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.”
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 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.
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.
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.
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.
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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.” Source: Cointelegraph...