This article takes a look at the possible scenarios to answer the important question of whether will a crash in Bitcoin's price lead to its demise.
The creation of Bitcoin in 2008 has kickstarted a technological revolution, one which aims to reshape the monetary system as well as disrupting a wide range of industries. Thanks to open-source decentralisation, individuals are empowered to participate in a monetary system that is transparent, secure and immutable. More importantly, the advent of cryptocurrencies allows for fast and cheap financial transactions on a global scale.
Evolution of Bitcoin
Bitcoin has come a long way since its inception in 2008. From a price of USD $0.003 in March 2010 to an all-time high of close to USD $20,000 in early 2018, one cannot simply ignore its exponential price growth. Not only does Bitcoin – and the entire cryptocurrency market – promises a disruptive technological wave, but it has made many people rich along the way. Therefore, it is of no surprise that many have jumped on the cryptocurrency bandwagon in the hope of increasing their wealth. (Read also: itcoin vs Alt Coins Returns: Comparison of Gains Between Bitcoin & Altcoins Investing)
There is traditionally 3 main ways that one can acquire cryptocurrencies:
- Purchase coins from a cryptocurrency exchange
- Investing in an Initial Coin Offering (ICO)
- Mining, a process of validating transactions using advanced computing hardware
Mining: A Vital Part of The Network
Given its decentralized, open source nature, Bitcoin miners play a huge role in validating the network. The incentive structure in Bitcoin’s architecture ensures that miners are compensated with additional supply of Bitcoins for their hard work in securing the network. Therefore, there is a financial incentive for miners to act in the best interest of the network.
However, this incentive is only as strong as the market value of Bitcoin. If Bitcoin’s value deteriorates, the financial incentive for miners would diminish. Therefore, the main question is:
What will happen if Bitcoin’s price plummets for a prolonged period?
Risk of Bitcoin Price Crash
Due to the extreme volatility of cryptocurrency prices, there is always a risk that Bitcoin’s prices would be suppressed. When this happens, there is a real risk of destabilization. Let’s explore the possibilities of what might happen if prices crash.
1. Economics of Mining
A core component of Bitcoin's properties – security, immutability and decentralisation – relies on miners to validate transactions on the network. There are 2 main expenses when it comes to mining:
- Hardware Costs: One needs to acquire specialized computing hardware (called Application-specific integrated circuit [ASIC] miners)
- Electricity Costs: Bitcoin’s mining algorithm requires a huge amount of energy – in the form of electricity – to be used. Electricity costs is perhaps the main, constant expenditure for miners
The average cost of mining one Bitcoin globally is approximately $5,000. Therefore, it wouldn't make sense for miners to mine Bitcoin if it's price goes below the cost of mining. Here is a look at the cost of Bitcoin mining across different countries:
(Source: Elite Fixtures)
If the price of Bitcoin goes below the cost of mining Bitcoin, then the network can be compromised. Once mining is unprofitable, the financial incentive to validate transactions and secure the network diminishes, thereby leading to an exodus of mining activity. Miners may explore mining other coins with greater profitability or even stop mining completely. The reduction of mining activity may jeopardize the security of the Bitcoin network.
Since mining is an essential part of securing the network, the absence of mining incentives will lead to a high risk of a ‘51% attack'. If it is unprofitable for miners to continue mining, then there will be less miners in the network performing a vital part of Bitcoin's network: validating transactions.
‘51% attack' occurs when a single party gains control of more than 50% of the computing power of a blockchain, giving them full control in engaging in malicious activities such as preventing new transactions from being added and double-spending the coins.
The strength of Bitcoin's decentralized network lies in the diversity of miners that validate transactions and secure the network. The exodus of miners may open up an opportunity for bad actors – that has the capacity to generate a great deal of hashing power – to ‘game' the system. In the event of an attack, Bitcoin would be compromised, and this will debase it's usefulness.
(Read more: Guide to Cryptocurrency Security: Activating 2FA)
Bitcoin will Never Die
As with 2 sides of the coin, there are those in the opposite side of the argument. Let’s take a look at them.
Ultimately, Bitcoin is a currency and in order to remain valuable, a currency needs to be used by the masses. The absence of consumer adoption and merchant acceptance would mean the death of a currency. Currently, it's utility is still relevant as it is much faster and cheaper to use Bitcoin to transfer value as comparative traditional banks.
Not only that, Bitcoin is the gateway for the entire cryptocurrency market; in order to buy other coins and tokens, one would have to own Bitcoin first. This role as being the base currency of the crypto world ensures that Bitcoin's relevance will remain strong in the long-term, assuming there is strong interest in cryptocurrencies as a whole.
2. Store of Value
Even if Bitcoin's role of being a currency is compromised (due to the lack of adoption & acceptance), its role of being a store of value is still strong given that Bitcoin is a deflationary currency. Given its fixed supply at 21 million BTC, prices are likely to increase in the long-run assuming demand is constantly growing since there's a finite amount of Bitcoin's in circulation. That is why Bitcoin is also referred to as ‘digital gold'.
3. Lower Mining Difficulty
In the event of a price crash and the possible exodus of miners away from the network, it will adversely be a great opportunity for new miners to enter the scene or even current miners (especially centralized entities) to increase their influence. This is because the exodus of miners in a crash would lead to a reduction in Bitcoin's cumulative hashing power, thereby lowering the mining difficulty level.
Mining difficulty is a unit of measurement designed to indicate the difficulty level of finding a hash below the given target. The higher the mining difficulty, the more difficult it is for a single miner to successfully mine blocks.
A reduction in mining difficulty would be a great time for new or existing miners that fundamentally believe in the long-term value of Bitcoin to enter the scene. Even though they'd be mining at a financial loss, they would reckon that the price dive would be temporary and prices would recover on the long-run. It is important to note that Bitcoin's difficulty changes every 2016 blocks, which is approximately 2 weeks. Therefore, it will take a while before the mining difficulty reduces after the reduction in hashing power.
4. Ideological Attachment
Perhaps a strong reason why Bitcoin will never die is the strong ideological support that the Bitcoin, and by effect, the greater cryptocurrency community subscribe to. The creation of Bitcoin allowed for an alternative monetary system that is devoid of any government of third party control. This is an attractive philosophy that many hold dearly and would go all out to prevent its destruction. For the first time in history, the masses are empowered and included in a monetary system that is transparent and immutable.
Beneath this mask there is more than flesh, Beneath this mask there is an idea, Mr. Creedy, and ideas are bulletproof.
What’s in Store for Bitcoin?
Though no one can predict the future, it’s interesting to look at the different possibilities on Bitcoin’s future in a scenario when prices crash. Though there is always a theoretical possibility that Bitcoin would one day cease to exists, it is hard to envision such a revolutionary technology being extinct. Given the absence of any fundamental defects since its inception as well as a strong, ideological community, it is unlikely that a temporary price crash would deter the majority of network participants.
Beneficial Resources To Get You Started
If you're starting your journey into the complex world of cryptocurrencies, here's a list of useful resources and guides that will get you on your way:
Trading & Exchange
- Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
- Guide to Bittrex Exchange: How to Trade on Bittrex
- Guide to Binance Exchange: How to Open Binance Account and What You Should Know
- Guide to Etherdelta Exchange: How to Trade on Etherdelta
- Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis
- Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works
- Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience
- Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
- Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
- Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)
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I'm Aziz and I'm a seasoned cryptocurrency trader who's really passionate about 2 things: #1. The awesome and revolutionary technology underlying Cryptos (Blockchain)#2. Making a ton of money along the way!