Bitcoin is a digital currency that has become increasingly popular over the past decade. One of the unique properties of Bitcoin is that it allows users to be their own bank – with Bitcoin, there is no centralized authority or bank that holds your funds.
While this gives Bitcoin users full control over their money, it also means that there is no one to call if you lose your private keys or recovery phrase. So can Bitcoin truly be lost forever if someone loses access to their wallet?
What happens when you lose your private keys
To understand how Bitcoin can be lost, it’s important to first understand how Bitcoin wallets and private keys work.
Bitcoin is not actually stored in a wallet. Bitcoin exists only on the blockchain – a public ledger that records all Bitcoin transactions. What is stored in a Bitcoin wallet are the private keys that allow you to authorize transfers of Bitcoin to and from public Bitcoin addresses.
Your private keys are essentially the password to your Bitcoin holdings. When you want to send Bitcoin from your wallet, you need to sign the transaction with your private key to prove you own the funds. Without your private keys, you cannot access or spend the Bitcoin associated with your wallet.
Now imagine you accidentally deleted your wallet file, or lost the piece of paper your private key was written on. Or your hard drive crashed and your private key was erased. Without your private key, you have no way to prove you own the funds in that wallet.
The Bitcoin network has no central authority that can issue password resets or override transactions. The network only verifies cryptographic signatures from valid private keys. So if you lose your private key, it’s gone forever.
Ways Bitcoin private keys can be lost
- Accidentally deleting wallet files or seed phrases
- Losing hardware wallets or documents with private keys
- Hardware failure/hard drive crash
- Sending Bitcoin to an invalid address
- Death of a Bitcoin owner without access instructions for next-of-kin
How much Bitcoin has been lost?
Given the inability to recover lost private keys, there is a sizable amount of Bitcoin that is considered permanently lost. Estimates vary on exactly how much has been lost over Bitcoin’s history:
| Source | Estimate of permanently lost Bitcoin |
|---|---|
| Chainalysis | 3.7 million BTC |
| CZ Binance | 2-4 million BTC |
| Jameson Lopp | 4 million BTC |
With only around 18 million Bitcoins currently in circulation, between 2 to 4 million permanently lost Bitcoin would represent a significant proportion of the total supply.
Much of this lost Bitcoin comes from the early years when prices were low and wallets less secure. As Bitcoin gained value and holders took security more seriously, loss rates have declined. Still, accidental losses continue to happen.
Major cases of lost Bitcoin
- James Howells lost 7,500 BTC when he accidentally threw out a hard drive containing his private keys.
- In 2013, a user claimed to have accidentally discarded a hard drive containing 7,500 BTC while cleaning their home.
- In 2017, a Bitcoin talk forum user claimed to have lost 4,100 BTC in an old wallet.
Is it possible to recover lost Bitcoin?
Given the permanence of Bitcoin’s immutable ledger, recovering lost coins presents major challenges. However, there are some potential ways lost Bitcoin can be recovered:
1. Finding lost private keys
If you accidentally deleted a wallet file or lost a piece of paper with your private key, it’s possible the key can be recovered. You may be able to find a backup of the wallet file on another device or in cloud storage. Or you might suddenly recall where your note was misplaced.
James Howells has offered his city millions if they let him excavate the landfill where he believes his old hard drive containing 7,500 BTC may be buried.
2. Trying every possible private key
It is mathematically possible, although completely infeasible, to eventually gain access to lost Bitcoin by trying every possible private key combination until you generate the correct one. This would involve testing a vast number of random private keys until you found the one that unlocks your lost funds.
Doing so would take an astronomical amount of time and computing power. By one estimate, it would take 9 quintillion years to test all possible ECDSA secp256k1 private keys needed to restore lost Bitcoin wallets.
3. Quantum computing
There is speculation that quantum computing could one day be leveraged to decrypt cryptographic keys. This could potentially allow someone to derive private keys from public wallet addresses and access “lost” funds.
However, Bitcoin developers are already working on post-quantum cryptography solutions. Upgrades would likely be made to switch encryption algorithms long before quantum computing scales sufficiently to pose a threat to Bitcoin’s cryptography.
Steps to avoid losing your Bitcoin
While recovering lost Bitcoin is very difficult, there are things you can do to avoid losing your coins in the first place:
1. Securely store private keys
Keep copies of your private keys across multiple physical locations. Use a hardware wallet and paper wallet for backup. Store key phrase recovery seeds securely.
2. Encrypt devices and enable backups
Password protect and encrypt devices containing wallets. Routinely back up your computer and mobile devices to the cloud to guard against hardware failure.
3. Use multisignature wallets
Multisig wallets require multiple keys to authorize a transaction. This provides redundancy in case single keys are lost.
4. Share access instructions
Share instructions for accessing your wallets with trusted loved ones in case you unexpectedly pass away.
Does lost Bitcoin impact the market?
Given the sizable amount of Bitcoin likely lost forever, does this permanently reduced supply impact Bitcoin’s price and market dynamics?
The short answer is that lost Bitcoin does not directly affect the market. Recall that Bitcoin exists entirely on its public ledger. Coins don’t need to be “physically” stored somewhere like traditional assets.
The Bitcoin protocol only verifies ownership via digital keys and network consensus – it has no notion of “lost” coins. No matter how many Bitcoins are lost, the blockchain will continue to verify the ownership of however many coins remain secured by valid private keys.
In economic terms, you could argue lost Bitcoins increase scarcity and in turn increase value for remaining coins by reducing the total verifiable supply. However, in practice, perceptions of increased scarcity from lost coins is not a major driver of market price.
Negative impacts of lost Bitcoin
While lost Bitcoin doesn’t directly impact the network or market price, it does have some negative implications:
- Reduces circulating supply available to buyers and sellers
- Hinders mass adoption and use in transactions
- Heightens perceptions of Bitcoin as complicated and risky
Conclusion
Bitcoin can be permanently lost if private keys are not securely stored. Estimates suggest between 2 to 4 million Bitcoin have been lost forever so far.
Recovering lost Bitcoin is essentially impossible. The Bitcoin protocol does not have a mechanism to reset keys or override signature verification.
While lost coins increase scarcity, they do not directly impact the market price or network operations. However, losing access to millions of Bitcoin hinders wider adoption and utilization.
Following best practices for securing private keys remains imperative to avoid the permanent loss of your digital assets.
