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Since there are a finite number of Bitcoins that can be created, I am wondering what happens if some of the coins are lost. My questions are three fold:

  1. How do you define a "lost" coin? For example if a bank note that was in my pocket is not there anymore (provided that I did not spend it), I know I lost it.

  2. How does the network know a coin is lost?

  3. How would the remaining coins value if some are lost? For example, assume there are 10 coins in total in circulation each worth 100 usd, the total spending power is 1000 usd. If say 2 of them are lost, are they assumed to be taken out of the circulation for good or someone can pick them up and reuse them. I guess in the first case the value of the remaining coins are worth 125 usd each due to fewer coins in circulation while in the latter case the value of each case would stay the same (this comes back to the second question of if the network is aware of the lost coins).

I come from non-programming background so appreciate clarification.

Thanks

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Since the "ownership" of bitcoins is essentially tied to having knowledge of the private key for the address they are stored against, it's very difficult to prove that nobody knows the private key.

However, it is possible to send bitcoins to an address with no private key, essentially destroying them. Details here: How to generate a valid bitcoin address for destroying bitcoins?

To answer your 3 questions:

  1. There is no accepted definition of a lost bitcoin that I'm aware of, and it's unlikely there will be one because of the difficulty in providing proof.
  2. The network doesn't know whether the private key for some bitcoins have been lost.
  3. The value is based on market demand. From this perspective, bitcoins that aren't currently offered for sale are the same as lost coins until they are offered up for sale, at which point the price is affected. Though individuals do have the capability to prove they own bitcoins without offering them for sale, they rarely do so, so you'll probably never be able to find out much about which unspent bitcoins are still being quietly held and which are lost.
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You should check this related question.

In summary:

1) A "lost bitcoin" is any unspent BTC balance in an account for which the private key has been lost. Without the private key, that balance cannot be spent again. If you lose your wallet file, you are effectively losing all the private keys for the accounts (addresses) created by that wallet. It doesn't mean that the balance cannot change, since the "lost" account can actually receive new funds (if funds are sent to its public address), but without the private key those funds will become equally inaccessible.

2) It's impossible for the network to know when a private key was lost. A balance can remain unspent for a very long time, but it could be by the owner's choice. So there is really no way to tell. No one can flag a wallet/account as lost, even the owner. This is because without the private key you cannot prove to be the owner anyway.

3) The Bitcoin price is simply a result of current demand/supply for it. You could say that the more lost coins, the less supply there is, so the prices will naturally rise, but that is simply a by-product of normal trading.

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  1. Bitcoins are typically lost (as in, inaccessible to humanity, rather than via theft) by the owner losing access to their wallet (ie their wallet.dat file gets corrupted and they have no backups), or accidentally transferring their coins to the wrong address. In either case, coins are contained in an address that nobody knows the private key to. The coins aren't completely lost, in that they still exist on the blockchain, but it's statistically impossible to guess the private key to the address they are on.
  2. There's not really a way to "know" a coin is lost, but guesses can be made. For example, if Blockchain.info (a blockchain analysis website) finds a private key with coins that haven't been moved for a long time, people can speculate that account may have been lost. But that's not that certain, as the owner could just be storing it. This is why you sometimes hear a figure about n percent of bitcoins have been lost. But it's a pretty weak guess.
  3. Lost coins would cause deflation, meaning the other coins are worth more.

Since bitcoins are so divisible, it'd be very unlikely we'd lose every unit of bitcoin after all the coins have been mined. And so long as one unit of bitcoin remains, the protocol could be updated to divide it even more.

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