Research shows: Nearly 4 million Bitcoins are permanently lost

Preface: The total number of bitcoins is 21 million, and the current circulation is more than 17.2 million (assuming that no private keys are lost). How many of these 17.2 million bitcoins have disappeared on the Internet? The research results of this article show that 2.87-3.79 million bitcoins cannot be recovered, accounting for about 17-23% of the current circulation. This is a large proportion. The survey company did not disclose the survey method, so there is a possibility of error. If true, this will have an important impact on the valuation of the entire bitcoin. The author of this article is Jeff John Roberts & Nicolas Rapp, from fortune.com, translated by Li Xihe of the Blue Fox Notes community.

Just like a gold bar falling into the sea or a $100 bill being burned, Bitcoin could disappear from the Internet forever. When all 21 million Bitcoins are mined by 2040, the amount that can actually be used for transactions and consumption will be much smaller.

According to the latest research from Chainalysis (a digital forensics company that studies the Bitcoin blockchain), there may be between 2.87 million and 3.79 million Bitcoins that have disappeared forever. This is equivalent to 17-23% of the total number of Bitcoins in existence. (Based on today's valuation, at least $20 billion is lost)

Chainalysis’ findings are based on a detailed empirical analysis of blockchains, which are known to record all transactions, making their findings particularly significant.

As shown in the above figure, Chainalysis's conclusions rely on a breakdown of the existing Bitcoin supply based on coin age and transaction activity. For some of the breakdown categories, the company uses statistical sampling methods to calculate the amount lost.

In the table below, the “Mined Coins” column reflects the bitcoins mined in 2017 (assuming none of them have been lost), while the “Transactional” column refers to those bitcoins that were transferred or spent in the last year, and only a small portion of the bitcoins in this breakdown have been lost.

Likewise, the “Strategic Investor” subcategory, which refers to those who have held Bitcoin for one to two years, also saw minimal losses.

However, in the Bitcoin sub-category of “Out of Circulation”, a large portion of Bitcoin mined 2-7 years ago and belonging to long-term investors (“Holders”) are lost. And the majority of Bitcoin mined in 2009 and 2010 are lost.

These figures reflect bitcoins that have actually been lost, rather than hacked or otherwise stolen (in which case the bitcoins aren’t actually lost because the thieves have control over them).

Note that the above figures are estimated based on a higher proportion. A lower estimate, that is, if 30% instead of 50% of the "Holder" bitcoins are lost, the specific number of lost bitcoins is 2,767,468. In addition, these estimates are based on a key assumption, that is, the bitcoins belonging to Satoshi Nakamoto are lost forever.

There will be more bitcoins lost in the future, but the loss rate will be much lower than before. Now that their value is so high, people will be more careful about how they store their bitcoins (unlike the poor guy who threw away a hard drive with 7,500 bitcoins ).

At the same time, this also raises another question, that is, Chainalysis' analysis means that Bitcoin is actually scarcer than people think, or whether the existing market takes these lost Bitcoins into account when calculating the value of Bitcoin.

“This is a very complex issue. For one thing, direct market cap estimates don’t take into account these lost bitcoins. Given the highly speculative nature of this space, those market cap calculations could make it difficult for market economic models to influence consumer activity,” said Kim Grauer, senior economist at Chainalysis.

On the other hand, the market has adapted to the traditional model of actual demand and supply, which only looks at transaction behavior. Moreover, it is well known that monetary policy affects exchange rates by increasing or decreasing the reserves of fiat currencies. So the answer can be said to be both yes and no."

Lost Bitcoins and the Secret of Satoshi Nakamoto

Chainalysis has a large amount of data and has conducted a very comprehensive study of blockchain wallets. Its clients include the IRS and Europol. The law enforcement agencies rely on the company to provide them with detailed and in-depth investigations on Bitcoin movements.

The overall analysis methodology used by Chainalysis is confidential, but a spokesperson shared with us certain details about how the company assesses which bitcoins are lost. One important clue comes from the moment a blockchain "forks," like the one that led to the creation of Bitcoin Cash. Such events can cause wallet owners who have been inactive for a long time to make transactions, providing an opportunity for statistical analysis.

This clue helps Chainalysis sort out who belongs to the "Holder" category - that is, to find the wallets of those early Bitcoin users. This also has the greatest uncertainty. It is difficult for us to determine whether these people's Bitcoins are lost or hoarded.

As for the 2% of Bitcoin in the "Transactional" subcategory, Chainalysis said this was based on crawling reports on lost Bitcoins on the Internet. These losses mainly come from erroneous transactions or lost private keys. The estimate of this category is not based on statistical analysis and requires further investigation and collation.

Finally, regarding the bitcoins that belonged to Satoshi Nakamoto, Chainalysis stated that wallets associated with Satoshi Nakamoto held approximately 1 million bitcoins, assuming that all of them were lost (this is from the days when it was easy to mine 50 bitcoins with a laptop).

This assumption is very bold. If it is later proved to be wrong, the amount of bitcoins circulating in the market will suddenly increase sharply and cause a shock to the market.

Fortune asked Chainalysis about the most surprising aspect of the investigation:

“First, we told a few people about the results and their reactions varied. But the most interesting and surprising thing to me was that people were even more confused when we explained the definition of lost bitcoins,” Grauer said.