Gone Forever: How people lose their bitcoin and what it means for the crypto economy
Anyone who works in tech support will tell you the number one problem they have to deal with is forgotten passwords. For banking apps, this isn’t usually too much of a problem since there is always a way to access your account so long as you can prove your identity. Cryptocurrencies don’t quite have the same leniency. If you lose your private key, you lose your coins. It’s that simple.
Now that one bitcoin is worth many thousand dollars, people tend to keep track of their private keys. Back in the early days of mining though, when Bitcoin was still in its infancy and the value of a one coin was a small fraction of what it is now, people were not as careful. The tragedy of James Howells is one such story, who mined 7,500 bitcoins back in 2009 using only a laptop. He kept the private keys on a spare hard drive that sat in the back of his junk drawer for years until it was accidentally thrown away during a move. That hard drive is now worth approximately fifty million dollars and sits somewhere deep inside a UK landfill.
This is a story that has been echoed time and time again. Campbell Simpson, a tech writer for Gizmodo carelessly disposed of a hard drive with 1,400 BTC. Parity Technology infamously locked up approximately 900,000 ETH after the code necessary to access user multi-sig wallets was accidentally deleted. Matthew Mellon left approximately half a billion dollars’ worth of Ripple in wallets that only he knew how to access.
My own personal story of throwing away the key to just one bitcoin seems paltry next to these larger figures, but it does illustrate that this sort of event is actually fairly common. Hard drives get corrupted all the time; old tech gets tossed out routinely. People are careless, and the crypto economy has been affected by it.
Let’s get into the big numbers now. Make no mistake, the majority of these lost bitcoins are held by just a few early miners. It’s estimated that Satoshi himself holds nearly one million bitcoins. What happened to those? It’s a good question to ask considering the economic leverage that much wealth can have on the market.
Bitcoin whales have, in the past, been known to use a “rinse and repeat” strategy that involves selling enough coins to incite a panic, then buying again when the price hits a new low. Just last September, a whale holding almost $1 billion started making waves using this formula. After more than four years of dormancy, old money was moving. Investors feared an imminent dump and the next day the price of bitcoin was down 13%.
Luckily, Satoshi doesn’t appear to have that kind of malicious intent. The wallets housing his million coin fortune have been dormant for years, untouched from the day they were originally mined. However, there is always a possibility that those coins will enter the market.
While it’s impossible to know for sure how many bitcoins are truly lost, we can make a good estimate based on transaction activity and age of the dormant wallets suspected to be inaccessible. Research from Chainalysis estimates that there are between 2.8 and 3.8 million Bitcoins gone for good.6 The uncertainty comes from hoarders who haven’t touched or moved their Bitcoins for years on end but still have access to the wallets. Still, even the low-end estimates mean that more than 16% of bitcoins currently in circulation are lost forever.
The tragedies listed above have become tales of caution that have fostered a different attitude towards Bitcoin. People are more careful with their keys, redundancies are being built into online wallets, and will executors are learning how to manage the transfer of digital goods. Perhaps the crypto community needed these lessons in order to develop into what it is today. Perhaps the tales of James Howells, Campbell Simpson, Parity, and Matthew Mellon were inevitable. Those trapped coins may be lost, but they are certainly not forgotten.