While the crypto market continues to grow, there have been renewed fears of a liquidity crisis, with more people unable to access Bitcoin. Most crypto insiders believe that the problem emanates from the growth of institutional investors. However, lost digital assets have a part to play as well.
Lost or Inaccessible Bitcoin
In a recent threat report, the United Kingdom’s National Cyber Security Council pointed out that about $140 billion in Bitcoin is lost or inaccessible.
The report explained that lost or inaccessible Bitcoins are primarily due to users’ recklessness with their passwords and private keys. Both problems appear to have become more prominent in the past few weeks.
Lost Bitcoins aren’t a novelty in the crypto space. Users of QuadrigaCX were left to fend for themselves after the exchange’s chief executive, Gerald Cotten, died while on vacation. Cotton had the sole access to the exchange’s cold wallets, and his death left about $150 million in exchange funds inaccessible.
This year, two instances of inaccessible Bitcoins have also made the rounds. Last week, Inside Bitcoins reported on Stefan Thomas, a German programmer who had issues accessing his funds.
The San Francisco-based developer had forgotten the password to his wallet, which contained 7,002 BTC (about $267.5 million at the time).
Stefan’s wallet is set to accept ten password entries before encrypting the data forever. The programmer had used up eight of his attempts and was now cautious not to mess things up and lose access to his funds forever.
A few days later, the South Wales Argus also reported that James Howells, the owner of a discarded hard drive with 7,500 BTC in it, had requested that the government excavate a landfill in hopes of recovering the device.
Per the report, Howells had been an early Bitcoin miner and built a stash back when mining was possible with a CPU. However, he accidentally threw his hard drive – and the Bitcoins it contained – away in 2013 while cleaning his house.
Howell has been looking to recover his hard drive since 2013. He recently tendered an appeal for the right to excavate a landfill in his city, offering 25 percent of the lost Bitcoin’s value as COVID-19 donations to the city.
A Brewing Problem
There’s no doubt that lost Bitcoins are contributing to the current liquidity problem. However, the entrance of institutional investors remains an important factor as well. Most institutional Bitcoin investors have a propensity just to hold their assets and wait for price gains, leaving less for day traders.
Last week, eToro, the top trading app, warned users that it had seen a surge in demand that could lead it to take drastic measures like limiting buy orders on weekends. Exchanges have also seen significant increases in trading activity.
With more institutions expected to enter the market in 2021, all eyes will be on the possible liquidity crisis brewing.