The blockchain technology and the concept of digital assets are relatively young phenomena. And ever since the first digital currency – Bitcoin, was introduced to the world back in 2009, the Cryptocurrency market has been experiencing a rollercoaster ride.
Whilst the market uncertainty prevails and even the biggest companies occasionally find themselves at a tragic end due to misconduct or external factors, many speculate about possible repercussions a global Crypto collapse can bring upon the Cryptocurrency ecosystem.
Among the many interesting scenarios that could cause such an event, one remains quite popular and is likely the most heavily discussed: What would happen if Bitcoin’s price dropped to zero?
A straightforward question, yet one that requires deeper analysis of the context to give an answer.
Understanding Bitcoin’s market dynamics
In order to solve this puzzle and come to a logical conclusion, it is vital to consider several factors and mechanics in motion, such as the driving force of Bitcoin and it’s value on the market.
Bitcoin is not a stablecoin, which means thats it’s value is not tied to any tangible asset, like the US dollar is backed by gold reserves.
This makes it vulnerable to significant price drops and/or any sudden upward spikes on a daily basis, just like any other Crypto asset.
Fundamentally speaking, volatility is the core characteristic of the Crypto market making any digital asset prone to skyrocket or crash in a matter of months, days or even minutes.
And Bitcoin’s price is no exception to this rule, as it’s historical performance proved this on multiple occasions.
Throughout the recent years several factors have affected the price of Bitcoin. Such as Donald Trump’s statement back in June of 2021 that “Bitcoin is a scam”.
Or the announcement of Elon Musk – Tesla’s CEO, earlier in May that Bitcoin will no longer be accepted as a payment method for produced vehicles.
Both with a negative impact on the price by nearly 55%, settled Bitcoin from a high of $57,352.77 to a low of $31,397.31.
Yet subsequently it rose over the course of the second half of the year hitting a record high of $64,863.98 as El Salvador was the first country to embrace Bitcoin as a legal tender.
Unfortunately many regulatory changes, the 2022 Bitcoin incident when Binance froze withdrawals and the cascade collapse of FTX and other crypto exchanges all together depleted Bitcoin of it’s value, making it depreciated as much as it was back in November of 2020 at a yearly low of $16,195.59.
The hypothetical drop: can Bitcoin go to zero?
In the light of these events concerns arise. A reasonable assumption that Bitcoin could hypothetically reach the null state of it’s value is worth the thought.
Even-though such an event is very less likely to take place, there are some factors that could theoretically lead to Bitcoin price crashing to zero.
Among many, here are the most hazardous ones. Those, which can lead to severe consequences and hypothetically terminate Bitcoin as a currency with a market price:
Crypto market mechanisms and their role
In contrast to the stock market, the cryptocurrency market does not have a circuit break. Which means that the trading sessions are never paused.
Such mechanics are downside accelerators when the price of a certain currency faces an extreme drop in the event of a massive sell-off.
Moreover, if a sell-off triggers panic, similar to the one that subjugated thousands during the FTX collapse, it can undermine consumer confidence.
Crypto investors may proceed with further sell-offs exponentially multiplying the disaster which might lead to a drop to zero.
External threats to Bitcoin’s stability
Beyond internal factors that may affect the price of Bitcoin, a number of external threats can also pose immense danger. Scalability issues are one of those.
As volume on the Bitcoin network rises with each transaction, latency increases, which in it’s turn intensifies insufficiency of processing operations.
Despite the ever growing Cryptocurrency ecosystem and more Bitcoin investors joining the community, global market competition pulls it’s share of the blanket.
Heating interest around artificial intelligence and it’s capabilities switches the focus of investors, giving them alternative purposes to consider.
Another nemesis to digital currencies are escalating implementations of strict regulatory frameworks that force investors to free cash towards other obligations.
In addition to that, the US Federal Reserve places higher interest rates thus cultivating a hostile environment that affects Crypto prices.
The domino effect of a Bitcoin crash
If Bitcoin lost all of its value and utility at once, the potential impact would be immense and most definitely lead to massive financial losses among individual investors, various companies and on the global cryptocurrency market.
A hypothetical ban on all operations with the mastodon among digital currencies would first affect Bitcoin miners, who rely on it as their main source of income.
Immediate dismissal from Bitcoin mining, would force almost a million miners to search for alternative sources to make a living.
Along with them, all major stakeholders like lending or swapping companies would face the harsh reality of shutting down and filling bankruptcy reports.
And lastly but not the least, would bring down a destructive wave upon other cryptocurrencies due to the nature of their dependency on Bitcoin.
The immediate aftermath for Crypto markets
If Bitcoin crashes, likely other Cryptocurrency will follow the suit as generally Bitcoin’s price action heavily reflects on market sentiment and pulls other major cryptocurrencies in the same direction. The second largest Cryptocurrency – Ethereum is a great example of such stalking dynamics.
Once most Bitcoin investors will notice that the largest digital asset has extremely plunged, taking down Ethereum along with it, a series of sell-offs of Bitcoin holdings is likely to occur.
And as a result, other coins will be sold-off in tandem in the fear of carrying out greater losses thus draining the market dry.
Long-term economic implications
Prolonged consequences of the crash may cause significant changes in the economic model of the blockchain technologies, related projects and in the approach of delivering fintech innovations to the world.
Perchance the digital assets will no longer be the centre piece of many former crypto fintech companies that will shift their focus to providing products and solutions to the global market to attract traditional investments.
Is a zero-value Bitcoin a feasible scenario?
The decentralised infrastructure and the robust architecture of the blockchain make it nearly impossible to put it at an absolute halt.
A complete failure of the thriving system would require an unrecoverable loss of interest to over a 100,000 active nodes within the Bitcoin network.
Besides the obvious technical advantages, the size of the community surrounding the first Cryptocurrency backs the claims of it’s sustainability in the face of a potential crash.
The support of crypto whales and thousands of individuals natively strengthens the asset’s value. Moreover, their contribution to it’s resilience multiplies the community and raises global awareness.
Preparing for the worst: strategies for a Bitcoin downturn
In the real world, the Cryptocurrency market remains unstable and prone to frequent fluctuations.
And despite a proven track record of Bitcoin historically performing well against the odds of internal and external factors, risk management lies in the core of any investment strategy.
Navigating and trading a potential steep decline in Bitcoin’s price requires much more knowledge than a raw theoretical base and absorbed speculations.
Selling or buying Bitcoin during a turbulent time should always be conducted in accordance with best practises, accompanied by a selection of proper analytical tools.
Risk management tactics
As appealing Bitcoin may seem to invest in, a good to go practise to mitigate the risk associated with a single asset is diversification. Spreading the risk helps offset losses by balancing them out with profits made in a different investment.
Another great way to protect an investment from losses is the utilisation of Stop Loss orders.
By placing orders that automatically trigger when the price reaches a certain threshold, any potential losses can be easily limited to an acceptable level.
Psychological aspect of investing during crises
Following a short-term trading strategy can bring various benefits, yet result in unfavourable outcomes in the long-term in the event of an unexpected situation.
Because of this, its vital to remain unbiased in choosing a strategy to execute. Adapting properly to the current conditions offered by the market could bring more advantages and profit opportunities.
Conclusion
While the prospect of Bitcoin crashing to zero is minimal considering all factors that can influence this cause within a hypothetical theory, trading or investing in the first Cryptocurrency on a daily basis may become a difficult task.
Exercising proper risk management both in the short or long terms can ensure a balanced strategy regardless of the current or predicted price trends.
