Bitcoin is the most profitable asset in the entire history of mankind. In November 2021, it was worth $69,000. However, critics believe that the cryptocurrency actually has no value, Bitcoin is not backed by anything and one day its price will drop to zero. We figured out how much this is possible, and also analyzed what exactly is behind the rise in the price of the first cryptocurrency and how high the chances are that these drivers will exhaust their strength. Spoiler: Bitcoin is with us, if not forever, then certainly for a very long time.
Cryptoskeptics believe that Bitcoin may depreciate in value
Bitcoin has been around for over 14 years. During this time, its price has grown from almost zero to $69,000 at its peak, institutional investors and large companies have invested in the coin, it has been legalized at the state level in many countries, and the number of wallets in the Bitcoin network already exceeds 70 million. A complex infrastructure has been built around the coin hundreds of billions of dollars, which involves tens of thousands of people.
Despite this, Bitcoin critics believe that one day the price of the coin will return to zero. Similar statements have accompanied the first cryptocurrency for 14 years. Among the main arguments of critics: Bitcoin is a pyramid, it is not backed by anything and the demand for it is purely speculative.
These and other arguments have been repeatedly voiced by Bitcoin critics such as legendary investor Warren Buffett, Bill Gates, Nobel Prize laureate in economics Joseph Stiglitz, former Bitcoin Cash supporter Calvin Ayre, Euro Pacific Capital Corporation President Peter Schiff, billionaire Mark Cuban and Bank CEO International Settlements (BIS) Agustín Karsten among many others.
Investment genius and Berkshire Hathaway CEO Warren Buffett has stated that he believes all cryptocurrencies, including Bitcoin, are worthless. “Cryptocurrencies basically have no value and they don’t produce anything,” said the Omaha Prophet.
In December 2020, renowned investment advisor and “asset czar” Dennis Hartman stated that Bitcoin was “totally illogical” and predicted that the digital asset would not compete with gold for long. Hartman also shared concerns that the value of BTC could one day fall to zero if central banks take action and give up their monopoly on monetary policy. While he wished Bitcoin investors well, he said he would prefer to own precious metals like gold instead of Bitcoin.
Scientists estimate the likelihood of a complete collapse of Bitcoin
We decided to consider the arguments of cryptocritics and find out what scientists think about the likelihood of a complete collapse of Bitcoin. Thus, in 2018, two Yale University economists Yukun Liu and Oleg Tsyvinsky published a study “Risks and Returns of Cryptocurrencies,” which included an analysis of the probability that the price of BTC will fall to zero within one day.
Using historical Bitcoin returns, the study's authors found that the probability of an unspecified catastrophe driving Bitcoin to zero ranges from 0% to 1.3% and was around 0.4% as of March 2021. For comparison, for the euro the probability of such a collapse would be 0.009%.
The conclusions of Liu and Tsyvinsky may be scary, but you need to understand that they were made when Bitcoin was worth about $7,000, and many experts seriously assured that the crypto market would never see the previous highs of $20,000 per BTC. Now that the Bitcoin price has already exceeded $60,000, and institutional investors and large companies have invested in the asset, a price of even $100,000 no longer seems too incredible. Therefore, the probability of the BTC falling to zero, especially within one day, tends to 0%.
What is Bitcoin actually backed by?
Another common argument that Bitcoin could collapse to $0 is the lack of intrinsic value. The asset is actually not backed by anything and is presented in the form of a code.
Typically, cryptocurrency supporters object to this by saying that Bitcoin is backed by the energy spent on its production. But this is not true. The energy spent during mining only produces Bitcoin - the coin cannot be exchanged for energy. The energy expended reflects the cost of the coin, but this does not mean that it is worth anything. If you extract sand from the ocean floor, it will be very expensive, but it does not guarantee that there will be a buyer for it.
However, this does not mean that Bitcoin is worthless. Yes, it is not backed by physical assets. But fiat currencies do not have it either. The American dollar, for example, is supported by the US GDP, its national debt, as well as the commitment of the Federal Reserve System (Fed, analogous to the Central Bank) to provide a predictable, reasonable value for the currency.
Lack of collateral does not mean that Bitcoin has no value. Not only does it exist, but it is also unique. The value of Bitcoin lies in the fact that this unique payment system has given people the opportunity to freely make transfers anywhere in the world and given full control over their digital assets. And the technologies embedded in the Bitcoin blockchain network make it a trustless environment where users do not have to trust third parties, such as banks, to conduct secure transactions. This makes Bitcoin more than just code.
The value of Bitcoin is also based on the number of users. This can be described by Metcalfe's Law, which states that the utility of a network is proportional to the number of its users.
Could Bitcoin depreciate in value?
The price of Bitcoin falling to zero is very unlikely. For this to happen, it must be virtually wiped off the face of the earth: ban all operations with Bitcoin around the world, disable all miners, pools and mining farms, and also find and destroy all devices storing the history of the Bitcoin blockchain. It is one of the largest computer networks on earth. Therefore, it is almost impossible to destroy it.
We think that Bitcoin has long passed the stage when its price could fall to zero. This could only happen in the early years of the coin’s existence, when mostly only computer geeks knew about it. Now this asset has become an important part of the new financial world.
Now Bitcoin is more than just a cryptocurrency. This is a huge multi-billion dollar financial sector with a developed infrastructure, which is supported by large companies, crypto exchanges and exchange platforms, giant mining farms and a multimillion-dollar audience of users around the world. To completely depreciate, Bitcoin must cease to be useful to anyone. Now this seems impossible. Moreover, in the coming decades, and probably several centuries, the demand for Bitcoin will continue.
