Lost Bitcoin may be a “gift”, but is it hindering adoption?

Cryptocurrency custody solutions have become big business over the past few years. Independent storage and security systems intended to hold large amounts of crypto on behalf of clients can attract institutional capital and pending retail investors simply because they eliminate a major fear: losing access to funds. which become unrecoverable.

Due to the decentralized nature of major blockchains like Bitcoin or Ethereum, whenever a user loses access to their wallet and does not have a backup of their private keys, the funds they contains cannot be retrieved. There is no central entity to turn to and no one can control the blockchain to allow anyone access to its funds.

Storing a private key can be tricky because it needs to be kept away from bad actors, but close enough that the user can access it if needed. Faced with the challenges associated with managing cryptocurrency, many have simply left their funds on cryptocurrency exchanges, creating massive demand for crypto custody services, to the point where America’s fifth-largest bank is offering a solution. .

Although keeping cryptocurrencies with a third party is often seen as a security risk because that third party itself can be hacked, experts told Cointelegraph that custody services are the best option when it comes to coins. lost.

Early cryptocurrency users lost cryptocurrency in many ways, including exchange hacks. These security flaws saw Bitcoin scholar Andreas Antonopoulos popularize the famous slogan “not your keys, not your coins”.

How much crypto was lost?

Cryptocurrencies can be lost in many ways, although unless someone admits they have lost access to their funds, it is impossible to tell from blockchain data. More often than not, users lose access to a wallet’s private key, which allows them to access funds within it.

There have also been instances of users sending cryptocurrency to the wrong address. Again, due to the decentralized nature of the blockchain, there is no corrective action to recover these tokens. Finally, users can pass away without letting anyone else access their funds.

Speaking to Cointelegraph, Kim Grauer, research director at blockchain forensics firm Chainalysis, noted that around 3.7 million Bitcoin (BTC) (currently worth over $140 billion) have been lost. Grauer said the estimate is a “bit old” and should be updated with additional research later this year.

Crypto-assets are often considered lost after sitting dormant for a number of years. While this method points to coins that are actually not currently in circulation, it is flawed. In 2020, for example, a wallet with 50 BTC first mined in February 2009 moved its funds to two addresses.

Michael Fasanello, director of training and regulatory affairs at the Blockchain Intelligence Group – which helps government agencies, cryptocurrency firms and financial institutions fight fraud – told Cointelegraph that it might be difficult to estimate the monetary value of lost coins because “those who suffered losses would not. always interested in sharing such information.

The 3.7 million figure represents nearly 20% of Bitcoin’s circulating supply, which Grauer says likely has an “economic impact that will affect the long-term price” of the cryptocurrency. Grauer added:

“There is also a more psychological impact. It is possible that people are more hesitant to invest in Bitcoin for fear of losing it, in which case it is not recoverable.

The Chainalysis executive added that this quality is not unique to the cryptocurrency ecosystem and “shouldn’t be prohibitive for further adoption” as there are “many ways to keep your cryptocurrency safe.” securely, either in your own possession or on an exchange”.

Speaking to Cointelegraph, Chris Brooks, founder of cryptocurrency recovery firm Crypto Asset Recovery, noted that in his experience people should be more concerned about leaving their seed phrase or private keys in paper wallets that can be thrown by mistake, rather than at hackers or scammers. Brooks said:

“You’re much more likely to move to a new apartment and lose your crypto password in the process than to get hacked.”

In March 2011, a Bitcointalk forum user started a thread, trying to add up known lost BTCs. Although the thread has gone off the rails over time, it showed how many users have lost access to cryptocurrency over the years.

These losses, as Chainalysis’ Grauer put it, can have a significant economic impact on the cryptocurrency ecosystem.

Should lost crypto be considered a donation?

Bitcoin creator Satoshi Nakamoto said lost coins are “only worth slightly more than everyone else’s coins” and should be considered a “gift to everyone”. Blockchain Intelligence Group’s Fasanello said that when it comes to coins with a limited supply, Satoshi might be right, but those with an infinite supply might see the opposite to be true.

Fasanello said that just as fiat currency loses value with inflation, so do cryptocurrencies. If a cryptocurrency does not have a finite supply, the value of lost coins will simply erode over time.

Speaking to Cointelegraph, Yuriy Kovalev, CEO of crypto trading platform Zenfuse, said that lost coins represent a hidden cost of security in the cryptocurrency space that benefits everyone else:

“The amount of crypto lost only shows that decentralized networks like Bitcoin are extremely secure, so much so that trivial mistakes can cost millions. Wallet hunters are rarely able to help except in the case of lost passwords, which further proves that the blockchain is immutable.

Indeed, most cases in which lost tokens are recovered involve lost passwords used to unlock wallets and not the private keys used to recover them. A recent case saw a computer engineer and hacker hack into a Trezor One hardware wallet that was locked because its owner forgot his security PIN.

Asaf Naim, founder and CEO of blockchain app developer Kirobo, told Cointelegraph that Satoshi’s words may be true for “minor and occasional instances of crypto loss”, but Naim added that the “law of scarcity only worthwhile if people have faith in the underlying system.If too much cryptocurrency is lost, people will stop believing in its use and intrinsic value.

Lost crypto and mass adoption

Early stories from the cryptocurrency space about lost crypto have made headlines over the years, highlighting how difficult recovering lost funds can be. One example is that of James Howells, who threw away a hard drive containing 7,500 BTC (nearly $285 million today) while cleaning his house in 2013.

Wallet recovery services have grown in popularity over the past few years, but often charge large percentages of the funds they recover. Grauer said there are industry solutions to reduce the risk of accidental loss, including “storing your cryptocurrency on a known and trusted exchange, or a dynamic wallet, similar to what you do with a bank.” .

The approach contrasts with those who argue that if a user does not control the private keys to their wallet, they do not actually own the coins in it. Speaking to Cointelegraph, Brooks of Crypto Asset Recovery seemed to agree with Grauer, however adding that “crypto can be extremely complicated”, and as such he thinks “new investors are better off with portfolios.” guard”.

For Brooks, if a user suddenly dies or suffers a serious accident, it’s easy for loved ones to claim their crypto from a custodial wallet, but difficult to do so using a private key. Kirobo’s Naim thinks the cryptocurrency recovery industry can be important, but is part of a retrograde approach:

“The main effect of so much lost crypto is that it gets in the way of mass adoption. If people don’t feel safe with crypto, they just won’t use it. It’s not acceptable that forgetting the access identifiers is irreversible.

He added that credit cards wouldn’t be as popular as they are if “there was a high chance of losing money irreversibly every time you used one”. The solution could be linked to cryptocurrency platforms and their user experience, which could, for example, set up whitelists in the same way that online banking platforms do to avoid common mistakes.

For the executive, it is “astonishing that writing words on a piece of paper or memorizing them is the best practice for security in 2022”, because it shows that “crypto does not have a safety net against cryptocurrency. ‘human error”.

The free market has tried to come up with better solutions over time, including the creation of titanium sheets on which users can write their seed phrases or private keys. These sheets are harder to throw away by accident and can often survive natural disasters. Some wallets, including Coinbase Wallet, allow users to back up their private keys to Google Drive or iCloud.

While cryptocurrency custody services can provide institutional investors with the security they need to enter the market, for users looking for an uncensorable form of money, lost crypto can continue to be a problem for the foreseeable future.

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