What Happens if Bitcoin Crashes to Zero?
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As the highest-valued cryptocurrency, Bitcoin has been a topic of much interest and debate for several years now.
The digital currency, which operates independently of any central authority, has been touted as a revolutionary development in the world of finance. However, there have been concerns about the stability and sustainability of cryptocurrency.
One question that often arises is what would happen if Bitcoin were to crash to zero.
In this scenario, the value of Bitcoin would drop to nothing, resulting in the collapse of the entire cryptocurrency market. This could potentially have significant consequences for the global economy and financial system as a whole.
In this article, we will explore the potential results of such an event and analyze how it could impact the world of cryptocurrency
Could Bitcoin Ever Drop to Zero?
Since its inception in 2009, Bitcoin has experienced everything from extreme price swings ($8,000 to $69,000 and back to $25,000) to rallies and crashes to country-wide bans (China, Egypt). These occurrences demonstrate the unpredictability and choppy trading histories of the cryptocurrency markets.
Bitcoin is infamous for its volatility and unpredictability. The coin’s value could reach its peak in one month and then fall to almost zero the next.
Unfortunately, it’s the way things operate in the crypto world which begs the question: What if Bitcoin, the world’s biggest and most valuable cryptocurrency asset, collapsed to zero?
Since Bitcoin is not a stablecoin and, hence, not tied to any real-world asset, it’s just as vulnerable to crashes as any other cryptocurrency. If you regularly track Bitcoin and its price, you’ve probably noticed that you can never anticipate what’s going to occur next.
Why do People Invest in Bitcoin?
Bitcoin is typically bought as part of a long-term or short-term investment strategy.
Some investors prefer to buy Bitcoin when prices are dropping in expectation of the next price hike. They would then sell it at a higher price to make a profit. Others buy Bitcoins with the intention of hanging onto them for a longer period of time, regardless of whether the price drops or rises after the purchase.
However, some people believe that Bitcoin will eventually supplant traditional payment systems, becoming the token of choice for everything from quick and transparent cross-border financial transactions to online shopping.
Crypto enthusiasts generally, on the other hand, believe that centralized banking is unjust or too controlling, and that decentralization is the future. Buying Bitcoin is, thus, more than just an investment for these individuals. According to them, it is the future of money and finance.
In addition, Bitcoin is increasingly being accepted as a mode of payment for buying products and services in many nations throughout the world, and a few countries like El Salvador even made it a standard practice!
While most countries are trying to reinforce their flawed traditional economic systems, El Salvador became the first country to officially recognize Bitcoin as legal cash in 2021.
Can Bitcoin’s Price Really Collapse to Zero?
Whether or not Bitcoin can collapse is a matter that should be addressed in light of the extreme volatility of its price.
The price of Bitcoin (and other cryptocurrencies) tends to fluctuate much, climbing up or falling without warning. It should be noted here, though, that there is a general tendency in most Bitcoin investors to work on the assumption that the price will continue to rise in the long run.
And they are not completely wrong, either; given how much the price has risen since it was released in 2009, Bitcoin has shown to be bullish overall, enjoying an upward price trajectory over the years.
Hypothetically speaking, at least, the value of a cryptocurrency can collapse to zero, as witnessed in the Terra Luna price crash. However, for a currency as popular and valuable as Bitcoin, the fundamental foundations are most likely strong enough to withstand most threats and extremely disastrous incidents.
Even though Bitcoin is strictly prohibited and illegal in the vast majority of nations worldwide, it is incredibly tough to break down the global Bitcoin network. For the blockchain to actually fail completely, the trust or interest of over 100,000 active nodes that make up the Bitcoin network would have to be lost.
The destruction of Bitcoin differs greatly from the simple closure of a website. It has a robust platform that is difficult to collapse, thanks to its intricate architecture and decentralized infrastructure.
Moreover, major stakeholders and the larger cryptocurrency community can have a huge impact on the overall investment landscape, especially those who trade or manage large amounts of the token.
These individuals and organizations are collectively referred to as “crypto whales,” and they own enough Bitcoins to influence the entire digital currency market.
No doubt they have enough funds to manipulate the market as they wish, but bringing the asset’s value down to absolute zero requires a lot more power than that.
A complete Bitcoin crash is highly unlikely, given its growing popularity as an investment asset class and increasingly strengthening fundamentals. Yet, there are some other factors at play here that might threaten Bitcoin’s value in the future.
Factors Putting Bitcoin’s Price at Risk
1. Limited Adoption
The fact that Bitcoin is not backed by any sort of tangible asset is one of the main objections put forth by its opponents. Others contend that it still doesn’t have enough adoption or acceptance in the established economy to be successful as a currency.
