What happens to lost bitcoin?

What happens to lost bitcoin?

SatoshiLabs

Mar 25 · 9 min read

Every year, millions of dollars worth of bitcoin and other digital assets are lost. In most circumstances, these coins cannot be retrieved and permanently exit the currency’s circulating supply. More often than not, lost coins can be traced back to user error, so let’s take a look at how to avoid costly mistakes.

Where the missing coins go

Unlike fiat currencies like the US dollar, Bitcoin was designed to have a limited supply. While more bank notes can always be printed by the Federal Reserve, new bitcoin cannot be issued once all 21 million coins have been mined.

Lost and destroyed Bitcoin further shrinks the currency’s maximum supply. According to Cane Island Digital Research, 4% of available bitcoin is lost each year. Despite Bitcoin being designed with a limited supply of 21 million coins, Cane Island estimates that a maximum of only 14 million bitcoin will ever circulate due to the rate at which coins are lost.

A report cited by the New York Times states that, of the 18.5 million bitcoin mined so far, an estimated 20 percent appear to be inaccessible or lost. At the time of the NYT report, the value of this inaccessible bitcoin was somewhere in the ballpark of $140 billion USD. Proponents theorize that lost coins only serve to increase the value of the remaining currency, as they increase Bitcoin’s scarcity.

How can Bitcoin get lost, stolen, or destroyed?

There are a few ways in which bitcoin can get lost or destroyed. The most common of these boil down to mistakes made when storing or sending the asset.

When sending bitcoin from one wallet to another, the user is asked for a string of 26 to 35 characters which serves as the recipient’s address. Most wallets are actually extremely robust when it comes to making sure that this alphanumeric string matches the public key of a cryptocurrency wallet that actually exists. In other words, sending Bitcoin to the wrong address due to a typo is exceedingly rare.

What is far more common, however, is sending bitcoin to the wrong wallet as a consequence of getting two addresses mixed up. A user might, for instance, send bitcoin to an address belonging to a fraudulent actor rather than the wallet address of a family member. They could also accidentally send bitcoin to a wallet they previously conducted business with rather than to the intended recipient of a new transaction. As long as someone has access to the receiving wallet, those coins should still remain in circulation.

Bitcoin can also be sent to burn addresses or wallets that people have lost access to. Since bitcoin is immutable, there is no way to undo these transactions. Burn addresses, in this context, are those which belong to wallets that are virtually impossible to spend coins from. Sending coins to these addresses is equivalent to putting money into a safe that no one will ever be able to open.

In some instances, cryptocurrencies are intentionally sent to burn addresses. This process is known as “burning”. Some crypto assets use unspendable addresses in order to prove they are limiting the supply of their own currency. There is even a consensus mechanism known as proof-of-burn built around this process.

People frequently lose bitcoin due to how they store them. For instance, many people store their bitcoin online on exchanges. In doing so, they are relying on the exchange to keep their assets secure. While there are certainly reputable exchanges operating in the world today, there have been a plethora of cases throughout the last decade where exchanges have stolen their users’ assets or failed to prevent hackers from doing so.

According to Atlas VPN, blockchain hackers stole nearly $3.78 billion USD worth of digital assets across 122 attacks in 2020. These attacks included notable examples such as hackers stealing around $150 million USD in cryptocurrencies from an exchange in Singapore which stored a portion of its assets in hot wallets.

When you store a cryptocurrency like Bitcoin, you can either do so by storing your assets in a hot wallet or a cold wallet. The former refers to wallets which are internet-connected, offering increased accessibility. They can easily be used without any dedicated hardware and often take only a few minutes to set up. However, this storage method is vulnerable to breach.

Cold wallets, on the other hand, are ways of storing your cryptocurrencies offline. They are much more secure, as they prevent hackers from gaining access. However, not all cold wallets are equally user-friendly. A significant amount of bitcoin has been permanently lost due to people losing the private key which grants them access to their wallet. In addition, there have been many cases of hardware being misplaced or failing where the user didn’t create a backup, making the funds impossible to retrieve.

