Bitcoin Q&A: Lost coins and the deflationary experiment


“Do you think there is a problem with bitcoin
being used as a currency or store-of-value… [when] it can be easily destroyed
by losing the private keys?” “Would it be a good idea to make a rule that bitcoin
which hasn’t moved in fifty or a hundred years… will be re-distributed to miners again?” This is a two-part question.
Let’s look at the first part. Do I think it is a problem for bitcoin to be used either
as a medium-of-exchange currency or store-of-value… if bitcoin keys can be lost? No, I don’t think it is a problem. The loss of
keys and bitcoin from circulation will simply… reduce the inflation rate, [while new] currency
is [still] being created through mining. At some point, the inflation rate will go down to zero.
Any keys lost will cause a deflationary effect. Bitcoin is a cryptocurrency that is already deflationary,
so it will become a bit more deflationary through loss, which will increase the value of the
[remaining bitcoin] held by everyone else. When someone loses their keys…
Let’s say I lose the keys to a hundred bitcoin. (Let’s hope not, because that is a lot of money.) What happens to the Bitcoin economy as a whole?
There is a hundred [fewer] bitcoins. Effectively, the activity of the entire economy is
now divided by a smaller amount of bitcoin. Therefore, that smaller amount of bitcoin
has more value, in pure economic terms. I have given a “gift” a one hundred bitcoin to
everyone. Its value has been redistributed, increasing the value of everybody’s
bitcoin by the same proportion. Essentially, every time someone loses, it is like they
are giving a gift to everyone who still has their keys. Also, there is an interesting effect. As the value of
bitcoin increases, [the risk of loss] is the incentive… for people to be more careful with their keys. What they hold will have more value.
But the bottom line is, it doesn’t matter. Think of bitcoin the currency as a unit of measurement.
If I measure your height in inches versus centimeters, I may get two different numbers,
but has your height changed? No. The unit of measurement changed.
The same thing applies to currency. If I take the size of the economy and divide it
by 21 million bitcoin, or one million bitcoin, I will get two different results, but has
the size of the economy changed? No. The value of each bitcoin changes because I’m
[pricing] more of the economy into [each bitcoin]. The value of bitcoin will increase,
but it is just a unit of measurement. The value isn’t in the bitcoin,
the value is in the economy. If you think of bitcoin the currency as a unit
of measurement for the value of the economy, it makes sense; when you change the unit of
measurement, it doesn’t change what you measure. We could lose almost all of the bitcoin, down to
one bitcoin left for the entire world economy. At that point, we would need to subdivide a satoshi
into smaller units in order to have enough granularity… for your measurement. Other than that, nothing changes. We can change the
protocol to introduce smaller units, like millisatoshis. In fact, we already see millisatoshis
implemented on the Lightning Network. So it isn’t a problem if we lose keys. The second part of your question is also interesting. Would it be good idea to make a rule that bitcoin which
hasn’t moved in fifty to a hundred years is redistributed? Well.. That might be a good rule, but I would
guess that no one would agree to that rule. As a bitcoin owner myself, I would
not agree to that rule for two reasons: setting an arbitrary deadline to redistribute funds
if I haven’t moved them, means I will need to… [consider] that as part of long-term
cold storage and inheritance planning. Fifty years is within the lifetime of a person.
One hundred years applies an economic impact… First of all, bitcoin which [was lost]
will be brought back into circulation. This may have a significant impact on the economy
in the future. That will have an inflationary effect. Not only that, but who do you redistribute it to?
If you redistribute to the miners, you are giving them… incentive to break the rules. [This would be] economic redistribution to a narrow
group of current participants in the economy. Why not give it to everyone?
Then political and economic questions come up. The simple answer is, we don’t need to do that. The cryptographic keys and algorithms
used in Bitcoin do not last forever [anyway]. At some point, the elliptic curve digital signature
algorithm (ECDSA) and SHA-256 will be obsolete. Maybe in ten or twenty years;
certainly less than fifty years. They will no longer be strong enough to protect
coins that haven’t been switched over to… a stronger cryptographic algorithm. All bitcoin will need to be recycled from time
to time into better cryptographic algorithms, due to the development of quantum computing and
mathematics [affecting] the discrete logarithm problem, or perhaps some other development
that we don’t know about yet. All cryptographic systems have a life cycle,
an expiry date. We don’t know what it is, but we know that they don’t last forever. Whether we like it or not, at some point,
if the cryptographic algorithms become weak, people will be able to break those
keys and retrieve those coins. Interestingly enough, that would be a better
policy than [redistributing them] to miners. It [creates] an economic incentive to break keys
and test the security of the Bitcoin system. The people who get the money will be those who put