However, when it comes to performing financial transactions or transferring cash, fiat options are definitely preferred over Bitcoin by the vast majority because of their widespread acceptance as payment options.
2. Scalability Issues
Further endangering Bitcoin’s future is its ongoing scalability issues. The volume of transactions on the blockchain rises as more and more people buy Bitcoins.
Because of this, it takes a substantial amount of time for miners to verify each transaction, which is referred to as latency. The blockchain can only execute a certain amount of transactions per minute due to Bitcoin’s modest block size. This factor is commonly quoted as one of Bitcoin’s fatal flaws.
3. Market Uncertainty
The price of Bitcoin can be influenced by many other variables as well. In 2021, a simple tweet from Elon Musk, the CEO of Tesla and SpaceX, precipitated a major price decline in the cryptocurrency.
Thus, it would be reasonable to say that Bitcoin is not a very reliable asset for investment. Moreover, it’s critical to keep in mind that its value is driven by the demand factor more than anything else. This also increases its extreme market volatility.
Let’s assume that Bitcoin’s value did, in fact, drop to zero. How would this impact the marketplace?
What if Bitcoin Collapsed to Zero?
Imagine if, one day, all nations in the world made mining, trading, and spending Bitcoin illegal, causing its value to sink to zero. Even if the network itself were not affected, such a drop in demand would cause massive financial losses for millions of crypto users worldwide.
Furthermore, a complete crash of Bitcoin would have a profound impact on the crypto-mining sector. The market for Bitcoin mining alone is enormous, and many people rely on it to make a living. Mining payments would become worthless if Bitcoin lost all value and utility, forcing almost a million miners to look for alternative sources of income.
The total amount of losses would exceed the total market value of all the digital assets. A collapse of such a magnitude would likely destroy both publicly-listed crypto companies ($90 billion) and private investments in crypto firms like crypto exchanges ($37 billion since 2010, according to data source PitchBook).
Other companies involved in the crypto industry, such as the maker of graphics cards, Nvidia, might also suffer a blow. The overall impact of this initial quake may eventually end up costing $2 trillion to stakeholders, which is somewhat more than Amazon’s entire market worth.
As a result, a substantial amount of money and financial resources would be depleted. Long-term investors would miss out on huge anticipated returns, and yet, they would only lose a small amount of this money compared to how much they invested in the first place.
The biggest losses will be suffered by those who bought Bitcoin less than a year before, amounting to an average of $37,000 as compared to the original purchase price.
Bitcoin investors who haven’t cashed out yet will be in a hopeless position.
This affliction could spread to certain other investment sectors in a variety of different ways. Among these channels is leverage. A significant amount of Bitcoin investments are in derivatives such as “perpetual” exchanges, which are never-ending bets on future price movements.
A large proportion of cryptos are also transacted on centralized exchanges such as Coinbase and Binance, where users may borrow money to raise their bets. Even slight price fluctuations may result in significant margin calls, and if they are not fulfilled, exchanges will swiftly trade their clients’ holdings, causing crypto prices to drop indefinitely.
Such a collapse in Bitcoin price would most definitely cause many other cryptocurrencies to fall as well. After all, if traders notice that the biggest coin in the cryptocurrency market has lost all of its value, chances are that many would sell their crypto holdings as quickly as possible to avoid further losses.
In other words, millions would suffer greatly if Bitcoin completely crashed to zero.
Bitcoin is not Collapsing Anytime Soon!
Without a doubt, the crypto industry would suffer tremendously if Bitcoin’s value dropped to zero. But practically speaking, the probability that Bitcoin would ever abruptly crash in this manner is very low.
Even if several factors may cause Bitcoin’s value to decline over time, it would need significant changes in the economic model and the network itself for Bitcoin to drastically go down to zero.
In conclusion, there are reasonable arguments at both ends of the debate. People who view Bitcoin and decentralized finance as potentially replacing our traditional financial model argue that the technology behind Bitcoin offers increased safety, transparency, and efficiency.
On the other hand, Bitcoin critics regard the virtual economy of cryptocurrencies as nothing more than the dot-com bubble 1990s.
Regardless of how the next few years play out for this newly-emerging virtual asset, one thing is certain: Bitcoin and other cryptocurrencies will play a larger role in our financial sector and other industries around the world.
The editorial content of OriginStamp AG does not constitute a recommendation for investment or purchase advice. In principle, an investment can also lead to a total loss. Therefore, please seek advice before making an investment decision.