Why Bitcoin Has Inflation Risk
Somewhere in the Newport, Wales garbage dump is a computer hard drive that local resident James Howells discarded in 2013. He had spilled lemonade on it and thought it wasn’t worth fixing.
Howells forgot that the hard drive contained the codes to access some Bitcoins he had “mined” beginning back in 2009. He had about 7,500 bitcoins, worth $75 million assuming a $10,000 bitcoin price.
Howells naturally wants to recover the lost device. He’s offered the Newport council 10% of the proceeds if it will let him dig into the landfill. So far the answer is “no.”
Stories like Howells’ are popping up everywhere. People who mined or purchased bitcoins, sometimes years ago, can’t access them.
The reasons vary, but whatever happened, a lot of value is missing as Bitcoin’s price zooms higher.
And these individual owners are only the first level. The accumulated pile of inaccessible bitcoins could lead to systemic consequences.
Bitcoin’s anonymous inventor(s), Satoshi Nakamoto, designed the program to allow mining of only 21 million bitcoins by the year 2140. Miners have dug up about 17 million Bitcoins in total so far.
A study last year by digital forensics firm Chainalysis estimated that somewhere between 2.78 million and 3.79 million Bitcoins are lost.
That means as much as 22% of the existing Bitcoin supply might as well not exist. For all practical purposes, it’s gone.
The real Bitcoin supply that is available for transactions isn’t 17 million — it’s 17 million minus those lost millions. So maybe as little as 13.21 million, using the higher Chainalysis estimate.
Does that affect the Bitcoin price? It should.
Imagine if these were shares of stock, and the company bought back two or three million of 17 million outstanding shares. The price would rise because supply dropped.
But are the lost Bitcoins really lost? For some of them, we can’t be sure.
“Satoshi” mined some 1 million initial Bitcoins.
They’re on the blockchain ledger, so we know Satoshi hasn’t touched them. We don’t know who Satoshi is, whether he/she is still alive, or whether he/she still has access to those one million Bitcoins, or may have given access to others.
Satoshi might even be a group of people.
In any case, Satoshi’s stash represents 5.9% of existing Bitcoin supply. Their existence affects the value of all Bitcoins… but maybe it shouldn’t if a bus hit Satoshi and they are effectively gone.
But Satoshi is/was pretty clever. Maybe some time-delay mechanism will distribute the one million bitcoins to Satoshi’s favorite people on a designated date. Or maybe Satoshi will retire and finally liquidate them next year. We can’t assume they are permanently gone.
Similarly, many of those other “lost” Bitcoins may not remain so. Maybe that council in Wales will let Howells dig for his hard drive, and he’ll find it. If so, the total Bitcoin supply won’t change, but the available supply will rise.
Or maybe scientists will invent brain-computer interfaces that let people recover forgotten passwords. Available Bitcoin supply will then grow some more.
The law of supply and demand applies everywhere, even to Bitcoin. More Bitcoins in circulation means more bitcoins available when someone tries to buy Bitcoins with dollars, yen, gold or whatever.
In theory, at least, that should have a bearish influence on the bitcoin price.
Sound familiar? It’s what we would call “inflation” in a fiat currency. The value of each dollar drops as more dollars enter circulation.