effort into breaking keys with their quantum computers. Essentially, it creates a bounty for testing the system,
and rewards people who [exercise their skills]. So [a redistribution event] will already happen. Next question comes from Jen:
“Many people assume that some coins are lost forever.” “But nobody [really] knows. The keys could still exist.
If Satoshi holds more than 2% of the maximum supply, is there a danger from centralization of power
[through bitcoin ownership] in unknown hands?” The same danger that exists in any monetary or
economic system from concentration of power… in a few hands. That concentration of bitcoin, if Satoshi is still alive,
has the keys, and wants to use them, is quite extreme. It is more than you see in other economies.
Of course, politically, it is a very different scenario. In many economies, wealth has been acquired through
various forms of exploitation, dictatorship, war, etc. The wealth that Satoshi potentially accumulated
[was from] inventing and investing in early-stage, very risky technology that nobody believed in. That is a different political situation. But again, I can
understand why people might be concerned about that. We have no way of knowing. The market would
incorporate that information fairly quickly. If some of those coins started moving,
we would probably see a response by the market. There are all kinds of conspiracy theories and
discussions about who has those coins now, whether [the keys] still exist. I am not interested in exploring those theories.
We will let the market find out for itself. “Has there ever been a deflationary currency
experiment before? Do we need inflation?” “Why would you buy anything if you would increase
your purchasing power by holding? We need inflation.” “How do we create that within Bitcoin?” There have been deflationary economies, but most
of the ones being studied by economists are facing… deflation in the [midst] of the government’s
unlimited ability to print more money. That deflation is not caused by a restriction in supply,
but instead by a collapse in demand in the economy. Deflation is a symptom.
The question is, what is it a symptom of? If the only economies you’ve studied with deflationary
characteristics are in fiat, then deflation is always… the symptom of a collapse in demand
because the [currency] supply is infinite. If you have a deflating economy,
then [they will] print more money. We have seen this example
in Japan, even in the United States. When you have deflationary tendencies,
the government starts printing more money. The only way it would still be deflationary, while you are
printing unlimited amounts of money to increase supply, is because there was a collapse in demand. A collapse in demand is a bad thing,
but deflation is not the bad thing. In traditional economics, deflation is always seen as
a bad thing because it is the result of demand collapse, where supply is not limited in any way. Deflation in Bitcoin is a very different thing. It is caused
by a reduction in supply, not a collapse in demand. It is caused by very robust demand meeting
limited supply and technological advancements. That form of deflation is qualitatively very different
from deflation due to a collapse in demand. Without a collapse in demand, deflation isn’t a bad thing.
Allow me to demonstrate: I currently have a computer… that I purchased for about $1,500. It contains many orders of magnitude more processing
power than the supercomputers of the 1980s. Over that time, the cost of this technology
(laptops, phones, cameras, etc.) that we use… has collapsed in [price]. This deflationary collapse was not driven by
a drop in demand, but by a very robust demand. Technology is offering better and better products
where Moore’s Law applies, supply is restricted, but demand is very robust. That is a deflationary environment caused by
a healthy market, not a recession or depression. In that environment, why would I buy a laptop now
if I could wait three years [to buy a much better laptop]… for the same amount of money? Presumably, then I would never buy a laptop.
I would just keep the same one forever. This applies to every technology out there. Why would I buy a device now when I can
just wait two years for an even better one? But we see that, in technology, people
don’t [usually] postpone purchases like that. Instead, they [take] advantage
of the deflationary system: spend some money now, but also save for the future. The money they save for the future maintains value, while [the money they spend] on a laptop or mobile… becomes a better purchase in the future. Saving isn’t necessarily the same as hoarding. In my experience with bitcoin, I have become
a better saver, but I have not stopped spending. I still spend in bitcoin on a regular basis in order to
use it as a currency, because I work with it every day. I also earn it as a currency every day.
My “hoarding” instinct isn’t as acute. I am in the economy of cryptocurrencies,
I am not just buying it as an investment, burying it in cold storage. I am earning and spending it for my business
every single week, so my attitude is very different. I don’t find that I am restricted in my spending by
the idea that it will have greater value in the future. Deflationary economies are bad when currencies have
infinite supply and a catastrophic collapse in demand. That is not the case with cryptocurrencies like bitcoin,
which has a limited supply. It is a very different thing.

