HODLers and Lost Bitcoins: Who’s Behind the 4M Missing Coins?

bitcoin hodl

The Curious Case of Lost Bitcoins and HODLers 

Chainalysis recently conducted a sophisticated study of blockchain wallets. Chainalysis is a respected digital forensics company in the cryptocurrency industry.  Notable Chainalysis clients include the IRS and Europol.  Additionally, law enforcement agencies and other financial agencies rely on the company to provide detailed insights into who owns the currency and how it moves around.  Chainalysis, a widely respected digital forensics company that studies the BTC blockchain, estimates between 2.78 and  3.79 million BTC are not actively traded at the moment.  The analysis, based on recorded BTC transactions, and are presumed to be lost or stolen.  

Why Do Bitcoins Get Lost?

Missing Bitcoins are commonly attributed to:

  • BTC Hoarding by HODLers
  • Careless Private Key Management
  • Criminal Activities (exa: Hijackers)
  • Permanent loss of Satoshi coins (original Bitcoins acquired by Satoshi – Bitcoin’s infamous inventor)

Do Lost Coins Materially Impact Bitcoin Value?

Lost BTC arouse strong interest due to their potential impact on BTC value.  Let’s dive deeper into how lost coins can impact BTC value:

  1. HODLer activity
  2. Pricing Integration of Lost Coins
  3. Private Key Management
  4. Missing Satoshi Coins

Does HODLer Activity Impact BTC Value?

Chainalysis estimates that 50% of lost or ‘missing’ coins belong to ‘HODLers’ who invested during the 2009 – 2010 period.  Since the revolutionary introduction of the original blockchain-based cryptocurrency, BTC, a frenzy of investment ensued.  Let’s dig in to who HODLers are and why HODLer activity maintains strong interest by the cryptocurrency community.  Today, BTC investment gained traction and is an emerging a major player in the international financial marketplace.  Early on in Bitcoin’s history, there were investors (commonly referred to as “HODLers,”) who have aroused valuation concerns due to Bitcoin hoarding.   In essence, HODL activity covers buy-and-hold strategies by cryptocurrency investors.  

Investment hoarding by HODLers has existed well before the advent of BTC.  This kind of loss is also common in analogous commodities markets with fixed supplies, notably Gold.  In spite of HODLer suspicions in the Gold market, Gold value has grown over the years.  The same phenomena is expected with BTC value, as less coins are available to mine leading to spiking demand.

Are Lost Coins Integrated Into Existing Bitcoin Pricing?

Market concern over lost Bitcoins surround its impact on Bitcoin value.  Is the market over exaggerating the losses or has the market 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.”

Careless Private Key Management Less of a Concern Today

The velocity of lost coins is slowing down due to extra private key vigilance by investors.  Cryptocurrencies like Bitcoin are anonymous, untraceable and only personally accessible with a private key.  Bitcoin private keys are algorithmically generated and can span 50+ characters in length.  Needless to say, password keys are not conducive to memorization and critical to Bitcoin access.  Once private keys are lost, access to Bitcoins and other cryptocurrencies are permanently gone.

In the early days of Bitcoin’s history, the low value of Bitcoins did not invoke security vigilance by Bitcoin owners. Infamous stories prevail.  There’s the hapless man who threw away a used hard drive with 7500 Bitcoins loaded, never to be found again.  Stories abound about investors who pass away without sharing their private keys with their heirs.  One story recounts the fruitless private key recovery efforts of a grieving family trying to gain access to an estimated $1Bn XRP investment.  Given the high value of Bitcoin today, the loss of Bitcoins due to careless private key management are expected to become less prevalent.  

Missing Satoshi Coins

The true fate of Satoshi’s coins will never be known as Satoshi has been totally silent since 2011.  As a result, it’s nearly impossible to determine if Bitcoin valuation concerns around lost Satoshi coins have legitimate credence.

Questions on the Chainalysis Methodology

The full details surrounding Chainalysis’ methodology were not disclosed and remain confidential.  A Chainalysis spokesperson shared certain details about how finding a “fork” in the blockchain led to the creation of a Bitcoin clone known as Bitcoin Cash.  When this happens investors with dormant wallets conduct transactions, paving the way for analysis.  This is how Chainalysis’ approaches an analysis on the scale and reasons behind lost coins.  

Questions on the Transactional Bitcoins Classification

A potential methodological gap with Chainalysis is a 2% Bitcoin loss classification known as Transactional Bitcoins.  Chainalysis makes the 2% assumption based on internet trawls for lost coin reports. This Bitcoin loss classification is based on direct measurement rather than statistical extrapolation.  These losses are are attributed to:

The lost coin categorization of “Transactional Bitcoins” may need to be further refined.

Questions Around the “1M Permanently Lost Bitcoin” Assumption

There is one assumption made by Chainalysis that may have serious repercussions for Bitcoin value.  Chainalysis assumes approximately 1 million Bitcoins are gone forever.  These Bitcoin transactions date from a time when it was easy to mine 50 Bitcoin with a laptop.  This assumption is a big one and, if it proves to be incorrect, the number of circulating Bitcoins could increase significantly and deliver a shock to the market.

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