What if bitcoin collapses to zero?
Does Bitcoin really represent the future currency?
Every fall in digital currency prices raises questions about how bad the repercussions are. The effects of falling prices appear to go beyond currency supporters who see Bitcoin as the future of finance.
There were about 6,000 digital currencies listed on the coin market cap just a year ago, and today it has reached 11,145.
Its total market value has risen from $330 billion to $1.6 trillion at present, roughly equivalent to Canada's nominal GDP.
The Economist, a British magazine, said: Cryptocurrency holders are becoming more sophisticated and richer as well.
Enterprises are responsible for 63% of cryptocurrency trading, up from 10% in 2017.
But this maturity in the cryptocurrency market has failed to reduce extreme price volatility, with bitcoin falling from $64,000 in April to $30,000 last May.
Today, its price swings in the range of $40,000, after falling to $29,000 on July 29.
The magazine noted that every fall in the price of digital currency raises questions about how bad the repercussions are. The effects of falling prices appear to go beyond currency supporters who see Bitcoin as the future of finance.
Currently, algorithmic traders account for a large share of transactions and have automatic "buy" orders when the price of Bitcoin falls below certain thresholds, but understanding the growing links between encryption and major markets requires imagining the bitcoin price falling to zero.
Bitcoin's price rose Monday to its highest level since mid-May, supporting statements by Tesla CEO Elon Musk that he was once again encouraged to deal in cryptocurrencies.
Bitcoin's unit price rose 2.8% to $45.6,000 with a total market value of $856.57 billion, spread over 18.780 million units out of a total of $21 million allocated for trading.
Cryptocurrency investors
The magazine explained that this collapse could occur either because of shocks within the system such as a technical failure, a serious breach of a large exchange of digital currencies, or could come from abroad, such as a crackdown by regulators or a sudden end to "price hikes" in the markets, in response to central banks raising interest rates.
According to Mohamed El-Erian of Allianz Insurance and Asset Management, cryptocurrency investors are divided into three types:
- "Fundamentalists" who believe bitcoin will one day replace government-issued currencies.
- "Tacticalists" who believe that their value will rise as an investment in them increases. "Speculators" who want to gamble.
The magazine noted that the collapse of the bitcoin price to zero could cause huge disruption among the first group of investors, but it is unlikely to give up the currency.
In return, the third group will escape at the first sign of trouble. To avoid the final abandonment of the currency, the second group must be persuaded to stay, but this is unlikely to happen if the price collapses to zero.
Price collapse, the magazine says, could hurt the digital currency economy, as bitcoin operators will have less incentive to continue, leading to a halt in the verification process and a halt to currency supply.
Investors are also likely to get rid of other cryptocurrencies. Recent fluctuations have shown that where bitcoin is trending, the rest of the cryptocurrencies follow. This is confirmed by Philip Gradwell of Chainalysis.
Expected losses
Long-term cryptocurrency owners will suffer small losses compared to the price they paid but will give up huge unrealized gains. The biggest losses will be recorded by those who bought the currency less than a year ago at an average price of $37,000, including most institutional investors, including hedge funds, university endowments, mutual funds, and some companies.
The collapse will also eliminate private investment in encryption companies such as exchanges, and negatively affect the value of listed encryption companies (with a market value of about $90 billion).
Payment companies such as PayPal (PayPal), Revolut, and Visa will also lose much of the growing business, reducing their valuations.
Overall, the magazine asserts, losses could reach $2 trillion in the first shock, just over Amazon's market value.
Infection
The magazine noted that the infection may be transmitted through several channels to other assets, both digital and prevalent.
One such channel is the leverage strategy, where 90% of bitcoin's invested funds are spent on derivatives such as permanent futures, as hostages to never-ending future price fluctuations.
Modest price fluctuations can trigger large margin calls, which are not being met by the haste of exchanges to liquidate their customers' assets, putting considerable pressure on cryptocurrency prices. As a result, stock exchanges can suffer significant losses as a result of default.
The magazine added that the rush to meet margin calls in cryptocurrencies may force speculators to dispose of traditional assets to provide liquidity, but in return, they may give up trying to meet those calls because their digital currency stocks have lost value, which will lead them to liquidate them.
The magazine reported that the second infection channel is "stable currencies" that act as a driver of digital currencies.
As the dollar-for-bitcoin swap is slow and costly, traders wishing to make gains and reinvest returns often deal in stable dollar or euro-related currencies, such as Tether and digital dollars, which are the main currencies traded on encryption platforms.
The collapse of the digital currency could lead to continued investment in stable currencies, forcing securities issuing bodies to dispose of their assets to make recovery.
Officials from the U.S. Securities and Exchange Commission and the Federal Reserve pay more attention to the risks posed by cryptocurrencies, and stable currencies in particular.
Widespread impact
The magazine noted that the collapse in the value of the digital currency may have a more widespread impact on the public atmosphere than the issue of selling at very low prices, as many entities are now vulnerable to digital currencies, but since few have bet on them with large shares of wealth, the losses will be widespread but not significant.
Banks are immune, and most will not rush to retain bitcoin anytime soon. The Basel Supervisors Club recently proposed that banks finance their bitcoin property through their capital stocks only and not from debt.
But it's not hard to imagine a worse situation, as low-interest rates have pushed investors to take more risks. The collapse of digital currency may lead to more investment in exotic assets.
In recent months, the relationship between bitcoin prices and equities, in general, has grown. This is partly because bookmakers are reinvesting gains from other stocks in cryptocurrencies and vice versa.
The magazine noted that the sale may begin with the most influential bookmakers - usually individuals and hedge funds - in high-risk areas. Investors exposed to these problems, who face scrutiny from their investment committees, will also follow this path, making risky assets less liquid, and possibly causing a general recession.
The journal concluded that market turmoil was associated with many factors, including the drop in the price of bitcoin to zero. However, the worst-case scenario suggests that fiscal leverage, stable currencies, and the general atmosphere are the main channels through which any decline in cryptocurrency prices will spread more broadly, large or small. Cryptocurrencies will also become more closely linked to traditional finance companies.
Comments
Post a Comment