Many crypto reporting websites frequently claim that up to 20% of all the Bitcoin that will ever exist have been lost forever. At first glance, that number seems very high. I have decided to take an in-depth look at this issue, and will discuss how it impacts Bitcoin's value. To keep my thoughts readable, I decided to break this topic into short chapters that will be posted in a multi-part series.
How do Bitcoin become lost in the first place?
There are a few common ways to lose Bitcoin:
1. Losing access to cold storage devices (USB keys, hard drives, etc.) if you were an early adopter
2. Sending BTC to nonexistent addresses
3. Forgetting passwords/private keys
4. Forgetting/losing access to the recovery seed phrase
5. Not sharing the above information with another person before you die or become incapacitated
How are the lost Bitcoin identified on the blockchain?
Chainalysis is a digital forensics firm that studies the Bitcoin blockchain. One of their reports in 2017 looked for BTC wallets that appeared to be dormant, with no history of any activity for several years following its last transaction. A clue to whether the wallet's owner retained access to the BTC was to check if the owner claimed any new coins after a hard fork. For instance, the Bitcoin blockchain's first significant hard fork occurred on August 1, 2017 to create Bitcoin Cash. Chainalysis would look to see if any Bitcoin Cash coins were subsequently claimed by the owner of the dormant wallet.
Several forks have taken place since that time, so intuitively, wallets that have never claimed any new coins after the forks are candidates to contain Bitcoin that are lost forever.
More recently, Delphi Digital studied Bitcoin's unspent transaction outputs (UXTO). The unspent transaction output can be thought of as the remaining amount of Bitcoin eligible to be spent after a transaction takes place. Only the unspent transaction output can be used to create new transactions on the Bitcoin blockchain. An example for a layman could consist of a wallet containing 1 BTC. If 0.1 BTC was transferred out of this hypothetical wallet, the network would generate a UXTO defining 0.9 BTC remaining and eligible for the next transaction from this wallet.
This study looks at the dates when all the UXTO transactions were created. UXTO aged 5 or more years old was defined to be associated with Bitcoin that are potentially lost forever. It's important to point out that 20% of the UXTO on the blockchain currently meet this criterion. The last time this ratio of 5+ year old UXTO was this high was back in 2014, when the previous bear market was in effect.
So is it fair to assume that 20% of all the Bitcoin that will ever exist are lost forever?
The Chainalysis report identified that 30-50% of HODLers have lost access to their Bitcoin. But a Bitcoin wallet should not be automatically considered to contain lost BTC just because a Bitcoin owner didn't claim any forked coins. It's not clear how that thinking went into determining the 30-50%.
The report also assumes that the roughly 1 million "original" Bitcoin in Satoshi Nakamoto's wallet are lost forever too.
This all adds up to 2.77 million BTC lost forever at the low end, and 3.79 million lost at the high end.
Given there can only be a maximum of 21 million Bitcoin ever created, I calculate that 13.2 - 18.0% of the total supply is lost forever, based on this Chainalysis data.
There's three sides to every story...my side, your side, and the truth.... - Robert Evans
The truth in terms of the ratio of lost Bitcoin is probably somewhere in between 13.2% and 18.0%. For argument's sake, I'll call it 15.6%.
But all bets are off if Satoshi Nakamoto ever resurfaces with all his 1 million Bitcoin...the lowered percentages would range from 8.43% to 13.29%. =)
Thanks for reading Part 1 of this series! In an upcoming post, I'll continue my analysis, with a deep dive look into a new blog about lost bitcoin that I found.
Thanks for reading, and stay safe!
Follow me on Twitter: @CryptoWordsmith
Last edited on September 11, 2020
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