Ask Cryptovantage: Why Are Millions of Bitcoins Missing?

The Biggest Culprit? Improper Bitcoin Storage

Bitcoins are stored and protected by private keys. If you lose your private key, you will no longer be able to access your bitcoin. Because no central authority controls bitcoin, once you lose your private key, there is no way to recover your coins.

For example, you cannot simply prove your identity to someone to gain access to your coins. Like physical cash, once you lose your private key, your bitcoins are gone. When people refer to “missing bitcoins”, they are typically referring to coins that can no longer be accessed because people have lost their private keys.

It is not only individuals who improperly store their bitcoin private keys. In early 2019, Canadian bitcoin exchange Quadriga CX announced that their CEO had passed away. It was then revealed that their CEO was the only person with access to the exchange’s private keys, which meant that the hundreds of millions of dollars worth of funds held in the exchange were lost forever.

This event highlighted the importance that exchanges follow proper procedures for storing their funds, and reminded thousands of users of the bitcoin mantra “not your keys, not your coins.”

Bitcoin’s Early Days

In the early days of bitcoin, people didn’t take care of their private keys because bitcoin didn’t have much value. For example, for the first year or two of bitcoin’s existence, a single bitcoin was worth pennies. It took more than four years for bitcoin’s price to reach $100 USD, and by that point more than half of all bitcoins that will ever exist had already been mined.

As bitcoin’s value has drastically increased, some early bitcoin users have been scrambling to find their old private keys and recover their bitcoins. For example, in 2013, someone threw their laptop hard drive in the trash, only to later realize that it contained 7500 bitcoins. Today, those coins are worth $240 M. In another example, someone who stored 7002 bitcoins on an encrypted drive lost their password to the drive. Because of the design of the drive, he now has a limited number of attempts to guess his password before the coins are lost forever.

In total, there are an estimated 3.7 million lost/irrecoverable bitcoins. The number of lost coins is typically estimated by observing the movement of coins. Analysts look at coins that haven’t moved for a number of years, and use this and other information to indicate that the person who originally owned the coins has probably lost access.

However, it is difficult to pinpoint the exact number of coins that are lost because some people may just be storing their bitcoins for the long-term, but still have access to their private key.

Satoshi’s Coins?

It is estimated that there are over one million bitcoins that were mined by a single person in the early days of bitcoin’s existence. These coins have still never been spent. Nobody knows for sure, but many speculate that they belong to Satoshi Nakamoto, bitcoin’s mysterious creator. It is impossible to know whether the owner of these coins still has the private keys or if the keys have been lost and the coins are locked forever.

Bitcoin Storage Solutions Today

Since so many bitcoins were mined while bitcoin had a low value (in the first 4 years), many were lost due to improper storage of private keys. Today, however, it is less likely that people lose their private keys because bitcoin has become much more valuable.

The bitcoin miners, and exchanges, who lost their private keys have taught the bitcoin community very valuable lessons about the importance of secure private key management. Also, in the past few years more educational resources about private key management have become available, and tools have been developed to make it easier to securely store bitcoin private keys.

Today, there are more people using bitcoin than there were 5-10 years ago. And, because bitcoin is much more valuable, the coins are distributed amongst a larger number of people. This makes it less likely for one user’s mistakes to cause a large number of coins to be lost forever.