Lost Bitcoin may be a ‘donation,’ but is it hindering adoption?

Please fol­low and like us:
Pin Share

Cryp­tocur­ren­cy cus­tody solu­tions have become a big busi­ness over the last few years. Inde­pen­dent stor­age and secu­ri­ty sys­tems meant to hold large quan­ti­ties of cryp­to on behalf of clients can bring in insti­tu­tion­al cap­i­tal and retail investors wait­ing on the side­lines sim­ply because they remove a major fear: los­ing access to funds that become unrecoverable.

Because of the decen­tral­ized nature of major blockchains like that of Bit­coin or Ethereum, when­ev­er a user los­es access to their wal­let and doesn’t have a back­up of their pri­vate keys, the funds with­in it can­not be recov­ered. There’s no cen­tral enti­ty to turn to, and no one can con­trol the blockchain to give any­one access back to their funds.

Stor­ing a pri­vate key can be chal­leng­ing, as it needs to be kept away from bad actors, yet close enough for the user to access it when nec­es­sary. Deal­ing with the chal­lenges asso­ci­at­ed with man­ag­ing cryp­tocur­ren­cy has seen many sim­ply leave their funds on cryp­tocur­ren­cy exchanges, cre­at­ing a mas­sive demand for cryp­to cus­tody ser­vices, to the point where America’s fifth-largest bank is offer­ing a solu­tion.

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

Ear­ly cryp­tocur­ren­cy adopters have lost cryp­tocur­ren­cy in numer­ous ways, includ­ing exchange hacks. These secu­ri­ty breach­es have seen Bit­coin aca­d­e­m­ic Andreas Antonopou­los pop­u­lar­ize the famous slo­gan “not your keys, not your coins.”

How much crypto has been lost?

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

There have also been cas­es in which users send cryp­tocur­ren­cy to the wrong address. Once again, because of the decen­tral­ized nature of the blockchain, there’s no reme­di­al action to retrieve these tokens. Final­ly, users can pass away with­out leav­ing any­one else access to their funds.

Speak­ing to Coin­tele­graph, Kim Grauer, direc­tor of research at blockchain foren­sics firm Chainal­y­sis, not­ed that an esti­mat­ed 3.7 mil­lion Bit­coin (BTC) (today worth over $140 bil­lion) has been lost. Grauer said the esti­mate is a “bit old” and is set to be updat­ed with fur­ther research lat­er this year.

Cryp­to assets are often con­sid­ered lost after remain­ing dor­mant for a spe­cif­ic num­ber of years. While this method does point to coins that are effec­tive­ly 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 busi­ness­es and finan­cial insti­tu­tions address fraud — told Coin­tele­graph it may be dif­fi­cult to approx­i­mate the mon­e­tary val­ue of lost coins because “those who suf­fered loss­es would not always be inter­est­ed in shar­ing such information.”

The fig­ure of 3.7 mil­lion rep­re­sents close to 20% of Bitcoin’s cir­cu­lat­ing sup­ply, which, to Grauer, 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’s pos­si­ble peo­ple will be more hes­i­tant to invest in Bit­coin out of a fear of los­ing it, at which point it is not recoverable.”

The Chainal­y­sis exec­u­tive added that this qual­i­ty isn’t unique to the cryp­tocur­ren­cy ecosys­tem and “should not be pro­hib­i­tive to fur­ther adop­tion,” as there are “many ways to cus­tody your cryp­tocur­ren­cy safe­ly either in your own pos­ses­sion or on an exchange.”

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

“You have a far greater chance of mov­ing to a new apart­ment and los­ing your cryp­to pass­word in the process than you do of get­ting hacked.”

In March 2011, a user on the Bit­cointalk forum start­ed a thread, try­ing to add up the known lost BTC. While the thread derailed with time, it did show just how many users have lost access to cryp­tocur­ren­cy over the years.

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

Should lost crypto be considered a donation?

Bit­coin cre­ator Satoshi Nakamo­to has famous­ly said that lost coins “only make every­one else’s coins worth slight­ly more” and that they should be thought of as a “dona­tion to every­one.” The Blockchain Intel­li­gence Group’s Fasanel­lo said that when it comes to coins with a lim­it­ed sup­ply, Satoshi may be right, but those with an infi­nite sup­ply could see the reverse be true.

Fasanel­lo said that just as fiat cur­ren­cy los­es val­ue with infla­tion, so do cryp­tocur­ren­cies. If a cryp­tocur­ren­cy doesn’t have a finite sup­ply, the val­ue of the lost coins is sim­ply going to 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 lost cryp­to only shows that decen­tral­ized net­works like Bit­coin are extreme­ly secure, so much so that triv­ial mis­takes can cost mil­lions. Wal­let hunters are sel­dom only able to help in cas­es of lost pass­words, fur­ther prov­ing 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 hard­ware hack­er crack a Tre­zor One hard­ware wal­let that was locked because its own­er had for­got­ten its secu­ri­ty PIN.

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

Lost crypto and mass adoption

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

Wal­let recov­ery ser­vices have gained pop­u­lar­i­ty over the last few years but often charge large per­cent­ages of the funds they recov­er. Grauer said that there are indus­try solu­tions meant to reduce the chances of acci­den­tal loss­es, which include “stor­ing your cryp­tocur­ren­cy on a known and trust­ed exchange, or hot wal­let, sim­i­lar to what you do with a bank.”

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

To Brooks, if a user sud­den­ly pass­es away or suf­fers a seri­ous acci­dent, it’s easy for loved ones to claim their cryp­to from a cus­to­di­al wal­let, but it’s hard to do so through the use of a pri­vate key. Kirobo’s Naim believes the cryp­tocur­ren­cy recov­ery indus­try may be impor­tant but is part of a back­ward approach:

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

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

To the exec­u­tive, it’s “amaz­ing that writ­ing down words on a piece of paper or mem­o­riz­ing them is the best prac­tice for secu­ri­ty in 2022,” as it shows “cryp­to has lacked a safe­ty net for human error.”

The free mar­ket has attempt­ed to come up with bet­ter solu­tions over time, which include the cre­ation of tita­ni­um sheets where users can write down 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 on Google Dri­ve or iCloud.

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

Source link

Please fol­low and like us:
Pin Share

Leave a Reply

Your email address will not be published. Required fields are marked *