Bitcoin Will Never Go to Zero. Here’s Why.
The view about bitcoin either “going to zero” or becoming one of the “world’s most valuable assets” is a simple, common observation that in reality is probably quite accurate.
Ultimately, bitcoin is not something that will “half work.” It will either succeed in its mission of being a way of moving real value around the world quickly and easily, or it will fail completely. It is, quite appropriately, a binary outcome, either a one or a zero.
Those of us in the industry who work with and promote Bitcoin day in and day out understand the risks. After all, while Bitcoin is very different from traditional fiat currencies and carries numerous advantages over the existing system, it still relies on one common aspect, at least partially.
That aspect is “confidence.”
Of course, bitcoin has the advantage that is is outside of human control and is actually backed the absolute certainty of mathematics, but even so, it still needs humans to accept it and believe it has value, like any other currency.
And in the world of traditional currencies, loss of confidence happens all too often.
We’re all familiar with those images of people struggling to carry enormous bundles of useless notes to the local shops, hoping to exchange them for a few meager goods and those protest signs reading “starving billionaires” that we’ve seen on the internet.
We’ve seen it in recent times in Zimbabwe, and it’s happening now in Venezuela, Argentina and other countries.
It’s happened throughout all modern history, mainly because we humans simply can’t resist printing money to oblivion to fund whatever harebrained scheme we’ve come up with at the time. The effects of covid-19 mean that it may well happen more frequently in countries than ever before.
In Bitcoin’s case, since there’s no way to increase the total supply, a loss of confidence would play out in a different way. It would simply be a total collapse of exchange rate to dollars or other currencies.
Although there’s always discussions about how this could happen, in my view there’s really only two broad scenarios where Bitcoin has the possibility to fail. Even then, as we’ll see, it may still not be enough to cause a final death blow.
Scenario One — Death by Regulation
This is the idea that your government could make everything even remotely linked to a non-sovereign cryptocurrency illegal and impose stiff penalties for anyone using, holding or working with it.
The reality is that some countries will probably try this, but all will ultimately fail in global terms. While that's a bold claim, let’s examine how this is likely to play out.
As an example, let’s say you live in the U.S. Right now, America isn’t anti-Bitcoin, but it’s not exactly creating a culture of encouragement either. Arguably, it could go either way as Bitcoin growth continues unabated anyway.
However, the Federal Reserve probably sees bitcoin as no more than a little novel toy played with by speculators and anti-establishment fanatics.
Its tiny $200 billion market cap is close to insignificant when compared to gold’s approximately $8 trillion or even USD’s M2 value, which is somewhere around $75 Trillion.
Of course, logically speaking, this is exactly the time the Fed should act if it wants to ban it, but the reality is that they are not likely to do anything until it is an actual, real threat to the sovereign currency, at which point it will be too late.
Banning it then will simply reinforce to people how important it is to have choice, and the network effect will almost certainly be too powerful to overcome.
Further, since bitcoin is truly global and does not recognize any border, people will simply circumvent the rules and will be to do so with relative ease.
The ban would only be effective if all countries — not some, not most, not 99%— agreed AND got the buy-in of all local and global banks, card providers and other online financial service providers to cut all on-ramps and off-ramps simultaneously.
This, of course, is impossible.
As a species, we can’t even agree to stop pumping highly toxic crap into the atmosphere — an act that will actually stop us from dying — let alone agree to stop a currency that is entirely neutral to that outcome.
Asking thousands of independent organisations with their own objectives, shareholders and viewpoints to do this would be like training thousands of cats to get together and do a perfectly synchronized line dance.
In fact, that would almost certainly be easier.
But even if we assumed that this was, somehow, possible, it still wouldn’t stop Bitcoin on its own once it is properly established, i.e. the point at which countries would actually act.
Even with no on-ramps and off-ramps, the Bitcoin economy would continue to thrive. With no way to switch between financial systems, people would have to commit to one or the other.
Why pay for a service or be paid for work in USD when you could conduct all your affairs directly in Bitcoin? And as for taxes, well, Uncle Sam, I don’t owe any. In legal and financial terms, according to your own definition, I am no longer earning anything.
The point is unless all countries on the planet agreed unilaterally and simultaneously to ban cryptocurrency and all related activities outright, then a global game of whack-a-mole would simply play out with the industry moving to whichever countries remain friendly with relative ease.
And, as long as there is a single, solitary country on the planet that is not hostile to cryptocurrency, it could continue entirely unencumbered.
And there’s already more than one. In fact there are many, including Malta, Slovenia, Switzerland, Singapore and Bermuda, to name a few.
Global prohibition, therefore, is already not a possibility in real, practical terms, although it could arguably succeed for short periods on a local level.
However, there does remain a second scenario, which, although still unlikely in itself, would have a higher chance or bringing down user confidence.
Scenario Two — Technical Armageddon
Bitcoin’s network is incredibly secure, to a degree that is easy to demonstrate in mathematical terms, but close to impossible using mere words.
The beauty of a simple, well-designed decentralized system has been proven with close to 12 (almost) trouble-free years of operation. Take a look at the latest network statistics taken at 11 a.m. GMT on Wednesday, September 23:
There were two short outages in the early days of development which affected the network, even though they were dealt within hours.
