Satoshi Secrets & Why Nearly 4 Million Bitcoins Are "Lost" Forever

Authored by Jeff John Roberts and Nicolas Rapp via Fortune.com,

Just as gold bars are lost at sea or $100 bills can burn, bitcoins can disappear from the Internet forever.

When all 21 million bitcoins are mined by the year 2040, the actual amount available to trade or spend will be significantly lower.

According to new research from Chainalysis, a digital forensics firm that studies the bitcoin blockchain, 3.79 million bitcoins are already gone for good based on a high estimate - and 2.78 million based on a low one. Those numbers imply 17% to 23% of existing bitcoins, which are today worth around $9,000 each, are lost.

While others have speculated about the number of lost bitcoins, the Chainalysis findings are significant because they rely on a detailed empirical analysis of the blockchain, where all bitcoin transactions are recorded.

As the graphic above shows, Chainalysis’s conclusions rely on segmenting the existing bitcoin supply based on age and transaction activity. For some segments, the company used statistical sampling to determine the amount lost.

The segment “Mined Coins” reflects bitcoins mined in 2017 (which are presumed not to be lost), while “transactional” refers to those that have moved or spent in the last year—very few of which are lost. Likewise, the category of “Strategic Investors,” who have held their bitcoins for 1-2 years represent a very small share of the losses.

Here’s the data in another format, which shows how “Out of circulation” bitcoins - those mined 2-7 years ago and belonging to long-time investors known as “hodlers” - and those from the early days of bitcoin in 2009 and 2010 account for the vast majority of the lost coins:

These figures reflect bitcoins that are truly lost, and not hacked or otherwise stolen - in these cases, of course, the bitcoin is not lost since the thief has control of them.

Note the numbers above are based on the high estimate, and that the low estimate, which is based on only a 30% loss in “hodler” coins, puts the number of lost bitcoins at 2,767,468. Also, both estimates make a critical assumption that coins belonging to bitcoin’s inventor, Satoshi, are gone for good (more on that below).

In the future, more bitcoins will be lost. But the rate at which they disappear will be much lower than in the past since, now that they’re so valuable, people will be more vigilant about keeping track of them (unlike this poor fellow out who threw away a hard drive with the key to 7,500 bitcoins). Meanwhile, there is a question of whether the Chainalysis findings mean bitcoin is more scarce than people assume—or if the market has already priced the missing coins into the currency’s current value.

“That is a very complex question. On the one hand, direct calculations about market cap do not take lost coins into consideration. Considering how highly speculative this field is, those market cap calculations may make it into economic models of the market that impact spending activity,” said Kim Grauer, Senior Economist at Chainalysis. “Yet the market has adapted to the actual demand and supply available – just look at exchange behavior. Furthermore, it is well known monetary policy procedure to lower or increase fiat reserves to impact exchange rates. So the answer is yes and no.”

Lost Bitcoins and the Secret of Satoshi

Chainalysis, whose clients include the IRS and Europol, has made a name for itself in the bitcoin world because of its abundant data and sophisticated study of blockchain wallets. Law enforcement agencies rely on the company to provide detailed insights into who owns the currency and how it moves around.

Chainalysis’s overall methodology is confidential, but a spokesperson shared certain details about how the company assesses which bitcoins are lost. An important clue comes when there is a “fork” in the blockchain, such as the one this summer which led to the creation of a bitcoin clone known as Bitcoin Cash. Such events can lead to the owners of wallets that have been inactive for years to conduct a transaction, providing an opportunity for statistical analysis.

These sort of clues help inform the Chainalysis figure for the “hodler” category - wallets belonging to people who got into bitcoin before it hit the big time, and which represent the biggest source of uncertainty as to whether bitcoins are lost or just being hoarded.

As for the 2% of “‘transactional” bitcoins that Chainalysis determined to be gone, the company says this is based on scraping the Internet for reports of lost coins. It added that the estimate of such losses, which can arise from a misdirected transaction or the loss of a private key through death or carelessness, is not based on statistical extrapolation and will be refined further in coming years.

Finally, there’s the question of what became of the bitcoins belonging to Satoshi, the pseudonymous creator of the crypto-currency, who has not been not been heard from since 2011. Chainalysis says wallets associated with Satoshi represent about 1 million bitcoins (the company will provide a more specific figure later this year), and that its model assumes that those coins—which date from a time when it was easy to mine 50 bitcoin with a laptop—are gone forever. This assumption is a big one and, if it proves to be incorrect, the number of circulating bitcoins could suddenly increase significantly and deliver a shock to the market.

