Immensely strong security means there’s no hope of recovering Bitcoins if you lose the password – and it happens a lot more often than you’d imagine
Unlike banks, Bitcoins are unregulated. If an owner dies without passing on their password (called a private key), their Bitcoins expire with them. They’ll remain in the ether, visible but unspendable. Nobody to help.
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You could imagine them eventually falling prey to brute force attacks – someone guessing key after key until they stumble upon the correct one. But that’s where Bitcoin’s formidable security becomes a problem.
Security expert Bruce Schneier once ruled out an attempt to crack a 256-bit key, of the type used by Bitcoin, by referring to the laws of physics: such is the magnitude of the problem. Even an impracticably large computer consuming all the energy outputted by the sun couldn’t count the number of possible combinations in several decades.
His mind-bending conclusion was that such an attack “will be infeasible until computers are built from something other than matter and occupy something other than space.”
The short version? Lost coins stay lost.
How many coins are lost?
We know that only 21m Bitcoins will ever exist, that they will be gradually mined over many years and that 13.7m have been unlocked so far.
We also know that they can be lost through death, simple carelessness or a hardware failure. But how many have actually been destroyed?
Scour the archives of the Bitcoin forums and you’ll find references in the early days of the digital currency to sums worth pennies at the time, but which would now be small fortunes.
Florida programmer Laszlo Hanyecz famously bought two pizzas in 2010 for 10,000 Bitcoins. At Bitcoin’s peak that pizza would have cost over $10m.
Many of those early adopters gave as much thought to safe storage as a value of pennies warranted: not a lot. So tales of big losses are not uncommon.
Welsh IT worker James Howells famously lost 7,500 Bitcoins in 2013 when he accidentally threw out an old hard disk containing his private key. It is reportedly under thousands of tonnes of landfill at a waste recycling centre in Pillgwenlly, Newport. Today those coins would be worth over a million pounds.
And there are countless smaller, unreported losses. London-based developer David Kitchen mined around 50 coins in 2010, stopping when the noise of the fans on his mining computer in the living room started to annoy him. He stashed the coins on a usb-c stick thought little more of it.
Until, that is, the price started to soar. Unfortunately, by then the USB drive had disappeared.
“At the peak the Bitcoins would have been worth around £50k. I looked, on many occasions, but have never found it. I suspect I didn’t actually lose the USB stick but just overwrote it with a Linux installer or something: the modern equivalent of recording a TV program over a VHS of your wedding,” he told the Telegraph.
To put a figure on the scale of these losses, some clever analysis is needed. Thankfully, as all Bitcoin transactions are public, this can be done by anyone with technical skill and time on their hands.
NVIDIA engineer John Ratcliff calculated in June that “zombie coins”, defined as those which have lay dormant for at least a year and a half, accounted for 30 per cent of all Bitcoins.
Those coins were bought for just a few cents, so the lack of profit-taking despite a return of 4,000 per cent seems to rule out the possibility that they’re simply long-term savings.
Historical price rises tended to get some of these zombie coins moving, as media coverage raised awareness, but that pattern has slowed.
As Ratcliff says: “while there can be no way to know with absolute certainty the status of zombie coins, by looking at trends historically over time, it is probably safe to assume that the vast majority, totalling approximately 30 per cent of all Bitcoins mined to date, are irrevocably lost forever, most having been thrown out because they were worthless at the time or the victim of a hard drive crash.”
At today’s price and today’s total number of mined Bitcoins, that equates to $948,750,000 or £625,400,000.
The biggest loss of all may have been intentional. Bitcoin was invented by a person or group going by the name Satoshi Nakamoto. The identity of Satoshi and his/her/their motive is unknown.
What we do know is that Satoshi mined lots of the early coins. Lots. Detailed analysis suggests that it was around a million. That’s one 23rd of all the Bitcoins that will ever exist.
Today they’re worth $230,000,000, but at the peak price of $1,200 Satoshi was a billionaire.
And that pile of coins accounts for a third of all zombie coins in existence: not a single penny has ever been moved or spent.
Was that an intentional part of the process of getting Bitcoin up-and-running, or is there some cunning plan for their use in the future? We can never know, but we can only assume that after years of complete inactivity they are lost.
Many people have inexplicably added to this figure by making “offerings” to Satoshi, sending their own Bitcoins – hundreds of thousands of dollars – to sit atop the stockpile. Take this address, for example, which received the first 50 Bitcoins ever mined. There are now 955 further transactions on top of it – another 15.4 Bitcoins destroyed.
So far we have several millions of Bitcoins lost – around a billion dollars. But that figures keeps creeping upwards. Start-up Counterparty intentionally “burned” 2,130 Bitcoins last year, worth over $1.7m at the time.
The company created a way to piggy-back on Bitcoin’s infrastructure to offer other financial services, which involved creating its own digital currency called XCP. Many start-ups have done similar things in the past and they often struggled to distribute their new currencies fairly.
Counterparty decided to do this by swapping Bitcoins for XCP but, because there’s no official mechanism to do this, they just handed XCP out to anyone willing to publicly destroy Bitcoin in return.
By setting up a wallet with no known private key they were able to “burn” any coins sent to it. The wallet can be seen online, complete with every transaction, but the funds can never be retrieved.
The company’s Ivana Zuber said: “Our primary concern at the time was to give the Counterparty project maximum legitimacy right from the start and ensure that all new XCP coins are distributed fairly and proportionally. We also wanted to ensure that Counterparty developers do not enjoy any special privileges.
“Instead of selling off a pile of pre-mined XCP and creating a centralized project with a potential point of failure, we decided to distribute XCP in a public, transparent and fair way and eliminate any speculation on ‘developers getting rich quick’.”
While Counterparty’s destruction at least served a purpose, there are many similar wallets which have been created to destroy Bitcoin for no logical reason at all, such as Bitcoin Eater.
What does this mean for Bitcoin?
The perilous nature of Bitcoin is due to its decentralized, libertarian nature: you’re free from inflation, quantitative easing or state seizure, but you’re also in charge of security and safekeeping.
For individuals, it’s obviously bad news to lose Bitcoins, but for the rest of the crypto-currency economy, it barely causes a ripple. In fact, due to a tiny drop in supply, other people’s holdings should theoretically see a small increase in value.
Currently, Bitcoin can be divided by eight decimal places, but that can be increased when needed by a simple update to the source code, so a diminishing supply of coins makes no odds: the whole network could operate by using infinitesimally small fractions of a single Bitcoin.
As coins are far more valuable now than in the early days it seems unlikely that newly-mined Bitcoin will be treated as carelessly as the early coins, so losses should reduce in the future. But it’s a one-way process so the number of lost coins will only increase.