Bitcoin has worked consistently ever since, and, as of today has run perfectly for over 7 1/2 years without interruption or issue, something that is close to impossible to achieve for any traditional centralized system.
However, because the network IS Bitcoin, any failure in it would be instantly devastating, at least in theory.
It’s unlikely this would happen through a design fault, as this would have long since been discovered and fixed.
Also, since there is an almost infinite amount of redundancy built in due to the decentralized nature of the network, a simple failure is also next to impossible. The only remaining possibility, therefore, is a deliberate attack.
This would probably be a 51% attack, where a rogue player takes control of the network through sheer computing power, but this would be difficult to mount in secret due to the expense and the amount of equipment required.
It would almost certainly need to be state-sponsored, and the motive, presumably, would be to stop the gain of Bitcoin against a sovereign currency.
However, it would be hard to maintain for long, and it would be obvious where the attack was coming from. The most likely outcome would be a short-term mess that would be fixed when network control resumed.
The other possibility is that Bitcoin’s algorithm, currently one of the most secure on the planet, is no longer unbreakable, perhaps because of a new breakthrough in Quantum computing. There are those who say it could even happen within the next decade.
This question was recently raised with Andreas Antonopoulos, one of the biggest influencers in the space, who simply stated that the solution would, in fact, not be complicated at all:
“The community” he said “would simply change the algorithm by consensus.”
This is a slight exaggeration, as that process is not without problems, but it is already generally recognized that at some point, there may well be a need to switch to “post-quantum cryptography” to protect all blockchain applications, including bitcoin.
But there is yet another twist. Even in this second scenario where a successful attack should utterly destroy confidence, it still may not succeed in doing so.
And there is actually a strange little precedent that might explain why.
The Mystery of Ethereum Classic
The last thing I want to do is get involved with the whole “my cryptocurrency is better than yours” lunacy which, unfortunately, seems to happen any time I mention a digital asset that someone doesn’t agree with. However, this example is really nothing to do with functionality or application.
It’s simply about confidence.
Ethereum Classic (ETC) is ranked as the thirty-first biggest cryptocurrency by market cap, being worth some $577 million as of Sept. 23, 2020. It has been the target of successful 51% attacks no less than three times in a single month, which was August 2020. And they weren’t even the first ones.
A single attack is enough to dent confidence, but three should be enough to finish it completely, and also for good. Why on earth would you mine or use it, knowing there is a real possibility that you could lose your assets at any time?
Yet, astonishingly, not only has volume remained relatively consistent, the price has only dropped marginally, rather than dropping to zero as we would perhaps expect.
The reasons for this can only involve speculation, as they appear to defy logic, but we can probably say this is something to do with the community that supports it.
In this case, because it is a little-known cryptocurrency in relative terms, it might just be that the underlying community is determined not to let it fail whatever the cost.
It’s possible, therefore, that there may be a period of Keynesian-style market intervention by that community while the issues are addressed, in whatever form that might take.
That may also be completely incorrect, and it’s just that the market doesn’t care either for the asset itself, or the attacks. Who knows?
The only thing we know for sure is that, logically speaking, it should be trading at zero — whether for the short term or all time — and it isn’t.
And whilst Ethereum Classic isn’t exactly Bitcoin, could this give us any clues about what might happen in the same situation? Perhaps.
And in fact there is one slightly more comical aspect that we should also take into account that is linked to that very point.
“If bitcoin goes to zero, I’ll buy it all”
While I’ve noticed variations of this coming through regularly on my Twitter feed over the last few years, it’s only recently I’ve really clocked just how common this phrase actually is.
There have even been times when someone has made this statement and someone else has challenged them, stating that they’d pay, for example, 10 cents a bitcoin to have it all instead of their initial offer of 1 cent, which, inevitably, is followed by someone else offering a dollar, and so on until we find ourselves back in a free market for bargain basement bitcoin.
And, as others have pointed out, you’d only take a loss (in fiat currency terms, not bitcoin terms) if you actually sold. If there’s one thing the Ethereum Classic precedent tells us, that may not actually happen anyway.
Plan B, the pseudonymous creator of the now famous stock-to-flow model, added another angle to this chain of thought by carrying out a completely unscientific poll on his 135,000 followers last month with the following results:
In other words, 72.1% of those followers claim they would still hold Bitcoin even if the fiat equivalent dropped to zero. If that’s the case, then, mathematically speaking, it couldn't anyway, due to the sheer number of “I’ll buy it all at X” brigade, some of whom we can safely assume, reside in that 72.1%.
And anyway, I can promise you absolutely it’ll never go to zero, because I’d buy it all off you anyway for old time’s sake, for peanuts.
Although, given the queue, I’m starting to wonder whether I’d actually stand a chance of doing that.
Want articles and up to the minute analysis and opinion in your inbox? Why not subscribe to the ‘Bitcoin and Global Finance’ newsletter? Receive special offers and insider info, unsubscribe at any time.
If you enjoyed this article, you may also find these useful:
Microstrategy buying £425 million of Bitcoin is a big deal. But it’s actually even bigger than you think. Here’s why.
The Microstrategy Bitcoin Deal Is Much Bigger Than You Think
Behind the numbers lies an even bigger story
Why this is getting harder to do as each day goes by … and why it’s more important than ever:
Just how fast is Bitcoin growing and who is using it? Here’s what the numbers tell us:
Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics.
Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.