Fortune asked Chainalysis about what was most surprising about the lost bitcoin findings.

“Firstly, we floated our findings to a few people and they all had different reactions about how surprising the figure was. But what I found most surprising/interesting was how when you unpack what it means to be “lost” things get even more confusing.” Grauer said.

Comments

Majestic12 hedgeless_horseman Mon, 11/27/2017 - 14:53 Permalink

Is it me?

Or did it state anywhere in the "article" above "why" bitcoins get "lost" or disappear?

Blockchain is being implemented across industries and areas that will intimately affect our lives (Financial,IT, Shipping, Insurance, Medical).

Yet, as pointed out above, peer-to-peer software file sharing, whether the "impenetrable" blockchain, or not, is just as shitty as Windoz.

At $9,300 a coin...I better be able to "hold" it physically.

Soon, when the Phoenix is the new global blockchain "currency", and we are all chipped or tattooed to be able to "exchange" our sweat for "labor credits" to spend at Target, will anyone stand against this total control?

The handful of sick-fucks who control us do so by quantum physics.

The Hundredth Monkey is at work. It only takes a little more than the "handful" to serve it right back.

There are many smart minds here. It only takes your minds in unison to "just say "no".

Do not give permission.

You don't need to form an army, you "are" one.

Don't give permission in your mind.

It's no skin off your ass, and may stop this wave of fire blowing out of Satan's ass from scorching the earth of all life.

In reply to by hedgeless_horseman

nufio Majestic12 Mon, 11/27/2017 - 17:56 Permalink

i never invested in bitcoin and the reason why I think it will never be a widely accepted currency is simply this.The early adopters have amassed massive amounts of coins in propotion to the total coins that are ever minable. Humans generally will refuse to accept making these people rich by buying them at higher prices to transact. Or they will demand that they get to buy the coins at the same price the original creators did. which is equivalent to governments creating their own crypto currencies.Gold/Silver would never have become transactional currency if the person who first discovered gold in the earth also owned half of the deposits. I think in today's world for a currency to be accepted, governments have to support it with their army and police enforcing that "debts can be legally paid" with the said currency. 

In reply to by Majestic12

fulliautomatix nufio Mon, 11/27/2017 - 18:51 Permalink

As I understand it, as each fork reaches the point of being controlled by a single entity, the value of the coin does in fact drop close to zero as its utility drops to zero - other individuals don't use the coin for the reasons you pointed out. Effectively, that branch of the fork "dies" (presumably to the tuneless but somehow gratifying squealing and wailing of the courtroom drama.) The existence of other forks means that there is still a population of currencies to invest in, the one best suited to doing the job of 'money' is the one left standing. The incentive is to build a useful coin. The trick is to invest in the right one or two or three... 

In reply to by nufio

RedDwarf webmatex Mon, 11/27/2017 - 20:58 Permalink

I'm mostly into crypto these days, but I do still have a decent silver stash.  Silver has a history of staying stable for long periods of time, then suddenly making very big moves without warning.  It was $4 for forever, then shot up to $16, then to $50, then down to $18 where it has settled out for years now.Silver, like oil, is a inflexible supply and inflexible demand asset.  That means it sometimes does odd things.  Cell phone manufacturers for example won't care if silver goes to $150 an oz since it still won't raise the price of a cell phone that much and there is no replacement.  So you may one day have your ROI.Gold on the other hand is a bit more risky oddly enough IMO.

In reply to by webmatex

serotonindumptruck Sun, 11/26/2017 - 23:58 Permalink

I established a BTC wallet back in 2013, and had amassed a whopping 0.11 bitcoins, from agreeing to watch video adverts.I still have the key stored on an external hard drive, although I seriously doubt that the wallet even exists now.What a colossal fucking scam.

Advoc8tr serotonindumptruck Mon, 11/27/2017 - 00:26 Permalink

If you have the private key you can recover the coins in 5 minutes flat. Install Coinomi wallet on your phone and sweep the balance straight into it. "Wallets" Like "Coins"  do not exist as discrete items.  The whole thing is an encrypted ledger that records balances. Educate yourself and claim that $2000 US ... or hold it for another few years and watch it become $20,000 USHow exactly does your colossal ignorance make it a scam ?? 

