Why Fears of Bitcoin Crash Are Overblown
Deutsche Bank sees the possibility of a Bitcoin crash in 2018, but we have reasons to support why this fear is overexaggerated.
Deutsche Bank has released a list of 30 possible events that pose a high risk to investors across the world in the coming year. A few of these include high inflation in the U.S., the Russian presidential elections, and the bursting of housing bubbles in Canada, Sweden, and China.
On this list is also a mention of a possible Bitcoin crash in 2018, which may significantly hurt investor confidence. But how well-founded is this fear of a crash? I say, not too well.
The fear of a Bitcoin crash is emanating from the supposed “Bitcoin bubble,” which is believed to have reached the maximum point of inflation after prices topped $17,000.
So my thesis begins from here.
Is the Bitcoin Bubble Real?
Let’s first establish what creates a bubble. It is when investors ascribe high value to something that’s not intrinsically worth it. Take the classic example of the “Dutch tulipomania.” The Dutch drove up prices of “worthless” flowers to insanely high levels, all because they were unique and served as a status symbol.
But ask yourself; is Bitcoin really worthless?
People are buying anything from food to smartphones to expensive cars with Bitcoin. Using Bitcoin debit cards is becoming commonplace in the crypto community. There are now hundreds of Bitcoin ATMs operational around the world. The U.S. has just opened the first-of-its-kind Bitcoin futures for trading—a financial derivative that won the government’s regulatory approval.
Governments around the world are showing interest in legalizing, regularizing, or taxing this cryptocurrency. There is actual interest in the world to adopt this digital currency as an alternative to fiat currency.
So, to strike it off as worthless with one big stroke is unfair, to say the least.
Let me take you back two decades to the “Dot-Com” bubble, when investors pumped up prices of Internet company stocks. Stock prices of these Internet companies skyrocketed just for having their names ending in “dot-com” even when they offered nothing of value.
Now, it’s true that at the peak of the bubble, the naive stocked up worthless investments but those who invested in, say, Amazon.com, Inc. (NASDAQ: AMZN) are today sitting on a jackpot.
My point is that even if you’re in a bubble, you can survive it if you put your money in the right investment.
It’s true that digital currencies are currently trading at hyperinflated prices. In the crypto universe, over 1,300 currencies are being bought and sold right now. Obviously, if you buy a little-known crypto coin for no better reason than because your neighbor bought it, you cannot later blame it on your fate or a bubble.
Differentiate Between a Bitcoin Correction & a Bitcoin Crash
This brings us to another important differentiation that needs to be made at this point—that is, Bitcoin correction versus Bitcoin crash.
Finance 101 teaches us a rule of thumb that if prices drop by under 10% on a given day, mark it as a correction. Anything over, and you’re looking at a crash. That rule is absolutely useless in the case of Bitcoin because if we go by that rule, Bitcoin crashes nearly every other day.
Just look at the BTC chart for the past few days. The Bitcoin price has gone from $16,600 down to $12,800, back up to $16,000 in just three days. That drop alone is over 22%.
Chart courtesy of TradingView.com
Does that mean Bitcoin already crashed (and recovered)? Nope. If that were the case, you’d be seeing Bitcoin crash headlines pasted all over the media. A drop of 20% is usual for a highly volatile investment like Bitcoin.
So don’t panic. Just as they say in the crypto world—HODL! No, I didn’t misspell that. You don’t just “hold” Bitcoin, you “Hold On for Dear Life.” Because technically speaking, a market crash triggers as soon as enough investors start dumping their investments.
Ironically, however, that’s also where Bitcoin differs itself from most other investment vehicles.
This cryptocurrency has an evangelical following. The hardcore Bitcoiners, many of whom are Bitcoin miners, are not in it for money. Instead, they are invested in Nakamoto’s dream to make this decentralized digital currency a practical substitute for government-controlled fiat currency. They won’t simply dump it even when the average Joe runs for the hills.
So even when the prices begin to tumble, the miners, in particular, are likely to keep holding on to their bitcoins and keep prices from crashing to zero because they want to retain the value that compensates them for their mining costs.
That’s why Bitcoin can possibly never zero out in value.
That is exactly why Bitcoin is a unique investment that cannot be compared to stocks, bonds, or any other form of investment vehicle issued by an authority.
Have you seen rocket emojis flooding social media every time Bitcoin or some other major cryptocurrency shoots up in price?
There’s an inside joke in the crypto world. Digital currency investments are likened to taking a rocket ride. Defying gravity, you hit the stratosphere in the blink of an eye. But if you’re faint-of-heart, chances are that you’ll throw up before you make it.
Bitcoin is a highly volatile investment and the bulls cannot deny it. But it’s not a worthless flower or a dot-com shell investment, and the bears must not deny it either.
Albeit slowly, Bitcoin is seeing real-world adoption. Big global corporations including major tech companies and big banks are likewise investing in Bitcoin’s blockchain technology.
It’s true that Bitcoin prices have gone up too high, too fast. That fact does make us skeptical. But even if I see a significant Bitcoin price correction happening in 2018, I don’t quite foresee a Bitcoin crash just yet.