45 thoughts on “Bitcoin Q&A: Lost coins and the deflationary experiment”

  1. The decimal places for bitcoin is unlimited. So even if bitcoin is 1 trillion per bitcoin, we will just add more decimal places until we get a small enough (per satoshi) value that we can transact in.

    Edit: There is no need to redistribute those inactive coins if your reasoning for it was that the satoshi value would one day be too high to transact in.

  2. Now i believe 1 bitcoin wil be worth 1.000.000 dollars within a decade. There is too many facts for it not to be worth that much.

  3. Hi Andreas. Thank you for your explanation on the deflationary economy question. I have a related question: In an economy where BTC is the prevailing currency, any debt will be denominated in BTC and because of the deflationary nature, the principle of the debt will increase over time. If this increase is more than the interest rate of the debt, then debtors will become bankrupt by default. My assumption is that debt is necessary for any economy to finance business and infrastructure investment. I agree that too much debt is a problem (like the current global situation) but an economy with no debt is hamstrung. Your thoughts?

  4. Gresham’s Law states that “bad money drives out good.” If Bitcoin is a deflationary, hard currency and therefore good money, shouldn’t we anticipate a preference for Bitcoin as a store of value rather than a medium of exchange? Dollars, Euros, Yen, Rubles, Rupee, & Peso get spent; Bitcoin are saved??

  5. Great video. The topic on inflation is definitely a concern when talking to skeptics. They proudly say inflation causes money to be invested but that is not that true. The majority of people save their money, not invest it because investing in your economy doesn't mean you are automatically a winner, you could lose it all. Saving money will always be needed.

    We do save bitcoin (deflationary currencies) and have an incentive to save more, perhaps, but in reality we don't want money, we want the things money can get us. Even when you are incentivizing to hoard your money, it will be spent eventually for what the person really wants.

    Then you have the deflation on demand which you talked about which IMO is the final nail in the coffin to this argument as to why deflationary currencies are terrible.

  6. “So if the keys to satoshi’s wallet is not currently protected in a way that will allow it to be transferred to a safer technology, then we can count on new tech one day breaking the encryption of satoshi’s wallet.” Truce (edit) and im not saying that it would necessarily be a bad thing by that point but ehhh.

  7. The best Bitcoin FUD buster there is, you should write a book solely based on destroying all the FUD out there. Personally I can think of more than a few (mostly annoying) people I'd buy the book for.

  8. I disagree that loosing private keys is gift to all other bitcoin holders. The problem is it is impossible to prove that a private key is lost and there will always be some uncertainty about whether someone has it or will one day have it, so we can’t effectively realize this gift.

  9. Hey great content Andreas! Been watching your videos for a while to learn more about the finer points of crypto. I'm an enthusiast and investor since mid 2017 and it's been cool watching the space mature since then. I continue to inform myself. I wanted to ask if you heard of Datchat and if you had an opinion of it as a project?

  10. If in the future mining becomes unsustainable or crypto algorithms be obsolete bitcoin can very easily be transferred via LN to another protocol and keep its value with mathematic formula.

  11. how can lost keys a to the value? know one knows those keys are lost therefore can't include them in any calculation. Can you presume a wallet not touched in 50 years is presumably lost? perhaps…

  12. We definitely need a better, more fool proof way to self-store our crypto. Up coming custody solutions will probably banks alive and well for the foreseeable future until we do.

  13. wow man, your explanation on deflationary currency blew my mind. It was the last hurtle for me, which I never had an answer for until now. Thank you!

  14. I've annotated an excerpt on DEFLATION in The Ethics of Money Production by Jorg Guido Hulsmann. It helped my understanding, hope it will help someone else too! https://www.reddit.com/r/Bitcoin/comments/art0am/empirical_evidence_does_not_seem_to_warrant_the/

  15. Loss of keys doesnt mean everyone gets a gift. It's still considered in circulation even though there is no access to it. There is no BTC burn where quantity is remeasured.

  16. I swear I watched at least the first two questions and answers in a previous video. Am I the only one that remembers that?

  17. what about investments? who will invest if holding a strong deflationary Bitcoin is the best investment? This will make interest rates explode in order to compete for funds. Will innovations be stifled by a strong deflationary Bitcoin?

  18. I nominate the term “ANTOSHI” for the more atomic unit. Ie what if each satoshi had another 8 decimal places and each of those units would be called an ANTOSHI

    – ants are small
    – it’s an homage to Andreas Antonopoulos

    I first thought “SUBTOSHI” would be a good word but it sounds too close to “SATOSHI”.

  19. 7:00 I never thought about that, I hear all the time that the BTC lost are lost forever, but it make total sense that at some point in time the weaker protection will be forced.
    I can image potential situation where that could be a problem like it you stay in the coma for decades or freeze yourself a few centuries ;).

  20. Currency inflation encourages consumption and debt. Currency deflation (not caused by debt deflation or a credit crunch) encourages saving and investment. Rich economies are the ones that save an invest, not the ones that consume and get indbeted.

  21. Quantum computing will eventually allow us to recover all lost private keys by unwinding the public addresses. Bitcoin will eventually implement quantum resistance. However, legacy addresses of lost Bitcoin will still be recoverable through quantum computing.

  22. Please explain how a deflationary currency wouldn’t lead to hoarding of wealth as people would rather keep their bitcoin than buy goods with them? Also explain how lending would work?

  23. Well new people are born too, they will need money, and if the money supply is not increasing, new born people will create even more deflation.

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