What happens to lost Bitcoin?

One of the best features of the way digital assets are designed is that despite addresses being publicly visible, they’re theoretically unhackable, except for when someone invents quantum computers that can do this particular problem.

One of the worst features of the way digital assets are designed is that if you lose the key to your digital assets, you can’t get them back.

Humans are the weak point of any system. There are no locksmiths in the crypto ecosystem now who can brute force their way back into a wallet address for you.

When is Bitcoin considered lost?

When is lost, lost? Well, a report from digital asset forensic firm Chainalysis considers any Bitcoin that hasn’t moved from its current set of addresses for five years or longer as “lost”.

That may not be a safe assumption, however, a lot of people who bought in 2017 have wallet addresses that old they still have the keys for.

How much is lost?

Estimates vary on how much Bitcoin is lost already, and how much is being lost even as you read this Cane Island Digital Research produced a report which suggests that 4% of available bitcoin is lost each year, and only 14 million of the 21 million theoretical maximum will ever circulate. A report from Chainalysis estimates that 20% of currently mined bitcoins seem to be inaccessible or lost by their definition.

However many are “lost”, these Bitcoins represent over 100 billion dollars of value. Indeed, the anonymous creator(s) of Bitcoin (“Satoshi Nakamoto”) mined around 1,000,000 bitcoins which have never been cashed out or traded. It’s lucky for Bitcoin that they don’t come back and spend them because that would utterly destroy the market.

Lost Bitcoin

Largely, lost bitcoin doesn’t go anywhere, because moving them would require someone to have the key. So they just sit there. Losing the key could be anything from losing a USB drive and not having a paper record of the passphrase, the dog eating your passphrase, a hard disk crash… and this is why it’s good to start writing your wallet passphrases on paper in a safe place.

However, you can lose Bitcoin in other ways. For instance, did you know that other blockchains share the Bitcoin address format? Specifically, blockchains such as Bitcoin Cash that “forked” from Bitcoin. If you send Bitcoin to the right address but the wrong blockchain, it’s gone. It’s like sending a letter to “20 High Street” but getting the town wrong.

It sucks that as a user of crypto you have to know this (and a wallet app should help out), but checking the blockchain of an address is an important step for verification. Be especially wary of Ethereum, btw: Binance Chain addresses (BEP20) look identical to Ethereum ones (ERC20).

Another way you can lose your bitcoin (and this is a bit drastic, but it still happens) is to die. Make sure that if you have crypto holdings, your next of kin know where to find them – otherwise that’s a big part of your estate they’re not seeing again.

You can also throw digital assets away by sending them to a specific address (known as “burning” them). I can’t imagine why you’d want to, but people have been sending “tips” to the Bitcoin genesis block for over a decade. And the inaccessible Ethereum address 0x0000000000000000000000000000000000000000 holds over $80m worth of tokens now.

Stolen Bitcoin

If you don’t have control of your own keys, then your Bitcoin is only as safe as the institution holding them. If your money is at an exchange or with a third party, make sure they have bank-grade security on their wallets, and deposit insurance against hacking. Many Bitcoins were lost from dodgy early exchanges, with early leader Mt Gox being the prime example. Exchanges are under attack all the time.

If you do have control of your own keys, then people can only get your Bitcoin if you give them your keys or send Bitcoin to an address they control. Probably best if you don’t do that.

How to keep your Bitcoin safe

Apart from due diligence on any company you send it to, the main thing you can do is to check the receiving address before you press “send”.

Also, check the transaction fees you’re going to be charged – both the sending fee and any withdrawal fee if you’re withdrawing from an exchange. The final confirmation screen for the payment should give you this information. If the fees are weirdly high, you might want to do the transaction later when things have calmed down.

One thing to beware of is that some companies can’t receive Bitcoin transmissions direct from exchange addresses. If this is true, there will be a clear warning about it when they give you the receiving address and (probably) a QR code.

Safely storing your Bitcoin means safely storing any USB drives, but also means finding a safe place for your wallet address – paper is safest, but maybe make two copies where the dog can’t eat them! Remember: HARDWARE WILL ALWAYS FAIL!

OH NO! THE WORST HAPPENED!

“I sent it to the wrong address”

The transaction can’t be reversed. If you know the owner of the address you sent it to, you can ask for them to send it back, but you can only ask them if you already know their contact details. There is no way to get from a Bitcoin address to contact details without additional external data. Otherwise, there’s no way to correct this problem.

“My assets were stolen”

If this is assets at an exchange, then the exchange owes you big-time and should have procedures in place, though the loss may be too big to handle for them. You should follow the issue and lodge a complaint/claim to make sure the authorities/exchange know what you’ve lost. You’re going to be quite reliant on them to sort this out if the exchange doesn’t do it voluntarily.

If assets were stolen from your wallet through a hack, then it depends on the circumstances of the hack: did you give someone else unauthorised access? Or was it a software bug? Is the wallet provider liable? It’s probably best to shout a lot about this but to expect that your assets are gone.

If your assets were stolen in person under threat of force, then you should report it to the police and take their advice, giving as much information as possible.

For any stolen assets, it’s not impossible that the authorities will find who did it, access their wallets and return the money, but it’s probably best not to rely on that. It’s a good reason to make sure your loss is reported.

Transaction is stuck

Transactions are visible on the blockchain, but in rare circumstances, a transaction can fail to complete; maybe a fee was too low, or there’s a technical blockage somewhere. There may be a “cancel” button on the status page you can get from your wallet or exchange.

If this happens from a centralised exchange, you should report it to see if the transaction can be cancelled from their end. Customer support is your friend.

Lost or Damaged Wallet

This can happen often: phones break. Make sure you have the passphrase written down: some wallets only generate this when you create it and are usually very clear about your writing it down – in fact, they insist on it by testing you on it afterwards.

This means that if you can’t find the passphrase, it’s probably around somewhere unless you just decided rules don’t apply to you when you created the wallet. We’re sure you’re more sensible than that.

If you find the passphrase, then you can reinstall the wallet software, import your keys using the passphrase and hopefully regain access. You don’t have to install the same wallet, and you can import your private keys to multiple wallets: the different wallets won’t even know about each other.

Payment for goods or services that weren’t delivered

The fact that a payment was in digital assets doesn’t alter whatever contractual relationship between you and the vendor might be. Complain using the usual channels.

Security Tokens – a new approach

A new type of digital asset is “security tokens”. These regulated tokens represent a share in a real-world asset. The newer security tokens have a system where all holders of wallet addresses are whitelisted. This means they know who’s holding each token (rather like the stock exchange knows who owns each share of a company). It also means that tokens cannot be sent anywhere unauthorised, and if you lose access you can apply to the issuer of the tokens to be revoked and reissued somewhere handier.

The price for this security is lack of anonymity of course: it’s the opposite of decentralisation.