Part of what gives Bitcoin value is its immutable ledger, the blockchain. When something gets added to the blockchain, there is no way to reverse or undo the process. You can’t “take it back.” The unalterable aspect of the Bitcoin blockchain is a huge factor in keeping the currency secure and transparent. Generally, this is a good thing.
Accidents Happen: Lost Bitcoins
Like all good things, there are, of course, some catches. For example, if you accidentally send 10 BTC to the wrong address, there is effectively no recourse unless whomever owns that address happens to be a saint and voluntarily returns the funds. Perhaps more common than sending Bitcoin to the wrong address is stashing some Bitcoin away in a wallet for safekeeping and then losing the private key needed to access said wallet.
Even with recent price drops, Bitcoin’s value today makes it hard to imagine anyone leaving a hardware wallet with 20 BTC on it sitting in a drawer and forgetting about it. In the early days of Bitcoin, however, mining with an old laptop was fairly easy. Back in 2009, a handful of BTC had little value and could have been misplaced as easily as pocket change without thinking twice. James Howells, a British man who started mining in the early days, somewhat famously threw away a hard-drive containing 7500 BTC.
According to a 2017 study done by blockchain analytics company Chainalysis, roughly 5 million Bitcoins are currently “out of circulation,” or not being actively traded. Chainalysis, whose clients include the IRS and Europol, estimates that as many as half of those Bitcoins are effectively lost forever. That comes out to upwards of $20 billion (USD) at the time of this writing.
The Scarcity Principle
Bitcoin’s value is due in part to the built in scarcity factor that was part of its design. By creating a finite cap to the number of BTC that will ever exist – 21 million – Satoshi Nakamoto imposed a condition that would support increasing value in the system over time. In economics, the “scarcity principle” is a well-established consideration in determining value. Simply put: as demand rises and supply decreases, value increases.
Speaking of Satoshi Nakamoto, he/she/they have somewhere around 8 billion dollars worth of original Bitcoin just sitting, untouched, for a decade. We can see this by looking at the blockchain. Of course, it’s possible that Satoshi’s stash could still be accessed at some point, but if the past is any indication it may be worth considering those Bitcoins out of circulation permanently.
The Supply Side
We know that scarcity can have an impact on market value. With a growing global interest in Bitcoin, it is worth considering how many Bitcoins there really are to go around as demand increases. We know how many Bitcoin have been mined to date (just under 16,825,000 at the time of this writing). If, as Chainalysis suggests, 5 million of those are lost Bitcoins, or coins that are otherwise out of circulation, then is the current supply of Bitcoin available on the market actually less than we think? Kim Grauer, Senior Economist at Chainalysis, told Fortune, “That is a very complex question. On the one hand, direct calculations about market cap do not take lost coins into consideration… Yet the market has adapted to the actual demand and supply available.”
While it is difficult to determine precisely how many Bitcoin are permanently out of circulation- locked up in wallets where someone has thrown away the key – it is certainly worth considering that this number may be more than trivial. As further research is conducted into the actual number of Bitcoins in circulation and the number of lost Bitcoins, we will get a clearer picture of what the supply side really looks like and how that fits into the context of the inevitable 21 million cap. Assuming demand doesn’t dwindle, recognizing that Bitcoin may be more scarce than we think could have a positive long term impact on value as markets adapt to new information.