In reply to by serotonindumptruck

Der Libertäre Advoc8tr Mon, 11/27/2017 - 06:03 Permalink

"How exactly does your colossal ignorance make it a scam ??"Good question.A collegue told me to buy BC at 500 USD and I "colossally ignored" it.I live now 50 years and it was never as if I had to learn how to use a money. BC needs to be learnt, but money - the exchange of it should be logically and easy.I read "there was a fork" and now there are BC and BCcash - what shall that mean? I have now Euros and Euroscash on my accounts?To me learning BC is as unnecesessary as learning latin - a dead language. This will never work in real life with real people. In a small exclusive group yes. Many closed up regions had special moneys (stones, pearls, sticks).I agree one should have bought them at 500 - but I do not understand it and would have sold them happily for 700 each (if I knew how). ;-)

In reply to by Advoc8tr

Anteater Mon, 11/27/2017 - 00:02 Permalink

Hodler (n) - A crypto-investor holding the 1/5th of crypto-crypto referred to as 'lost', like the Greek poet spoke ofOdysseus, but are really bidding their time before they 'hodler'the crypto-market back to $5.50 per.USAGE: "Billionaire Barnabus hodlered the BTC pricetoday by selling 500,000 coins thought to be lost.

adr Yellow_Snow Mon, 11/27/2017 - 00:08 Permalink

I think of it like a fragmented hard drive. One Bitcoin split into 10,000 pieces becomes impossible to index. Eventually the sector fails and is lost forever. You might own 75% of the block, but if the 25% left gets traded into oblivion, how does your block survive. By design the Blockchain removes unrecoverable blocks to keep the rest intact. 

In reply to by Yellow_Snow

Advoc8tr adr Mon, 11/27/2017 - 00:33 Permalink

It doesn't work like that. The blockchain records the transactions and balances assigned to specific keys. If you have the key to that wallet with crumbs in it you can sweep or send it to another wallet / key and it will be added to that balance.  The coins are not discrete "things" ... more like shares - 1 millionth of Apple corporation is not a discrete thing you can isolate. The share register simply records what percentage of the whole you own and have control over.

In reply to by adr

adr Mon, 11/27/2017 - 00:04 Permalink

I  just wonder how many people bought Bitcoins that were kicked of the blockchain for one reason or another. The whole local Bitcoin thing never sat right with me. You can make multiple copies of a wallet, technically making copies of a single Bitcoin. If you sell a copy to someone, yet update your copy with a new transaction, your version of the block will be accepted by the blockchain. The other copy would either be rejected or updated to the new status. If you found a wallet from five years ago and tried to exchange the coins, would it even work? Or would the blockchain reject the coins that were never updated? How does anyone really know if the exchanges are really trading and selling you a real Bitcoin?Trust with Bitcoin is about the same as jumping off a building hoping there os a net down on the street. 

adr BadLibertarian Mon, 11/27/2017 - 00:16 Permalink

I understand that the key links to the coins on the Blockchain. That coin 12542 gets linked to your crypto key. When the Blockchain is updated all coins traded to addresses are updated. What I am getting at is if a key is linked to a certain Bitcoin, but that key is copied and sold to you, yet you never update, and someone else updates what that key addresses. How can your key obtain the Bitcoin? 

In reply to by BadLibertarian

BadLibertarian adr Mon, 11/27/2017 - 00:19 Permalink

I never bought bitcoin using the local bitcoins thing, but my understanding from others who have is that they transfer them by sending from one address to another using the Bitcoin network, just like any other transaction. The reason they meet in person is to transfer the government fiat at the same time the blockchain transfer is made. They don't actually copy the wallet, because doing so would give both parties access to the same bitcoin.

In reply to by adr

adr BadLibertarian Mon, 11/27/2017 - 00:26 Permalink

That is the way it is supposed to work. I just remember in the early days people saying to make multiple copies of your wallet in case your hard drive dies. The same key would access any copy. My understanding is that once the Blockchain is updated, a key trying to access a Bitcoin that has essentially changed addresses would no longer be able to access that part of the block. 

In reply to by BadLibertarian

BadLibertarian adr Mon, 11/27/2017 - 00:35 Permalink

The "wallet" actually is the key. So by copying the wallet, you are making backup copies of the private key that maps to a particular Bitcoin address. You can also password protect the wallet that contains the key, and of course your same password would open any of those copies.Bitcoin transfers are a little more complicated than what you are describing - when you send a transaction from an address, you have to move *all* of the bitcoin on the address. So unless the amount in the wallet it exactly the amount you need to move, you create two transaction outputs - one of which makes the payment and a second one that sends the change back into the originating address.

In reply to by adr