Lost bitcoin and the effective supply

The ledger records every output and whether it has been spent. What it does not record is whether the key that controls an unspent output still exists. An output that has not moved in a decade might belong to a long-term holder, to an exchange's cold storage, or to no one at all. The ledger cannot tell the difference, and neither can an observer.

This is why lost-coin figures are estimates. Analysts build them by identifying outputs that are provably unspendable, such as the genesis coinbase, and by applying heuristics to outputs that have been dormant for a long time. The heuristics rest on assumptions: that a coin untouched for a given number of years is probably lost, that certain address patterns indicate a discarded key, that coins sent to particular scripts are unrecoverable. Each assumption is reasonable and each can be wrong.

The dormancy heuristic is the weakest of them. A coin that has not moved is not necessarily lost; it may be held deliberately by someone who intends never to sell, or by an institution that has simply not needed to move it. Treating dormancy as loss will overstate the lost total. Conversely, a coin whose key was lost yesterday will not appear in any dormancy-based estimate for years, which understates it. The two errors run in opposite directions and neither can be quantified from the ledger alone.

There is a further problem with any single number. The set of lost coins changes over time, and it changes in one direction only: coins are lost but never found. A figure published in one year is a snapshot of an estimate, and it is not comparable with a figure published in another year unless the method is identical. Readers should treat any quoted total as an order of magnitude rather than a measurement.

The effective supply is the quantity of bitcoin that is actually available to change hands. It is the protocol supply minus the coins that are unrecoverable, and it is the figure that matters for thinking about how much bitcoin could in principle be sold. The protocol supply is exact and verifiable; the effective supply is an estimate, because one of its two terms is an estimate.

The distinction matters for market analysis. A market capitalisation calculated from the protocol supply will overstate the value of the tradeable float, because it prices coins that can never be sold. A market capitalisation calculated from an estimated effective supply will be closer to the truth, but it inherits every assumption in the estimate. Neither figure is wrong; they answer different questions, and the market capitalisation page sets out where the measure misleads.

The practical conclusion is that the effective supply should be treated as a range rather than a point. The protocol supply is a fact; the lost total is a judgement; the effective supply is the difference between them and carries the uncertainty of the weaker term. A reader who needs a single number should use the protocol supply and note that it overstates the tradeable quantity, rather than adopting an estimate whose error bars are unknown.