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If for some reason many people lose their wallet files then many bitcoins are effectively taken out of circulation.

Seen as it's not possible to tell as far as i know if bitcoins are actually disabled in this way, so to speak, I'm wondering what are the implications for this.

I thinking of the hypothetical doomsday scenario whereby it's a significant percentage of the economy. Lets say it was enough to significantly reduce the volume on the markets.

For example a large group of people who hold a great many and live in the same city are subjected to a large EMP. :-)

Would this effect the value of bitcoin indirectly?

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Economic theory tells us the price would rise. It would have a deflaitonary effect on bitcoin economy. However because bitcoins are so easily divisible it would not impact the ability for the network to function.

If 90% of bitcoins were lost/destroyed that would leave 2.1 million "whole" bitcoins in circulation. This wouldn't be an issue because currently bitcoin network supports transactions down to one satoshi (0.00000001 BTC) which is 210 trillion discrete units of exchange.

It is possible to allow smaller units of exchange however I will illustrate that is unecessary. The world's money supply (M0) is valued at ~ $20 trillion. If entire world switched to using bitcoin for all commerce the value of a "whole" bitcoin would be $9,524,000 each. However the smallest unit 1 satoshi would be worth $0.10 Even with 90% of bitcoins destroyed/lost there would be sufficient units remaining to allow commerce down to a 10 cent granularity with Bitcoin replacing the entire world's money supply.

It would result in some changes in language. Obviously most people wouldn't value things in terms of bitcoins but rather in smaller units like satoshi's (0.00000001 BTC).

As an example a fastfood meal could be priced as $5USD, 0.00000053 BTC, or 53 satoshi's. Obviously 53 is far easier for humans to express than 0.00000053 BTC despite them having equivelent value. Given the high value of a single BTC, "whole" BTCs would rarely be used other than to express things that are currently express in millions of dollars (like salaries of celebrities, values of corporations, size of national debts, etc).

Satoshi is used as an example but alternatively SI prefixes could be used. For common usage prices in fractional μBTC (micro bitcoins) makes the most sense with 1 μBTC = 1E-6 BTC.

Some examples:

"Man gold broke 200 μBTC today"

"The US Congress raised the minimum wage to 1.50 μBTC effective Jan 1"

"I got the job. Starting salary is 8,400 μBTC a year"

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  • So what if we lose more than 90% of coins? For example, what if we lost all coins?
    – Pacerier
    Commented Jun 15, 2012 at 15:26
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    Well if we literally lost all coins (as in ever single satoshi of all 21M BTC) then it doesn't really matter does it. The blockchain has no value. Simply start fresh with a new blockchain.
    – DeathAndTaxes
    Commented Jun 16, 2012 at 21:21
  • Hmm but even when all satoshis are lost, no one is aware of it right? Perhaps the transactions are no longer moving, but that isn't enough evidence that they are in fact lost and not just "stored".
    – Pacerier
    Commented Jun 17, 2012 at 6:22
  • Correct. There is no way to know how many coins are lost but we can look at coins that haven't been in x period of time to get an upper limit on the number of lost coins. i.e. if 8 million coins have moved in the last 90 days then we know at least 90 days ago the network had at a minimum 8 million usable coins.
    – DeathAndTaxes
    Commented Jun 20, 2012 at 18:52
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Would this effect the value of bitcoin indirectly?

Simply put, yes. If the number of bitcoins in circulation were to decrease the bitcoins that are still in circulation would be worth more. That is, of course, if the faith in Bitcoin as a currency remains the same.

In practice, if a huge part of the bitcoins would suddenly disappear there would probably be some sort of panic. Trying to say exactly how this would affect the value of Bitcoin would mostly be speculation though.

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The value of a bitcoin would increase because the supply would be lowered. Because bitcoins are pretty much infinitely divisible, the usefulness of bitcoins and the ability to use them in commerce would not be affected.

However, it does create one problem. It makes the future supply of bitcoins much harder to predict. If you take the absurd extreme where, say, 95% of the supply of bitcoins is believed to have been lost, you always have the risk that someone will acquire the ability to spend a large sum. If that happens, the value of bitcoins will drop due to the sudden supply increase. If there's a realistic fear that this will happen, people will be less willing to store their assets in bitcoins.

This fear can increase the velocity of bitcoins through the marketplace. It can also increase the interest in exchanges between bitcoins and other currencies, as people prefer to hold wealth in a currency with a more predictable supply.

Although this outcome is not that likely, I believe it was a mistake not to design something into the protocol from the beginning to deal with it. I discuss one such solution in my answer to 'Why doesn't Bitcoin return lost coins into the block reward. Though I realize that 20 years is not long enough.

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  • BitCoin isn't "pretty much infinitely divisible". In fact, only being able to divide it by 10^8 portions means that we will start facing granularity problems when we lose more than 90% of the coins, as demonstrated by the maths in DeathAndTaxes's post.
    – Pacerier
    Commented Jun 15, 2012 at 15:30

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