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a month ago

Bitcoin crash: could BTC ever go to zero?

Bitcoin has seen tremendous growth over the last 5 years. Not only in price, but also in its community and its use. Many analysts have claimed that the bubble has finally popped, but for each time BTC came crashing down, there was another bull cycle afterward that brought it to new highs. The most recent all-time high was around 64.000 US-Dollars.


But the crash following in May 2021 has brought up a question: Can Bitcoin go to zero? While many Bitcoiners are absolutely enthusiastic about their investment there is a chance that such an event could potentially happen.


The crash itself was caused by the fact that Chinese regulators enforced a full crackdown on Bitcoin mining and Bitcoin trading. Chinas government has always been skeptical in terms of cryptocurrencies in general, but it was only this year that a ban was enforced that drove the mining industry out of the country. With the decreasing hashrate the ecosystem became fragile.


Why is Bitcoin valuable at all?


There have been a few voices heard in public who suggested that this is the time for a paradigm shift and abandon proof of work coins. One thing that is important to keep in mind is the fact that Bitcoin is so valuable, is because proof of work is needed. It is very difficult to participate as a miner and mint new BTC because it requires electricity and hardware. It remains open to debate if proof of stake network provides a similar or better incentive structure that adds value to the network.


Up until this day, it is Bitcoin that has the highest value, but it is not only the work that is needed to run the network and mint new BTC. According to Metcalfe’s law, the value of a network is proportional to the square of the number of connected users. And with Bitcoins network growing even faster in the last couple of years its value is also rising.


Last but not least, Bitcoin is very scarce. There are only going to be about 21 million BTC ever coming into existence and the finite supply is part of its protocol. One could argue of course that you could simply fork Bitcoin’s code and create a version with fewer coins, but that’s where again the size of the network and the market cap comes into play.

Why could Bitcoin crash?


The largest threat is regulatory issues. Not necessarily because regulations are a bad thing. Most of the laws are made to protect the best interest of retail investors. But many players in the cryptocurrency space struggle to fulfill the role that they are supposed to play. This could potentially lead to harsher policies and affect the market.


But that could only cause a crash like we have witnessed in May 2021. In order to go to zero Bitcoin would need to be untradable. Meaning that the asset itself is declared illegal and therefore no market is available. That would also require that all governments in the world declare this at once with no exceptions.


But that is not the only possibility for BTC going to zero. Another option is that Bitcoin is becoming obsolete. There are around 5000 different cryptocurrencies available on the free market and all the while Bitcoin has the largest market cap and the biggest community, it doesn’t necessarily have to stay that way.


Most recently western societies have engaged in a debate whether Bitcoin mining is sustainable and if the impact on the environment should be tolerated or if this could be a reason to ban mining and in conclusion Bitcoin altogether. But aside from the question if this could be a good reason to ban Bitcoin a broad community began to promote proof of stake coins. Among them are Tezos, Cardano, and last but not least Ethereum. There is reason to believe that Bitcoin could become obsolete because its fundamentals did not change since its inception in 2009. If society agrees that it is time to replace proof of work all along or technology is invented that is going to beat Bitcoin by far, then its value could crash down to zero.


How likely is such an event?


There are many other events that could lead to a complete and utter crash. Let’s say a giant asteroid is going to hit the earth in 2023 and is going to destroy the world. But this wouldn’t be very likely, would it? We don’t need to go that far and show examples of highly unlikely events in order to determine that any of the aforementioned events is very unlikely.


But that doesn’t really answer the question of how likely it is that Bitcoin going to zero. Let’s say Bitcoin get replaced within the next 10 years or so. Even with that scenario in mind, Bitcoin wouldn’t necessarily go to zero. It could still keep a little value as a collectible. Its scarcity is one of the biggest factors when it comes down to value after all. While Bitcoiners claim that those features make it a good store of value, it makes it also a scarce collectible item. Even if the network itself would fail there will be still people left running an old laptop for nostalgia and hold or trade some Bitcoins. The same thing has happened for retro computing. Old hardware that isn’t even worth the scrap price gained in value. Some items are even worth thousands of euros depending on the availability and the demand.


But to finally answer the question to the full extent a report of two economists from Yale University might come in handy. According to their research that they conducted in 2018, the likelihood of Bitcoin crashing to zero within the span of a day due to an unspecific event ranges between 0% and 1,3%.


In conclusion: There are a couple of scenarios that could possibly cause such a crash and trigger an event that will cause a drop of Bitcoin’s value down to zero. The likelihood is very low, even if you consider an unspecific event.

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