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Bitcoin loss/destruction
One thing that has been bothering me as I’ve been learning about bitcoin is this thing about bitcoins that have been lost forever, and that it can be lost. In effect, value is destroyed when this happens, at least for the bitcoin owner.
The only thing that prevents this from happening is keeping the passphrase safe. This could be lost for any number of reasons and seems to be a weakness of bitcoin. As I’ve learned, something like 4 million bitcoin have already been lost, which is over 20% of the total that have been created.
As bitcoin becomes more and more valuable, the risk of loss goes higher and higher.
Bitcoin is said to be a “trustless” form of money, but at the very least, the owner of bitcoin must trust themselves and the method they use to keep it safe.
For instance, say I have some bitcoin and I don’t share this information with anyone. At some future point, I unfortunately get dementia, and forget that I have bitcoin or lose the passphrase. Or I get run over by a bus. Whatever. To prevent this loss, I could share the passphrase with someone else, someone I trust, but now third party trust is involved, which is a different kind of risk.
It just seems that fundamentally, owning bitcoin comes down to keeping a unique piece of information secret. Secrets are vulnerable to loss, which means bitcoin is vulnerable to loss, and therefore destruction since it becomes irretrievable.
Won’t this keep happening over time as more and more bitcoin is lost, in spite of the efforts of its owners? It’s clearly a problem for those owners, but wouldn’t this also be a problem for the network and economy as a whole, and wouldn’t it be a real loss of value, potentially a large loss?
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7 Replies
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My guess on that last point is that although this is a loss of value to the owner, the value becomes part of all other bitcoins since it means a reduction in the supply of bitcoin, the opposite of what happens with inflation.
But this vulnerability is still a problem for owners and is only going to get to be a bigger problem as the value of bitcoin rises as far as I can see.
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You are right that a lot of Bitcoins have been lost over the years but my guess is that most of the loss occurred while the value was negligible. As the value has increased and continues to increase over time, the loss will asymptotically decrease (but never go to zero) as owners will guard them with their lives! Also at Layer 2, Satoshis being sub divisible will help with network scalability so that over time, smaller chunks of value are susceptible to loss.
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Robert Breedlove mentioned that in theory if this became problematic enough, the decimals to the right could be moved out. As Saifedean has mentioned in his book, its not the number of units that matter but the buying power of each unit. So we could extend the decimals to the right, people could still accumulate bitcoin and the total supply would still be 21 million.
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It’s not a problem for the network, in fact, it’s a positive since eventually more coins will be lost than new coins being mined, making it truly deflationary. Therefore, everyone’s coins become somewhat more valuable over time as they become more scarce.
But as an individual, *you* should take steps to make sure your coins go to where you want them to go if you become incapacitated (e.g. to your family). This is not a simple problem and you need to balance security with the risk of loss.
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With bitcoin you are your own bank. That has consequences. It means that you are responsible for the security of your money. People are not really use to that. It is something you really need to internalize when you hold your own bitcoin. You need to consider both how you will recover your bitcoin if you lose your wallet (backups), and how your heirs will access your bitcoin if something happens to you (succession planning). Services are starting to become available that provide these services using multisig wallets, but they are expensive.
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No one agrees with Mark, and instead is presenting one or another apology for Bitcoin.
Mark is obviously correct; if there is a finite supply of bitcoin, and a nonzero probability that any hoard of bitcoin will be lost each year, then the number of hoards in play decreases exponentially with time. As such, the probability that at least one hoard remains never goes to exactly zero. But eventually, the probability that at least one hoard remains goes to a value much less than 1. Final loss is inevitable.
I was bothered by the same thing as Mark, until I realized that Bitcoin won’t be around forever. Sometime during this millennium, something better than Bitcoin will come along and people will move their hoards into that. Hence, even though Mark points to a real weakness of Bitcoin, Bitcoin will die of natural causes before that weakness will become fatal.***
If I may wax philosophical, there is a Zen-Buddhist truth here that I discovered only recently: In a universe that never stops changing, nothing is gained by preparing for very improbable events.
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Not to worry. Currently there are 100,000,000 satoshis per bitcoin, or in another words, fractions of a bitcoin are resolvable down to 8 decimal places. If we ever lost so many bitcoin that it starts to be a problem, it would be a simple matter to add more decimal places.
Imagine if the entire $200T economy uses bitcoin. Then, with 20M bitcoin each bitcoin would be worth $10M and 1 satoshi would be worth $0.001. In this case the total economy is 2×10¹⁵ times the size of the minimum resolvable amount of money. Now imagine all but 20 bitcoin are lost. Thus, only 1 in a million of the original bitcoin remain accessible. All one would need to do is increase the resolution of bitcoin by 6 more places. Now the resolvable bit of money would be the microsatoshi, or μsat, and we are essentially back to our original situation. In this case each bitcoin would be worth $10T, 1 μsat would be worth $0.001, and the the total economy would still be 2×10¹⁵ times the size of the minimum resolvable amount of money.
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