- CROX ROAD
- Posts
- Could Bitcoin Ever Go to Zero?
Could Bitcoin Ever Go to Zero?
In theory, the price of bitcoin can go to zero, even though this is very unlikely to happen any time soon.
Crox Road
October 22, 2022
In theory, the price of bitcoin can go to zero, even though this is very unlikely to happen any time soon.
In brief
Even though Bitcoin recently hit a high of more than $60,000, people who don't believe in it say that it's only a matter of time before its price goes to $0.
Two Yale economists wrote a paper in 2018 that said the chance of Bitcoin's value going to zero is about 0.4%.
Getting the price of Bitcoin back to what it should be, which is zero, would be a huge job that might be close to impossible.
Bitcoin's price has increased "up and to the right" throughout the majority of its history, with the cryptocurrency's value going from almost nothing to as high as $60,000 in a little under 10 years' time. The first cryptocurrency is one of the most important currencies in the world right now, and even though it has only been around for a short time, it has already become one of the best investments of all time.
Even though the value of Bitcoin has gone up, critics have said for a long time that it is only a matter of time before the currency goes back to being worth nothing.
Calvin Ayre, a former advocate for Bitcoin Cash, declared in July 2020 that Bitcoin is useless, while Warren Buffett, CEO of Berkshire Hathaway, told CNBC that he thinks all cryptocurrencies, Bitcoin included, are worthless. Charlie Munger, who is a business associate of Buffett's, has referred to bitcoin as "rat poison" and "turds."
However, during the last several months, there has been a rush of institutional investment in Bitcoin. Companies such as MicroStrategy, Tesla, Square, and Aker ASA have all recently purchased Bitcoin for their own corporate treasuries. During this time, the popularity of Bitcoin exchange-traded products has skyrocketed. The first product of its kind to be formed in North America was Canada's Purpose Bitcoin ETF, which was introduced earlier this year.
This kind of institutional investment is generally believed to be the impetus behind Bitcoin's recent bull run, and it is seen as evidence that the cryptocurrency, which now has a market valuation of over a trillion dollars, is not going anywhere anytime soon.
But what would have to happen for Bitcoin's value to plummet by a factor of one hundred? As it turns out, a significant amount.
Could Bitcoin really crash to zero?
Yukun Liu and Aleh Tsyvinski, both of Yale University, are economists who, in 2018, co-authored a paper titled "Risks and Returns of Cryptocurrency." In this report, the authors looked into whether or not Bitcoin could lose all of its value in a single day.
The authors discovered that the possibility of an undefined tragedy crashing Bitcoin's price to zero varied from 0% to 1.3%, and that it was approximately 0.4% at the time of publishing. This was obtained by utilizing Bitcoin's history returns to compute its risk-neutral disaster probability. As a point of reference, Tsyvinski said in an interview with YaleNews that the probability of the same happening with the euro (EUR) is 0.009%.
Others contend that Bitcoin will ultimately lose all value and become worthless since it has no inherent worth. However, proponents of Bitcoin counter that it is supported by mathematics and the faith of customers. Even though Bitcoin is frequently positioned in opposition to government currencies, "fiat" currencies such as the United States dollar (USD) and the Pound sterling (GBP), which were once backed by gold (which has inherent value), are now not backed by any physical commodity. Bitcoin is also not backed by any physical commodity. In fact, others believe that at least the United States dollar is supported by debt.
Common reasons against Bitcoin
The idea that Bitcoin is essentially an elaborate fraud, concocted by some malicious institution or group to swindle people out of their hard-earned money, is one of the most widely stated reasons why Bitcoin will eventually fail as a currency.
One of the most recent illustrations of this can be found in a post written by an iOS developer by the name of Gaurav Sharma. In this article, Sharma makes the case that Bitcoin is basically just a tweaked version of a Ponzi scheme.
According to him, Bitcoin's development is controlled by a central committee of developers, despite the fact that Bitcoin is often portrayed as a decentralized currency. This, he adds, is to the advantage of only the most powerful people. This ignores the reality that anyone with the necessary skills may submit a Bitcoin Improvement Proposal (BIP) for consideration, and that the whole protocol can be split with a comparatively small amount of effort if modifications are not acceptable.
When it comes to Bitcoin, every node and miner is free to pick whatever client they want to run; the client that has the greatest combined work is automatically promoted to the canonical chain position. Because of this, the Bitcoin unit on these chains will probably still have value because keeping the network's integrity takes a lot of computational work and resources.
Another prominent argument by Sharma and a number of other Bitcoin doubters, including Warren Buffett and Mark Cuban, is that Bitcoin is simply overpriced because it has very little or no practical use. On the other hand, one may make the case that the value of Bitcoin is in fact exactly proportional to the number of people who use it.
This has been shown by the appearance of new applications for the cryptocurrency. Before the advent of internet commerce, cryptocurrency was used for peer-to-peer bartering; today, there is a full ecosystem of DeFi products that extend its usefulness even further.
Metcalfe's law, which claims that the value of a network is proportionate to the square of the number of connected users, describes a behavior quite similar to the one discussed here. And since the number of wallets that can store bitcoins is rising at an exponential rate, the currency's usefulness is expanding at an even quicker rate.
Fringe case scenarios
If the price of Bitcoin were to genuinely go to zero, it would indicate either that it had become impossible to trade Bitcoin or swap it for goods and services, or that buy-side liquidity had fallen to zero for some reason. One of the only realistic possibilities that may cause this is all governments across the globe banning Bitcoin, which could make it illegal to hold or use Bitcoin (as it currently is in a few places). This is the only plausible scenario that could cause this.
This would also entail shutting down the whole Bitcoin network, putting all nodes offline (even the ones that are in space), and preventing the creation of any new nodes. Theoretically, this would make it impossible to transfer Bitcoin and would put a stop to underground trade, which would likely leave Bitcoin worthless. Nevertheless, it would be very difficult to put this theory into practice. The value of the Bitcoin blockchain is based entirely on the fact that it is decentralized and that network nodes are spread out all over the world.
One such possibility is that Bitcoin will become irrelevant because it will eventually be replaced by a more advanced cryptocurrency or a payment system that is functionally equivalent to it (and therefore worthless as a payment method or store of value). On the other hand, the execution of this scenario would most certainly take a number of years, maybe even decades.
In any event, it seems quite probable that Bitcoin will always retain some value, either as a collectible or as a historical relic, for the benefit of future generations.
A similar situation occurred not too long ago in India when the Reserve Bank of India (RBI) demonetized the Rs 500 and Rs 1,000 notes in November of 2016, as a response to the significant rise in the number of counterfeit notes. Even though genuine Rs 500 and Rs 1,000 notes can no longer be used as a form of payment in India, there is still a market for them as pieces of art or just as a point of interest.
That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)
DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
You May Also Like
Reply