Bitcoin has mostly gone “up and to the right” for much of its existence, with its price climbing from essentially zero to as high as $60,000 in under a decade. The original cryptocurrency is now one of the largest currencies in the world, and in its short lifespan has become one of the most profitable assets of all time.
Why Bitcoin may crash to zero possible reasons
- Bitcoin, the first cryptocurrency was created in 2009. At the time of launch, the value of a 1 bitcoin was $0. In 2010, the value became $0.08. It reached $64,863 in April 2021. In the next months, the value fell to less than $30,000. As of 25th September 2021, the value of 1 bitcoin is $42,705. The value is highly volatile and is changing based on the demand. When the demand decreases, the value decreases. So, if no one is interested in buying bitcoins, the value will eventually become zero.
- At present, only in El Salvador, Bitcoin is legally recognized money. In many countries, the legal status of bitcoin is not yet determined. Some countries including Egypt, Turkey completely banned cryptocurrencies. Recently, China too banned cryptocurrency transactions. So, this resulted in the fall of bitcoin and other cryptocurrencies prices. So, if all the countries ban bitcoin and make it illegal, then its value will go down to zero.
- Other cryptocurrencies such as Ethereum, Ripple, Litecoin etc. are giving tough competition to Bitcoin. If investors and common people are more interested in other cryptocurrencies, they may pull investments from Bitcoin to invest in them. In that case, there is a possibility that the value of a Bitcoin may fall to zero.
- A few famous personalities including Elon Musk, Warren Buffet made negative remarks on cryptocurrencies. Warren Buffet shared his views on cryptocurrencies that they are worthless because they have no intrinsic value. These remarks negatively impacted the prices. Even though Bitcoin’s intended purpose was providing access to cheap and instant worldwide payments, but now it is being used mainly as a form of gambling. Hence, there is a possibility that the value of bitcoin going down to zero.
- Crypto hacks are now a common thing. This can eventually lead to a lack of trust in cryptocurrencies. With the next biggest crypto hack, people may pull out investments in Bitcoin and other cryptocurrencies.
- In 2018, many investors sold their cryptocurrencies, which lead to the cryptocurrency crash. So, the possibility of the bitcoin value becoming zero cannot be ruled out.
Could Bitcoin really crash to zero?
In 2018, two Yale University economists (Yukun Liu and Aleh Tsyvinski) published a report titled ‘Risks and Returns of Cryptocurrency,’ in which the authors examined the risk of Bitcoin collapsing to zero in the span of a day.
By using Bitcoin’s historic returns to calculate its risk-neutral disaster probability, the authors found that the likelihood of an unspecified disaster crashing Bitcoin to zero ranged from between 0% to 1.3%, and was around 0.4% at the time of publication. For comparison, Tsyvinski stated that the euro (EUR) has a 0.009% chance of the same, in an interview with YaleNews.
Others argue that Bitcoin will eventually crash to zero because it lacks intrinsic value. But supporters retort that Bitcoin is backed by consumer confidence and mathematics. Even though Bitcoin is often framed in opposition to government currencies, both Bitcoin and “fiat” currencies like the US dollar (USD) and Pound sterling (GBP), which were once backed by gold (which has intrinsic value), are now backed by no physical commodity. Of course, some would argue that the US dollar, at least, is backed by debt.
Why Bitcoin can never go to zero
- Bitcoin creators kept some bitcoins with them. Even if all the other investors sell the coins, creators will not sell them to prevent the value from going to zero.
- Some companies including Tesla are buying Bitcoins. Moreover, El Salvador became the first country to make Bitcoin a legally recognized money. So, the trend may continue and the value will only increase.
- Many common people prefer not to sell Bitcoins in the hope that their value will increase. So, people are incentivized to keep the coins and not to sell them. This will prevent bitcoin from crashing to zero.
- Many Bitcoin traders have set algorithms to purchase bitcoins automatically when the price falls below a specified point. So, there are just too many people trying to prevent bitcoin from crashing to zero.
- The underlying technology of Bitcoin, which is blockchain is revolutionary. Hence many investors believe in the potential of cryptocurrencies and the new possibilities. So, they may not pull out investments even when the situations force otherwise.
Possible consequences if Bitcoin crashes to zero
- Trust in cryptocurrencies will diminish drastically. It will become very difficult for other cryptocurrencies to attract investments. The cryptocurrencies with no volatile value or the lowest volatile value may survive.
- Many investors including common people will lose their hard-earned money.
- Investors may divert their investments to Central Bank Digital Currencies, which are in the progress in many countries.
What will happen To The Cryptocurrency Ecosystem?
Online publication Axios has come up with an estimate of $250 billion as the monetary impact of a bitcoin crash. But that estimate betrays an incorrect understanding of the utility and markets to cryptocurrencies. There is already substantial investment in blockchain, the technology underlying bitcoin. Besides this, bitcoin’s price movements suggest that it is emerging as a store of value. Cryptocurrencies are also useful as a means of exchanging value within closed ecosystems.
That said, it will be some time before their utility is realized within mainstream applications. The current rise in prices for most cryptocurrencies is mostly the result of a domino effect from bitcoin’s surge. It is quite likely that a bitcoin price crash will result in a correction in their prices as well. It is also certain that the vast majority of cryptocurrencies that populate the current listings will disappear. Only digital currencies that have defined business models and clear utility within mainstream society will survive a crash.
Indian Government set to Ban Cryptocurrencies
According to a government bulletin, the ban is part of the proposed Cryptocurrency and Regulation of Official Digital Currency Bill that will be introduced in its winter session.
The planned legislation aims “to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India (RBI)”.
The plan to prohibit all private cryptocurrencies appeared to be essentially the same as an earlier draft of the bill submitted in January.
In recent months it was thought the government may soften its stance on cryptocurrencies, possibly seeking to have them regulated as assets instead of a means of payment.
While the description of the bill has remained the same, the exact differences have yet to be confirmed because the latest draft is not yet publicly available.
The value of several digital currencies reportedly dropped following the announcement of the bill.
Bitcoin fell more than 13% on the Indian exchange site WazirX, while Shiba Inu and Dogecoin both dropped more than 15%.
However, Glen Goodman, author of The Crypto Trader, told the BBC’s World Business Report radio programme that the global impact was “relatively small”.
Even when China decided to ban cryptocurrency – and that was a really big deal – it didn’t completely massacre the crypto markets.
According to a video report by local news publication India Today, cryptocurrency trading is likely to continue under the proposed bill, as long as users buy from exchanges which meet certain requirements.
The report added that the bill may focus on restricting who is allowed to create cryptocurrencies, with the aim of protecting investors.