Can Bitcoin survive the next financial crisis? These three scenarios can answer

The market's views on Bitcoin have formed two distinct camps. The opposition firmly believes that all virtual currencies are "tulip bubbles", while the affirmative side believes that the price increase of Bitcoin "has no end in sight."

How to tell who is right and who is wrong? Charles Hugh Smith, a columnist for the blog oftwominds.com, believes that it is impossible to judge when the economy and market are booming. To judge the true value of Bitcoin, we have to go through a financial crisis .

Wall Street Journal has mentioned many times that the reason why Bitcoin has high price volatility is because of liquidity concerns. If Bitcoin also encounters a financial crisis of the same scale as in 2008, how will it react?

The author of the blog post compared the performance of gold prices during the peak and later stages of the 2008 financial crisis. From March to October 2008, the unit gold price fell from $1,100 to $830, a drop of 25%, but rose back to the $1,100 range in February 2009.

A possible explanation is that gold was under heavy selling pressure during the height of the financial crisis, and investors sold gold for cash to meet margin account replenishment needs. Gold is attractive as an ideal store of value, and "buyers" emerged one after another, subsequently raising prices.

The article worries that Bitcoin will not be able to cope as well as gold when faced with a financial market crash, and hypothesizes the following three scenarios, which Bitcoin followers may wish to use to self-examine.

Scenario 1: Can Bitcoin be used directly to repay margin calls? Can large-scale operations affect market liquidity? Are there margin loans and equivalents denominated in Bitcoin?

Scenario 2: Can Bitcoin be widely used to pay for daily needs, such as food, fuel, medicine, clothing, electricity bills, tax bills, rent and mortgages? How convenient is it to pay directly with Bitcoin locally? Do we need to convert it into legal currency?

Scenario 3: Can the minimum physical infrastructure required to maintain Bitcoin be met with Bitcoin? For example, can Bitcoin be used to pay rent, electricity bills, purchase the minimum necessary servers, and maintain brokerages and trading platforms?

In addition, when encountering liquidity shocks, does Bitcoin have a lender of last resort system like the modern banking system, with a terminal unified institution providing liquidity support and assistance?

The article points out that if none of the above scenarios can be met, and Bitcoin has a natural supply cap of 21 million, then it will be powerless in the face of the impact of liquidity tightening, and any future global financial crisis will cause Bitcoin to collapse .

A lack of liquidity can easily trigger a self-reinforcing feedback loop, whereby a lack of liquidity triggers market panic, leading to intensified sell-offs of certain types of assets; the sell-offs in turn reinforce the lack of liquidity, which in turn intensifies the extent of panic selling.

When faced with a financial crisis, Bitcoin's liquidity issues mainly come in two parts: whether sellers can successfully find buyers, and the convertibility of Bitcoin into fiat currencies (especially global reserve currencies such as the U.S. dollar, euro, yen, and renminbi).

The ownership relationship of Bitcoin is also relatively complicated. A person can have multiple trading platform accounts and wallets, and a Bitcoin address can be owned by more than one person. Moreover, it is unknown how many Bitcoin keys are lost when the storage hard drive crashes, that is, the number of "zombie bitcoins" is unknown (Note: public key addresses that have no transaction records for more than 18 months).

In this case, it is impossible to accurately estimate the supply and demand of Bitcoin in the event of a financial crisis . However, the article believes that "success or failure" is the characteristic of Bitcoin ownership. If Bitcoin ownership is really too concentrated, the liquidity problem can be solved by a few top owners. Either they are buyers during the sell-off, or they do not need to sell Bitcoin to repay the recovery of margin accounts, which will help alleviate the liquidity panic caused by the massive selling pressure on Bitcoin.

So will setting up Bitcoin futures contracts help alleviate liquidity shocks? Wall Street News once mentioned that the answer is no. Some Wall Street analysts are worried about this type of futures. Bitcoin is difficult to price, and derivatives are easily packaged into unknown concepts, which may bring huge risks.

In fact, what the market is really worried about is not whether Bitcoin can survive the financial crisis, but that the next financial crisis should not be caused by Bitcoin.