Collateral Damage From The Inevitable Bitcoin Crash
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Bitcoin is well off its all-time high, due in large part to moves by China to shut down domestic Bitcoin exchanges.
Also putting pressure on Bitcoin: The People’s Bank of China recently banned initial coin offerings (ICO), thus outlawing the practice of creating and selling cryptocurrency to investors to finance startup projects in the country.
Bitcoin-watchers take solace, however, in Bitcoin’s price resilience around the $4,000 mark – and hopes that China will see the light and ease its newly-minted restrictions.
And then there are skeptics like myself who see China’s moves as the first few dominos to fall, heralding a complete collapse of the Bitcoin speculative bubble.
I’m not going to use this article to argue that Bitcoin is in a speculative bubble, however. That fact is too obvious to warrant such an argument.
Instead, I’m going to gaze into my crystal ball and predict what secondary effects such a crash will cause – in other words, the collateral damage.
When Bitcoin Crashes, Who Will Suffer?
Crystal balls are notoriously fickle to be sure, and there’s no reason to believe mine is any better than anyone else’s. As such, I am going to rate each of my predictions with a subjective probability score, measuring how likely I personally believe such collateral damage will occur. Your results may vary.
Everybody with an investment in Bitcoin, including miners who are invested in mining infrastructure – 99%. Clearly, when Bitcoin falls, so too will all the Bitcoin portfolios.
ICOs and everybody touching them, including buyers, sellers, issuers, infrastructure providers, and ICO-based business models – 95%. ICOs have always struck me as being little more than selling hand-printed Monopoly money to investors. I’m not surprised that China has pulled the plug. It won’t take much to blow over this house of straw.
All altcoin and altcoin-based business models, including Ethereum – 80%. Technically speaking, a Bitcoin crash shouldn’t directly impact other cryptocurrencies – but remember, market crashes are more psychological than technical. If Bitcoin loses the trust of the community, what chance do other currencies have in maintaining it?
The Bitcoin payments infrastructure itself, including all Bitcoin-based business models – 75%. As I theorized in a recent article, the Bitcoin bubble differs from all other speculative bubbles in history because the crash of the currency may also take down the payment infrastructure itself. I’m less confident that this eventuality will take place as compared to the ones above – but I’d still bet on it.
All blockchain-based business models that have nothing directly to do with Bitcoin – 50%. The level of blockchain activity is dramatically surpassing the attention on Bitcoin itself, so there’s a good argument that these blockchain business models would come out of a Bitcoin crash unscathed. Then again, cautious investors may be scared off, for good reason.
The banking infrastructure and economies of smaller countries moving to depend on Bitcoin – 33%. Ask any Bitcoin aficionado what Bitcoin is good for, and they’re likely to tell you how Bitcoin is moving to fill the void in many developing countries that poor monetary policy and onerous banking regulation has opened up. The question: will a Bitcoin crash take down these poor countries’ banking infrastructure and economies altogether? Somewhat unlikely, but I wouldn’t keep my money in an African bank, would you?
Established companies who have bet on blockchain, for example, IBM IBM +0.43% – 20%. True, IBM and a few other established firms are betting big on blockchain, and a Bitcoin crash might torpedo those efforts. Will the collateral damage include taking down such companies altogether? Improbable, but not inconceivable.
The rest of the banking and financial services infrastructure – 5%. If the banking infrastructure in developing nations crashes, will the chaos be enough to take down the global banking infrastructure? Highly unlikely, but ironically, this eventuality plays right into the hands of the cryptoanarchists at the heart of the Bitcoin movement.
The global economy – 1%. OK, I consider this possibility a one in a hundred longshot – but do we really want to take that risk?
Plenty of Losers – but Who will be the Winners?
Any move in the market – even a speculative crash – features winners as well as losers. Who would gain from a Bitcoin crash?
Bitcoin short sellers to be sure – but short selling requires a mature trading infrastructure that Bitcoin mostly lacks, and short sales always have time limits. Who’s to say when the crash will happen?
Organizations looking for technical talent that was tied up in Bitcoin/blockchain companies – enterprises are desperate for cybersecurity expertise, and a lot of it has been sucked up by Bitcoin and blockchain startups. Time for these folks to get a real job.
Lawyers – face it, the lawyers always win.
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