Lost Bitcoins Were Not Meant To Be Easily Recovered

There have been stories of people losing their digital asset, Bitcoin (BTC), for careless reasons. There is the story of a Welsh man who “accidentally” (we don’t know for sure) threw a hard drive away that contains approximately $80-$100M+ worth of BTC. The price actually will be worth plenty more or even less based on market value. The most common incident involves holders of BTC losing their private key to their digital wallet. Now think of it like losing your apartment key. It is different though because if you don’t have a duplicate you can always go to the apartment manager for a master key to open the door. In Bitcoin, unfortunately, there is no master key that unlocks all digital wallets. Other instances of unrecoverable BTC happens when the holder of a digital wallet dies and no one else has access to it. Unless there is a next of kin to claim the inheritance, it is as good as gone unless the private key can be provided to recover the coins.

You can still recover your BTC even if the private key is lost, provided you took the required measures. You must have the seed phrase generated during wallet creation. The problem is if you don’t have both then your BTC will not be recoverable based on the blockchain’s inherent design. That is because all private keys and wallets are unique, and since the blockchain is decentralized there is no master key or main administrator to support users. Incidents that involve hacking would not be considered lost BTC because the hackers will most likely send the stolen coins to another wallet and then try to lose anyone tracking the BTC by using various digital exchanges. In other words, that BTC would be considered stolen rather than lost, and it could end up back in circulation if it were sold to an exchange. This is why it is important to make backups of both the private key and seed phrase, but store it in a secure location and not just some random cloud drive. Consider using hardware wallets, removable hard drives, thumb drives and other storage devices that can be locked up in a vault (you get the idea).

Is it easy to lose your private key? The answer is yes, when considering the circumstances. If you store your private key on your local hard drive without a backup copy, if that hard drive should fail then it could mean game over. Your savior would be the seed phrase of the digital wallet or what is called the recovery phrase. This is provided to the user during the creation of the digital wallet, when the private key was generated. This contains 12 words in Bitcoin (also called the mnemonic) that must be provided when recovering the private key. Another way a user loses a private key is if it was stored online and never exported to an offline location. If the online service were to fail with no backup system, the private key will be gone as well.

Whatever the story is, lost BTC lead to less of the supply of the cryptocurrency. According to Chainalysis, an estimated $35,000,000,000 (price is volatile so this is not a fixed value) in Bitcoin (BTC) is likely to never be recovered. This was based on their report that 20% of Bitcoin’s total supply of 21M BTC has not moved for five years or longer. According to the report, that would be 3.72M BTC based on a market valuation of $9,408.60 (as of the market value when report was published). It is also assumed that 4M BTC in total, including the BTC in the report, may never ever be recovered unless there is protocol which will allow the lost coins to be released back into circulation. That is not likely unless the Bitcoin community in general come to a majority consensus. The Bitcoin blockchain does not support releasing lost BTC as of Bitcoin Core 0.20.0 (Released in 6/3/2020). When we deduct the 4M BTC, that means there will be only 17M BTC.

Holding a digital asset like BTC requires plenty of responsibility in return for financial independence. The question then is why would anyone even want to own Bitcoin if it cannot be easily recovered, has no customer support like a bank and no master key to unlock it if the private key is lost? That should make it all the more obvious why it is important to own Bitcoin. Only you can have control of your BTC. The government cannot freeze it and prevent you from storing value on the blockchain. You have freedom from bank policies which regulate finances (e.g. withdrawals, remittances, loans, etc.). The only thing a person must do to have this benefit is to secure their private key and seed phrase. Humans are not perfect and very prone to mistakes, so is it even possible to have a system like this?

We have to go back to the fundamentals of Bitcoin and why it was designed that way. Remember, its founder Satoshi Nakamoto developed a system of direct peer-to-peer payments without relying on a trusted third party. It is also decentralized so that it cannot be manipulated and controlled by a single entity. The way to do this is give full control of money to the users and establish a platform that is permissionless and trustless for exchanging value. The blockchain provides a cryptographically secure platform of trust among strangers who want to transact because it doesn’t require them to know each other or trust an arbiter to exchange value. Instead they use a private key to authorize transactions under their digital signature and verify that they are indeed the holder of the BTC. The reason lost BTC cannot be recovered is because it will require the unique private key that belongs to its owner. If that was lost, the BTC can still be recovered using the seed phrase. Until there is a chance at recovering BTC, users must be responsible for their digital assets. All it requires is keeping a digital wallet with a private key, in a safe and secure manner.

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