Can lost Bitcoins be considered a “donation”? Will it further hinder adoption?

An estimated 20% of the Bitcoin supply has been lost. Are these funds a donation to others, or a challenge to further adoption?

Cryptocurrency custody solutions have become big business over the past few years. Due to the decentralized nature of major blockchains like Bitcoin or Ethereum, whenever a user loses access to their wallet and does not have their private keys backed up, the funds in the wallet cannot be recovered.

Storing private keys can be challenging as it needs to be kept away from bad actors but still accessible to users when necessary. In dealing with the challenges associated with managing cryptocurrency, many people simply leave their funds on cryptocurrency exchanges, creating a huge demand for cryptocurrency custody services.

Experts say that while storing cryptocurrency with a third party is often seen as a security risk because the third party itself can be hacked, custodial services are the best option in case of losing coins.

Early cryptocurrency adopters have lost their cryptocurrencies in a variety of ways, including exchange hacks. These security breaches led Bitcoin scholar Andreas Antonopoulos to popularize the famous slogan “not your keys, not your coins.”

How much cryptocurrency is lost?

Cryptocurrency can be lost in a number of ways, but unless someone admits they have lost access to their funds, it is impossible to tell from the data on the blockchain. Typically, users do not have access to the private keys of their wallets, which makes them unable to access the funds within them.

There have also been cases where users have sent cryptocurrencies to the wrong addresses. Again, due to the decentralized nature of blockchain, there is no remedial action to recover these coins.

Kim Grauer, head of research at blockchain forensics firm Chainalysis, noted in an interview that an estimated 3.7 million bitcoins (worth more than $140 billion today) are lost. Grauer said the estimate is “a little out of date” and will be updated with further research later this year.

Michael Fasanello, director of training and regulatory affairs at Blockchain Intelligence Group, said it can be difficult to estimate the value of lost tokens because “those who have incurred losses are not always interested in sharing information like this.”

3.7 million equates to nearly 20% of Bitcoin’s circulating supply, which Grauer believes could have an impact on the cryptocurrency’s long-term price.

Grauer added: “There are more psychological effects as well. People may be more hesitant to invest in Bitcoin out of fear of losing it.”

The Chainalysis executive added that this feature is not unique to the cryptocurrency ecosystem and “should not prevent further adoption” as “there are many ways to safely keep your cryptocurrency, either in your own hands or on an exchange.”

Chris Brooks, founder of Crypto Asset Recovery, noted that in his experience, people should be more worried about leaving their private keys in a wallet that could be mistakenly discarded than worrying about hackers or scammers.

“The chances of moving to a new apartment and losing your crypto in the process are much greater than the chances of getting hacked,” Brooks said.

Should lost cryptocurrency be considered a donation?

Bitcoin creator Satoshi Nakamoto famously said that lost bitcoins “only make other people’s coins a little bit more valuable” and should be considered “a donation to everyone.” Fasanello said Nakamoto may be right when it comes to coins with a limited supply, but the opposite may be true for those with an unlimited supply.

Just as fiat currencies lose value with inflation, so too do cryptocurrencies, Fasanello said. If a cryptocurrency doesn’t have a finite supply, then the value of lost tokens will depreciate over time.

Asaf Naim, founder and CEO of blockchain application developer Kirobo, said Nakamoto’s words may apply to “minor and occasional loss of cryptocurrency,” but Naim added that “the law of scarcity only holds true if people have confidence in the underlying system. If too much cryptocurrency is lost, people will no longer believe in its usefulness and its intrinsic value.”

Lost Cryptocurrencies and Mass Adoption

Over the years, stories from the cryptocurrency space about lost cryptocurrencies have made headlines, demonstrating how difficult it can be to recover lost funds. One example is James Howells, who threw away a hard drive containing 7,500 Bitcoins (about $285 million today) while cleaning his house in 2013.

Wallet recovery services have grown in popularity over the past few years, but typically charge a significant portion of the funds they recover. Grauer said there are industry solutions designed to reduce the likelihood of accidental loss, including “storing your cryptocurrency on a known and trusted exchange or hot wallet, similar to what you would do at a bank.”

This approach stands in stark contrast to those who believe that if users do not control the private keys to their wallets, they do not actually own the coins in their wallets. Brooks seemed to agree with Grauer, but added that “crypto can be very complex,” and therefore, he believes that “new investors are better off using custodial wallets.”

To Brooks, if a user dies suddenly or suffers a serious accident, it is easy for loved ones to access their cryptocurrency from a custodial wallet, but it is difficult to do so by using private keys. Kirobo's Naim believes that "the main impact of losing so much cryptocurrency is that it hinders mass adoption. If people don't feel that cryptocurrency is safe, they won't use it. Forgetting access credentials is irreversible and this is unacceptable."

He added that credit cards wouldn’t be as popular as they are today if “there was a high probability of irreversible loss every time you used your credit card.” The solution could lie with cryptocurrency platforms and their user experience, for example, implementing whitelisting to prevent common mistakes, as online banking platforms do.

Over time, the free market has tried to come up with better solutions, which include creating titanium plates on which users can write their private keys. These are difficult to accidentally drop and can usually survive natural disasters. Some wallets, including Coinbase Wallet, allow users to back up their private keys on Google Drive or iCloud.

While cryptocurrency custody services may provide institutional investors with the security they need to enter the market, for users looking for an unregulated form of funding, losing cryptocurrency is likely to remain a problem for the foreseeable future.

By Aaron Wood