Every year, there are hundreds of stories about people losing their private key or throwing away a drive that had their Bitcoin wallet on it. This year, for instance, a programmer in San Francisco made headlines when he found himself locked out of an encrypted drive with a reported $220 million USD worth of bitcoin stored on it. According to the article, he only has two remaining attempts to input the correct password before his coins are permanently lost.

Zombie coins are those with addresses that have not had any outgoing transactions for years yet could theoretically still be accessed. One such address is associated with the infamous Mt. Gox hack. This address has been holding 79,957 bitcoin since 2011, and no one knows for sure if those coins will ever re-enter circulation. It stands to reason that the owner may be deceased or have lost access to their wallet. At today’s bitcoin price, the current holdings of this wallet address are worth more than $4.8 billion USD.

How to keep your bitcoin safe

Since most cases of lost bitcoin can be chalked up to user error, the good news is that keeping your assets safe is relatively easy once you know what to look out for.

When sending bitcoin transactions, the first thing to pay attention to is the recipient’s address. As we covered in the previous section, most wallets are effective at preventing you from sending a transaction to an address that does not actually exist. However, you do have to consciously make sure that you have not mixed up two valid addresses. For instance, you might have an old address in the recipient field which you forgot to change.

Double checking that you have the correct address is crucial, as the crypto industry is rife with phishing scams which attempt to deceive people into sending digital currencies to their address. These scammers often pretend to be an authority or someone you know. Once you send bitcoin to them, there is no way to undo the transaction.

Further, fraudulent browser tools and malware can make it look like you are sending bitcoin to the right recipient when you are actually sending your money to a scammer. In order to ensure that you are not victim to malware or fraud, it is important to have a way to know exactly what address you are including the transaction..

Some physical storage wallets, such as Trezor, protect your bitcoin by allowing you to verify the transaction address you are signing, through a trusted display. This means that even if malware or a fraudulent browser extension changes the address you see on your screen, Trezor will still display the actual address so that you can cancel the transaction.

The next thing to do when conducting a transaction is to check that you are setting an appropriate fee. With Trezor, optimal fees are calculated according to estimated confirmation times, or you can set a custom fee of your own. Some crypto wallets auto-fill fees or suggest ones which are grossly overstated so it’s a good idea to look up current fee confirmation times to work out how much to spend.

Double checking the fee is important as there have been some cases in the past where people have accidentally sent small transactions and paid exorbitant fees. For instance, Decrypt reported that an address paid over 2.6 bitcoin in fees just to send 0.01088549 BTC. Further, setting too low a fee can slow down your transaction or cause it to become stuck. If this happens, Trezor’s replace by fee feature will help you increase the fee to one that will confirm quicker.

When storing cryptocurrencies, the safest option is to opt for cold storage by using a hardware wallet. These are far more secure than the hot wallets that you find online. By storing assets on secure hardware that is not connected to the Internet, you are able to mitigate any potential risk of breach.

In order to avoid losing access to your bitcoin in the event of a misplaced device or hardware failure, it is important to have a backup solution in place. This solution can be as simple as having a backup drive that stores a copy of your wallet. However, you still run a risk of the device failing or being compromised when you connect it.

Cryptocurrency storage solutions such as Trezor let you to store your cryptocurrencies offline, allowing you to avoid the risk of having your assets stolen. Trezor is also equipped with a way to regain access to your coins should something happen to your physical device.

When you first use a Trezor, it will generate a recovery seed that is 12 to 24 words long and lets you recover all the coins you store on it. It is important to keep this recovery seed secure in physical form such as handwritten on paper — never store it digitally. In the event that you cannot access your device, you can use this recovery seed to restore access to your bitcoin. The latest Trezor Model T can even create a split backup, called a Shamir backup, which will recover your coins even if you lose a part of it.

