The Curious Case of the Disappearing Bitcoin

Did you know that it is possible to lose Bitcoins? A recent Big Bang Theory episode explored this theme, with Raj, Howard and Leonard managing to lose their Bitcoins after it was put on a USB. But, if only the concern of lost Bitcoin was limited to the big screen.

According to Chainalysis, a digital firm that researches Bitcoin and the blockchain, up to 3.79 million Bitcoins have been lost. That’s the equivalent of 30 billion dollars that has fallen behind the digital crack in the couch. An astounding 23% of Bitcoin just gone. Ouch!

But how does this happen?

The scenario from The Big Bang Theory highlights how easy it is to lose Bitcoin, and losing your wallet could even be the most common way to lose Bitcoins. Chainalysis has the most common status of Bitcoin losses due to “out of circulation”, meaning that it was mined between 2 to 7 years ago. These coins were owned and lost by people known as “hodlers”, a group of long term holders of Bitcoin. Their losses have amounted to a total of 2.56 million Bitcoin, at an astonishing $20 billion valuation. A quick perusal of the internet produces a variety of gut wrenching stories of coins lost by these “hodlers”.

The next highest group of lost Bitcoins belong to the original coins mined. Chainalysis asserts that the original coins, known as “Satoshi coins” after their owner and the creator of Bitcoin Satoshi Nakamoto, have been lost. This ownership amounts to 1 million Bitcoin, which if lost, represents a loss of over $8 billion.

Chainalysis has not provided any explanation as to why or how the Bitcoins have been lost.  These original coins were actually designed to initiate and stimulate mining activity. Some have surmised that he simply removed them from the blockchain, meaning that he still has access to them, but they are lost for the purposes of circulation. Before you get too worried, Satoshi is reported to have other coins that are still in circulation, reputedly held across a variety of wallets.

Of the remaining coins, 121,300 Bitcoins have been lost through buying and selling activities, whilst 71,200 have been lost by “strategic investors”, those who have held their Bitcoins for 1-2 years as an investment. The reason these categories are significantly lower than the previous ones is simple: these activities represent recent use of Bitcoin.

Not only has there been less time to lose the Bitcoins, but also these Bitcoins are substantially more valuable than the Bitcoins mined by the hodlers. As a result, people take greater care of a $15,000 coin than they would on $0.50 one.

With the loss of circulation of so many coins, will this distort the value of the remaining Bitcoin? Has the market priced in this loss or is it unaware that the potential supply of Bitcoin is lower than expected? When calculating the market cap of Bitcoin, the value is based on the total amount of Bitcoin, whether lost or not. But the current behavior of the market is more in line with supply and demand economics, meaning that the actual value of Bitcoin is reflected in the price, including the lost coins.

So, can we take a lesson from all this lost Bitcoin? Perhaps it is that despite the current level of technological advancement and sophistication, you still want to keep close tabs on where you left those darn coins!