In order for something to be valuable, let alone be a good form of money, it needs to be scarce. Gold, waterfront property, antiques, even baseball cards are valuable because they are scarce. Digital objects, on the other hand, such as photos, movies and music are not scarce at all. But there are some digital objects such as domain names which are both scarce and incredibly valuable.
Bitcoin is another example of a scarce digital object. By now, most investors interested in cryptocurrencies have heard that Bitcoin is a scarce digital asset, with there only being 21 million coins in circulation. But is this actually the case, or could the supply of Bitcoins actually be much more scarce?
Firstly, it’s important to note that there are actually only 17 million Bitcoins which have been mined to date. Through the process of Bitcoin mining, there will eventually be a total of 21 million mined Bitcoins, but that won’t occur until around the year 2140. So if 17 million Bitcoins were mined in the first nine years of Bitcoin’s existence, why then will it take another 120 plus years to mine the remaining 4 million?
This is because Satoshi Nakamoto, the mysterious creator of Bitcoin, designed the system so that the number of Bitcoins mined progressively diminishes as the difficulty in mining increases. This means that for the first 210,000 blocks mined (approximately four years), miners were rewarded with 50 newly created Bitcoins per block. In 2012, this number halved to 25 Bitcoins rewarded per block, and halved again to 12.5 Bitcoins in the summer of 2016. Extrapolating the time in which blocks are currently being created, it can be estimated that the next reward halving will take place in mid-2020.
BTC in circulation
But of the 17 million Bitcoins which have already been mined, how many are actually in circulation? Chainalysis is a digital forensics firm that studies the Bitcoin Blockchain. Their data estimates that between 2.8 to 3.8 million Bitcoins have been lost forever. Or more accurately, the private keys that are required to access and spend these coins have been lost forever. These numbers imply that between 16% to 22% of all existing coins are inaccessible.
Further Blockchain forensic studies have estimated the blocks created during the first few months of Bitcoin were mined by Satoshi. Based on block patterns, it can be said that 19,600 blocks were mined by Bitcoin’s creator. Multiplying this by the mining reward at the time, 980,000 Bitcoins are estimated to have been mined and owned by Satoshi. These coins have never been spent or moved, and are unlikely to be in the future, meaning that a further 980,000 Bitcoins are inaccessible by the market.
Measuring transaction volume
The Bitcoin ecosystem also has a term called “Bitcoin Days Destroyed” which is a measure of the transaction volume of Bitcoin. Days Destroyed is calculated by taking the number of Bitcoins in a transaction and multiplying it by the number of days since those coins were last spent. The idea behind this statistic is to measure how much real economic activity is occurring on the Bitcoin network. Days Destroyed can also be used to estimate the number of Bitcoins which are held dormant in deep cold storage and in the hands of strong believers in Bitcoin. Studies dating back to 2014 show that around 70% of Bitcoins remain unspent for over 6 months. A more recent study undertaken found that around 42,000 wallets each containing 25BTC or more have remained dormant since 2013. Basic maths implies that at least 1 million Bitcoins have remained dormant, although the study goes on to state that many wallets actually contain more than 25BTC and calculated that there are in fact closer to 3.3 million dormant Bitcoins.
Roughly approximating these figures, of the 17 million total Bitcoins which have been mined, 3 million have been lost, 1 million are unspent in the hands of Satoshi, and a further 3.3 million are in dormant wallets. This leaves less than 10 million Bitcoins available in circulation.
Bitcoin may be even more scarce
A research into Bitcoin wallet data has found that just 1,000 wallets contain 40 percent of all Bitcoins. Further still, 97 percent of all Bitcoins are held by 4 percent of wallets.
Of course all these numbers are guesses at best, as it’s very difficult to calculate the exact number of coins lost or to determine if a wallet containing a significant amount of Bitcoin is accessible or not. But regardless of how accurate these numbers actually are, one thing is for certain – Bitcoin as a scarce, digital asset, is much more scarce than is commonly perceived.