What to do if you’ve lost coins

If you happen to find yourself in a situation where you have lost access to your bitcoin, your best course of action depends on the cause.

If you have sent bitcoin to the wrong wallet address by mistake, there is unfortunately no way to directly reverse the transaction. In this situation, your best bet is actually to contact the wallet holder and ask if they would be willing to refund the transaction.

One way to do this is using the OP_RETURN feature to send a message to the address explaining the mistake. Understand that this method will make any sent coins unspendable, so make sure only pay the necessary fee.

While this is a complete shot in the dark, it may be worth trying if you have no other options.

In the event that your bitcoin was stored on a hot wallet or on a breached cryptocurrency exchange, your next course of action is probably a legal route. Unfortunately, there are very few paths for pursuing stolen bitcoin but it is best to alert the community with details of the transaction.

That said, there might be light for a small portion of users in this category. Some people are only now being offered a route to compensation for a portion of their holdings that were stolen in the infamous Mt Gox breach of 2014.

If your bitcoin is stuck because you’ve set the wrong fee for a transaction, you can leverage a method known as Replace-by-fee (RBF) in order to bump it — if your wallet supports this feature. Doing so allows you to replace the stuck transaction with an identical one that offers a higher fee and is more likely to be confirmed. Check out our guide to fixing bitcoin transactions through RBF.

If you were using a cold storage wallet and have since lost access to it, you have a few options. In the event that the hardware has failed or become damaged and you do not have a backup, you may have some luck letting a reputable data recovery team have a crack at it.

If you’re using a Trezor, you can regain access to your wallet by inputting your recovery seed. Trezor’s online user manual is easy to follow and can help you navigate the recovery process so that you can regain access to your Bitcoin.

Published at Thu, 25 Mar 2021 16:02:40 +0000

ALTCOIN NEWS BITCOIN NEWS BLOCKCHAIN NEWS CRYPTOCURRENCY NEWS ETHEREUM NEWS EXCHANGES NEWS LITECOIN NEWS MARKET NEWS REGULATION NEWS
Gamestop
Important Facts of Gamestop Entering into Cryptomarket
UniFarm
UniFarm Raises $2 Million After Launching Innovative Farming Pool Featuring 17 Top DeFi Projects
XRP, FTX Token, Waves Price Analysis
#HODL #SHILL YOUR SH*T COIN! #SPOTTED! #VIRALS BITCOIN SCAM WATCH FUN QUIZZES
bitcoin-scams
Top 5 Bitcoin Scams you should be aware of!
Instagram Influencer Accused of Scamming Followers Out of $2.5M In Bitcoin Scams
five assorted color cars parked inside room
WHAT WILL YOU BUY WITH YOUR BULL MARKET GAINS?
FAQ'S INTRODUCTION TO BITCOIN INTRODUCTION TO BLOCKCHAIN INTRODUCTION TO CRYPTOCURRENCY EXCHANGES
Cryptocurrency
4 Amazing Perspectives of Cryptocurrency Characteristics, Everyone Should know
How bitcoin Transactions Work
Bitcoin For Beginners: 5 Plus Important Reasons Why You Should Understand The Future Impact of Bitcoin On Society
blockchain
5 Important points about Blockchain, Cryptocurrency, and Bitcoin(Safe or Not)
EXCHANGES WALLETS
coinbase
4 Best Crypto Coins on Coinbase
flat lay gadgets beside bearded man
ULTIMATE LIST : BEST BITCOIN AND CRYPTOCURRENCY WALLETS 2021
person shopping online
2021 BEST BITCOIN AND CRYPTOCURRENCY HARDWARE WALLETS TO STORE YOUR COINS SAFE

Get more stuff like this
in your inbox

Subscribe to our mailing list and get interesting stuff and updates to your email inbox.

Thank you for subscribing.

Something went wrong.