Will Bitcoin, with a market value of trillions of dollars, return to zero? Will a collapse impact the financial system?

Source: The Paper Author: Ye Yinghe

If the trillion-dollar Bitcoin collapses, will it cause a financial crisis?

On February 22, possibly influenced by the remarks of US Treasury Secretary Yellen, the price of Bitcoin experienced a waterfall-like decline, from around $58,000 to a low of less than $48,000. According to Coin data, the amount of Bitcoin liquidation on February 22 reached $1.817 billion, of which $1.656 billion was liquidated for long orders and $161 million for short orders.

On the same day, according to CNBC, Yellen pointed out that Bitcoin is a highly speculative asset. She believes that people should be aware that this asset may be extremely volatile and she is worried about potential losses for investors.

Although the price of the currency has declined, as of press time on February 23, the price of Bitcoin is close to $50,000, and the market value is still close to $1 trillion. Since last year, mainstream companies including Tesla have also entered the market to purchase cryptocurrencies. With the ups and downs of Bitcoin, will such a large amount of Bitcoin have an impact on the traditional economy and finance? In case of a collapse, will it cause a financial crisis?

Is it possible for Bitcoin to return to zero?

"There is almost no possibility that the value of Bitcoin will return to zero," said Gu Yanxi, founder of Liyan Consulting and researcher in the blockchain and encrypted digital asset industry.

But he also admitted that the possibility of Bitcoin fluctuating sharply is very high, because now more and more individuals and institutions are holding Bitcoin, rather than buying and selling it. Even mining companies listed in the United States buy Bitcoin for storage through cash, and do not sell the mined Bitcoin, so the number of tradable Bitcoins in the market is decreasing, and the price will inevitably fluctuate sharply, especially considering that some trading venues can also use super-large leverage for trading. All these factors will cause Bitcoin trading to fluctuate sharply.

Yu Jianing, rotating chairman of the blockchain committee of the China Communications Industry Association and president of Huobi University, also believes that in the short term, the Bitcoin market will experience high price fluctuations, and may even see a deep correction of up to 30%-40%. However, Bitcoin has experienced many deep adjustments in history, and has also experienced many "mining disasters", so a deep adjustment does not mean a complete collapse of Bitcoin, and the long-term trend will remain unchanged.

"A sharp correction in Bitcoin prices is possible. Because many investors use high leverage, they will lose money in a correction," said Zou Chuanwei, chief economist of Wanxiang Blockchain and PlatOn.

He pointed out that even if Bitcoin falls sharply, the security of the Bitcoin network will still be guaranteed, and activities such as mining and trading will continue, so Bitcoin will not disappear from the world.

Yu Jianing said that in fact, in the more than ten years since the birth of Bitcoin, there have been overseas websites that have been counting market reports on Bitcoin's return to zero. According to statistics from 99bitcoins, Bitcoin has been declared dead (returned to zero) 401 times so far. The 2017 bull market received the most zero obituaries, 124 times. But we also see that the current price of Bitcoin is more than 2.5 times the highest price at that time.

He believes that one of the greatest significances of Bitcoin is to promote and popularize blockchain technology and blockchain applications globally. Bitcoin is a "general equivalent" in digital assets, similar to the blue chip in the digital asset market, and its application scenarios will further increase with the development of the blockchain industry.

"This Bitcoin bull market will encourage venture capital to increase its attention and investment in blockchain application areas, including my country's inclusion of blockchain in the category of new infrastructure. It can be said that if there was a risk of Bitcoin returning to zero in the early days, then in the current era when blockchain technology has become a global highland of technological innovation and practical applications are flourishing, the risk of Bitcoin returning to zero is extremely low," said Yu Jianing.

"Limited scale" and "irrelevant to the real economy"

If Bitcoin collapses, will it trigger a financial crisis?

"Bitcoin is a very small-scale investment product, and its price fluctuations are inevitable. Due to the limited scale of Bitcoin, even if it collapses, it will not trigger a financial crisis, and the impact on the economy and finance will not be large." Wang Yongli, former vice president of the Bank of China and chief economist of Shenzhen Neptune Group, told the Paper.

"One trillion dollars is simply insignificant in the financial market," said Hu Jie, a professor of practice at the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University. "Foreign exchange transactions exceed 5 trillion dollars a day, the US stock market is worth about 40 trillion dollars, and China's banking assets are 300 trillion yuan."

According to the latest data from bond research firm Learnbonds, the global foreign exchange market has seen daily trading volume of $6.6 trillion over the past decade.

Yu Jianing also believes that although Bitcoin's "digital gold" value storage function has been recognized by some financial institutions and listed companies this year, such as its limited supply, global circulation properties, and can be configured as a safe-haven asset, the overall size of digital assets is not large. Even if Bitcoin experiences a deep correction, it will have a certain impact on these institutions, but the impact is very limited, and it will not reach the point of causing a financial crisis.

Hu Jie also said: "Bitcoin is a very isolated market, and it has nothing to do with the real economy."

He believes that Bitcoin is a "limited edition digital cultural relic" and a cultural relic market that has nothing to do with other financial markets. It is a transaction that a group of people who love cultural relics enjoy. "I don't deny that this thing itself is a market that will continue to exist, but for now it has nothing to do with our real life."

Zou Chuanwei also mentioned that Bitcoin has little to do with the real economy except that mining involves hardware development and construction, as well as electricity consumption. Therefore, the sharp drop in Bitcoin prices has very little impact on the real economy.

Institutional investment in Bitcoin is currently sporadic

As Bitcoin continues to rise, mainstream companies are paying more and more attention to Bitcoin, and investing in Bitcoin seems to be a trend. So if Bitcoin collapses, will it cause corporate debt problems and lead to financial risks?

On February 8, Tesla announced that it had purchased $1.5 billion worth of Bitcoin and may purchase and hold digital assets from time to time or for a long time. Tesla also said that it hopes to accept Bitcoin as a payment method for its products. Mastercard announced on February 10 that the company will begin to support the use of some cryptocurrency payments on its platform this year. Bank of New York Mellon, the oldest bank in the United States, also announced on February 11 that it will enter the Bitcoin and other digital currencies.

In addition, MicroStrategy, the world's largest independent BI (Business Intelligence) company, purchased Bitcoin in August 2020. According to CNBC on February 16, MicroStrategy's stock price has climbed more than 7 times since the purchase of Bitcoin. The company also announced on February 16 that it would issue $600 million in convertible bonds to purchase more Bitcoin.

In this regard, Hu Jie believes that this is only a sporadic phenomenon at present. If more companies invest in Bitcoin, they may suffer losses when Bitcoin plummets, but it will not have any major impact on the economy.

In addition, Gu Yanxi said that the conventional view is to invest 0.5% to 1% of the funds in the portfolio in Bitcoin, so such a proportion of funds will not affect the overall investment portfolio of the institution. Mainstream institutions will only invest a portion of their funds in Bitcoin, and there are almost no cases of large-scale debt purchase of Bitcoin like MicroStrategy.

"Bitcoin's impact on the value of institutional holdings won't be that big," he said.

Gu Yanxi believes that the birth of Bitcoin was caused by the financial crisis in 2008. The purpose of Bitcoin is to reduce the probability of financial crisis. Bitcoin will suppress the occurrence of financial crisis. "If there is a financial crisis, it must be a financial crisis based on legal currency."