What happens if Bitcoin returns to zero?

After reaching a value of $69,000 in November 2021, the current Bitcoin price is fluctuating to $30,000.After each slide, the prospect of a complete cryptocurrency collapse is brought to the table.

Even though the cryptocurrency market has grown much compared to climaxes like 2013 or 2018, many investors still cannot escape the obsession with Bitcoin’s collapse and zero value.

Bitcoin Collapse Hypothesis

An unbelievable event that makes Bitcoin price zero can come from inside the system, such as a hack targeting a high-value transaction or a technical error. External factors can also impact, such as government sweeps or when the financial bubble breaks as the central bank raises interest rates.

Cryptocurrency investors can be divided into three main categories, according to insurance and asset manager Mohamed El-Erian at Allianz: those who believe in Bitcoin’s platform, tactical investors and speculators, and those who like to venture out.

Although the first group will receive a fatal blow from the collapse, they will likely hang on for the longest. Meanwhile, the third group will immediately flee from the first shocks. The second group must stay to prevent catastrophe, which is very unlikely when prices go to zero.

A slide can easily drag the whole market into collapse. Bitcoin miners, who ensure transactions are made and rewarded, will lose the momentum that continues, leading to the stagnation of cash flow. Investors are more likely to sell off other cryptocurrencies. Observing recent fluctuations, Philip Gradwell from Chanialysis Data Group pointed out that cryptocurrencies constantly fluctuate in Bitcoin prices.

As a result, a large volume of assets will evaporate. Long-time owners will suffer less than what they spend but lose huge undrawn profits. Recent Bitcoin buyers will yield the most. The latter group includes most financial institutions: hedge funds, investment funds of universities, mutual funds and enterprises.

Spreading influence

The aftershocks of collapse can be transmitted across multiple channels to other asset classes, both encrypted and universal. One of them is the leveraged trading channel. Nearly 90% of the money invested in Bitcoin flows into derivatives such as indefinite swaps, allowing to bet on the volatility of Bitcoin price over an indefinite period of time.

Most of these transactions are conducted on unregulated platforms such as FTX and Binance, where customers can borrow for larger bets. A small fluctuation in the price can trigger a margin call. If not met, the broker will quickly liquidate the assets held by the client, accelerating the slippage of the crypto value. The brokers have to cuddle a large volume of bad debt.

When cryptocurrencies are collateral when the derivative investment loan loses value, the investor will have to sell off or let the floor liquidate the money. The extent of leverage to the system is difficult to determine as the brokers allow indefinite swaps that are not under any control.

Influencing traditional markets

Corporations specializing in payments like PayPal, Revolut, and Visa also lose a fat business sector that is growing and suffering a significant impact in terms of value. Businesses that follow the crypto boom, like graphics chip maker Nvidia, will also suffer. Some $2,000 billion could disappear during Bitcoin’s first wave of crashes, much more than Amazon’s market capitalization.

The Bitcoin conversion effect can spread to many other areas through different channels, including in the crypto and traditional markets. One of them is stablecoins, which were developed to ensure the smooth operation of the cryptocurrency trading system.

Stablecoins are cryptocurrencies designed to reduce volatility. The price of stablecoins is tied to specific fixed assets or fiat currencies of relatively stable value, such as USD and Euro. The stablecoins, the largest of which are Tether and USDT, currently total more than $100 billion.

Stablecoin is backed by many assets, but is largely unsecured by cash. Tether said 50% of their value lies in commercial bonds, 12% in guaranteed loans, 10% in corporate bonds or precious metals.

The collapse of Bitcoin will directly affect stablecoin, forcing issuers to sell off assets to recover capital. “The massive sell-off in assets could affect the stability of the credit market in the short term,” said rating company Fitch. The US Securities and Exchange Commission (SEC) is closely monitoring the risks from cryptocurrencies, with particular attention to stablecoins.

Many businesses have paid attention to cryptocurrencies, but there are not many parties pouring large amounts of their assets into the market, so the damage will be widespread but not serious. Banks will be completely immune to the collapse of the Bitcoin market.

A lot of factors will have to happen together for Bitcoin price to plunge to zero and impact the market strongly. However, this catastrophic scenario can also be seen in the scale of cryptocurrencies, as well as its impact on traditional markets today.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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