This opinion is also shared by Evgeniy Marchenko, director of E.M.FINANCE, who believes that a complete depreciation of Bitcoin looks very unlikely: “The coin is kept from collapse not only by its growing popularity, but also by the increasing adaptation of the legislative framework for settlements using BTC. Bitcoin is a fairly young asset, so it is impossible to talk about its endless relevance. There are simply not enough statistics in the world for long-term forecasts. However, it is likely that the more countries and institutional investors take this asset into account, the more drivers it will acquire.”
Under what conditions can the price of Bitcoin collapse?
Although Bitcoin is unlikely to ever completely depreciate, there are several threats that could significantly depress the value of the coin.
Complete ban on Bitcoin. Let’s assume that authorities around the world have completely banned transactions with Bitcoin. Let’s say the authorities also closed all large mining pools and data centers: mining can only be done underground or on a home laptop. In this case, the crypto market will, of course, collapse, and the value of BTC will collapse. In this case, we may see very cheap Bitcoin.
UBS Global Wealth Management experts believe that regulators are the main threat to Bitcoin. Cryptocurrency prices may rise again in the near term due to market momentum, institutional adoption and limited supply. But in the long term, it is regulatory intervention that threatens the crypto market. The authorities can create unbearable conditions for military-technical cooperation and regulate the market so strictly that it becomes simply impossible to work on it.
However, such a development seems very unlikely. Firstly, in the last few years, Bitcoin has not only not been banned, but, on the contrary, has been legalized at the state level. Secondly, it is impossible to imagine such a unanimous agreement of all countries. After all, if some states ban Bitcoin, others will support it - for them this will turn into an opportunity to become a unique jurisdiction that supports digital innovation. As soon as the United States bans Bitcoin, we are almost sure that China or Venezuela will officially support it - just to annoy the Americans.
Replacing Bitcoin with another coin. The Bitcoin blockchain is technically already outdated - it is slow, energy-consuming and not suitable for mass use. Therefore, it seems that if another, more advanced blockchain appears, the value of Bitcoin will disappear.
But there are already thousands of blockchains on the market, and almost all of them are superior to Bitcoin in speed and scaling - but this does not affect the price of the coin. The value of Bitcoin is that it was the first cryptocurrency and, thanks to its properties, became a kind of crypto standard. Moreover, the success of altcoins has a positive effect not only on the entire crypto market, but also on Bitcoin itself. For example, payment cards as a means of exchange are much more perfect than gold, but does this make the precious metal lose its value? On the contrary, due to its rarity it only becomes more in demand.
Massive loss of trust. The price of Bitcoin is also based on faith in the technologies embedded in its network. Can a coin of this faith be lost? For example, what if Bitcoin can be hacked using a quantum computer? Or is there a bug in the coin’s algorithm that could allow transactions to be canceled or coins to be counterfeited? The exchange rate will probably deteriorate noticeably. But over the course of 14 years, the best mathematicians checked the Bitcoin code. And if there was a mistake in it, it would have been found already.
Why Bitcoin will never depreciate in value
No matter what drawdowns and crypto winters Bitcoin experiences, it will definitely not collapse to zero. Moreover, in the long term it will most likely only become more expensive. There are fundamental reasons for this confidence:
Limited edition. Bitcoin is designed to rise in price. There will never be more than 21 million Bitcoins. Currently, 19.271 million BTC have been mined, of which several million are lost forever. But even after the last Bitcoin is mined, there is a high probability that the demand for this asset will continue, which means its price will go up;
Mining. Mining new coins is a very energy-intensive activity. Although mining does not provide Bitcoin, it does give it a cost. The more expensive it is to mine one bitcoin, the higher the price at which miners will be willing to sell it;
Decentralization. This is a unique property and advantage of Bitcoin. The cryptocurrency is not issued by anyone, and its blockchain network is resistant to hackers;
Developed infrastructure. Recently, in a number of developed countries, Bitcoin has already acquired the status of a legal asset, that is, no one is going to ban it. On the contrary, in these countries new laws are constantly being adopted to introduce it into the legal field. Thousands of companies that have built billions of dollars of infrastructure are working with Bitcoin. This is a full-fledged sector of the economy, whose participants are interested in maintaining the price of military-technical cooperation and its growth;
Big players. The fall of Bitcoin is not beneficial for large players, the so-called Bitcoin whales, who have invested tens of billions of dollars in BTC;
Growing acceptance. Bitcoin is increasingly entering the real economy, with millions of people using it every day. Payment services are launching the ability to pay not only with Bitcoin, but also with other popular cryptocurrencies, making them available to hundreds of millions of users around the world. Even Mastercard is planning to integrate cryptocurrencies into its payment infrastructure, just as Visa is working to integrate cryptocurrencies as a means of payment;
Collectible value. Even if Bitcoin ceases to be a popular coin, we are confident that it will be of value to collectors and as a historical artifact;
Alistair Milne will buy it all. Ultimately, entrepreneur and Bitcoin investor Alistair Milne will come to the rescue, who in July 2020 placed an order on the Bitfinex crypto exchange to buy 18.52 million BTC if the coin fell to $0.01. Thus, Milne promised that Bitcoin would never completely depreciate.
In conclusion
Let us repeat: the possibility of a complete depreciation of Bitcoin passed many years ago. It has already experienced major collapses several times, but this has not disrupted its overall upward trend.
Moreover, now all the relevant fundamental indicators of the coin are better than ever - Bitcoin is stronger than ever and will continue to strengthen as the crypto market, the number of users and infrastructure grows. There is now a much greater chance that Bitcoin will cost more than a million dollars than that it will fall to at least a thousand.
