Key Points
- The inability of asset owners to exercise control over Bitcoin on the blockchain results in lost Bitcoin.
- Lost Bitcoin contributes to the scarcity of available Bitcoin and accelerates the deflationary process.
Bitcoin is deemed lost on the blockchain when the owners can no longer control it. Bitcoin (BTC) is a decentralized digital currency that stores its records among a distributed set of nodes that form a public ledger, or a blockchain.
On the Bitcoin blockchain, private wallet users possess a public address and hold a private key that allows them to control assets within that address. The Bitcoin protocol is designed and coded to have only 21 million BTC in circulation.
Bitcoin’s Deflationary Design
Bitcoin is designed to be deflationary, meaning that over time, the scarcity of the asset increases. The value of Bitcoin is partially maintained by a maximum limit on the total number of Bitcoin that can exist and by periodically decreasing the rewards given to miners for bringing new Bitcoin into circulation.
Any lost Bitcoin contributes to the deflationary process and adds to the scarcity of available Bitcoin. It’s hard to estimate the exact number of lost Bitcoin, as wallets could simply be dormant. However, research by blockchain data platform Chainalysis suggests that 17%–23% of the overall Bitcoin supply might be lost, which is between 2.78 million and 3.79 million BTC.
How is Bitcoin Lost?
Bitcoin can be lost due to user errors or malicious activities from third parties via scams, hacks, or social engineering. Some potential scenarios include private key compromise, sending to the wrong network or address, damaged wallets, user abandonment, inheritance issues, enforcement actions, and centralized exchange hacks.
The consequences of lost Bitcoin can be severe, especially with increasing institutional awareness and interest. Bitcoin is gaining more recognition as digital gold and a store of value. Users who have lost their BTC forever with no possibility of recovery may struggle with guilt and self-blame.
Is Lost Bitcoin Recoverable?
Whether any Bitcoin can be recovered depends on what’s available to reconstruct and the background to the loss. Some firms specialize in the recovery of users’ lost cryptocurrencies, dealing with scenarios around drive issues or hardware failure, forgotten passwords, wallet corruption, data loss, or incorrect recipients. Private investigation firms can also assist in the case of hacks or scams that involve a large amount of money.
Safe Storage of Bitcoin
Cold storage, strong security practices, and personal control of one’s private keys are essential for safe Bitcoin storage. Using “cold storage,” which keeps private keys offline, helps store Bitcoin safely and prevent cyber threats. A hardware wallet is the most widely used cold storage solution, offering transactions and superior security.
Regardless of the method used, it is crucial to have secure backups of private keys. Whether users prefer software or hardware wallets, they should always select trustworthy options. Exchanges may not be a viable medium to store substantial funds because they are easy targets for hackers. Awareness of phishing scams and good password hygiene provide additional protection for Bitcoin holdings.
