adding your funds to list.
$32 Billion Worth of Bitcoins Have Been Lost Forever
Unlike physical currency, bitcoins can never truly be lost or destroyed. However, users can — and often do — lose access to their bitcoin wallets, effectively placing their coins in a network lockbox that will never be reopened. According to a recent analysis of blockchain data, the value of that lockbox is becoming quite large.
As reported in Fortune, blockchain analytics and digital forensics startup Chainalysis estimates that 2.78 million to 3.79 million bitcoins — or 17 percent to 23 percent of the total coins in circulation — have been lost forever. Since only 21 million bitcoins will ever exist, this is a significant sum, and at the present exchange rate, the value of these lost coins amounts to approximately $23.9 billion to $32.6 billion.
Chainalysis — which has been hired by the Internal Revenue Service (IRS) to help identify and unmask tax cheats who are not reporting their bitcoin-related income on their taxes — uses complex algorithms to “read” the bitcoin blockchain. From this data, the firm was able to categorize coins according to age and transaction history, allowing their engineers to make an educated guess about what coins are likely locked in wallets to which owners have lost the private keys.
Importantly, Chainalysis’ report also assumes that the more than 1 million coins held by Satoshi Nakamoto — the pseudonymous creator of bitcoin — will never be moved.
That billions of dollars worth of bitcoins have permanently gone missing is certain, but what remains unclear is to what extent the market has priced in the fact that, although these bitcoins exist, they have effectively been removed from circulation. Consequently, it is possible that the calculated bitcoin market cap is somewhat less than its effective market cap.
“On the one hand, direct calculations about market cap do not take lost coins into consideration. Considering how highly speculative this field is, those market cap calculations may make it into economic models of the market that impact spending activity,” Chainalysis CEO Jonathan Levin told Fortune. “Yet the market has adapted to the actual demand and supply available – just look at exchange behavior. Furthermore, it is well known monetary policy procedure to lower or increase fiat reserves to impact exchange rates. So the answer is yes and no.”
How to Avoid Losing Your Bitcoins, Too
The vast majority of the lost coins were created in 2009 and 2010, when bitcoin was worth just pennies and many users did not feel the same need to take precautions to secure their crypto assets as users do today, now that bitcoin is trading above $8,600. Many of these early bitcoin users likely deleted their wallets without backing up their private keys, threw away broken computers with bitcoins stored on the hard drives, or made other similarly-careless actions that have proved costly over the long term.
To avoid making the same mistake, it’s important to backup your entire wallet at regular intervals in several places, such as on physical CDs and USB flash drives stored in secure, hidden locations. If you keep a wallet backup on a computer that is connected to the internet — especially one that accesses a public wireless network — you must encrypt these files to avoid having them stolen by computer malware or hackers.
Even if you use a hardware wallet such as a Trezor or Ledger Nano S — the safest way to store bitcoins and other crypto assets while still retaining easy access to your funds — it is vital to retain paper copies of your private keys or wallet seeds so that you can recover your funds if your wallet is damaged, stolen, or destroyed.
These measures may seem tedious, but accidents happen, and there will likely be a day when you will be glad you took the time to secure your funds.
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Featured Image from Pixabay
By Josiah Wilmoth