What Happens if/when the Bitcoin Bubble Bursts? (Will it Be Anything Like the Bursting of the Housing Bubble?)

The bursting of the Bitcoin bubble no longer seems to be a question of “if”, but rather one of “when”. When it indeed happens, what will be its consequences for the global economy and for the crypto industry as a whole? Let’s explore a few possibilities and possible consequences.

First of all, let us set it straight from the get-go: Bitcoin did indeed waltz into bubble territory some time ago, and the bursting of that bubble may already have indeed begun. I am by no means a crypto FUD-pusher, but once it shot past the $10k mark a few months ago, bitcoin (and arguably, some of the other cryptos) undeniably strayed into bubble territory, as most of the growth past that point bore the telltale marks of FOMO (Fear of Missing Out). Scores of otherwise uninterested people jumped onboard, and now that the price of the crypto asset has fallen below $9k, they are just as desperately seeking to jump off the bandwagon.

Let us not kid ourselves: this major correction was bound to happen. Is it though the bursting of the bubble, the beginning of the much-prophesized end, or nothing more than a correction indeed? Whatever it is, it has certainly put a dent into the price of bitcoin, so much so that it may soon end up driving it out of bubble territory.

Bitcoin Bubble @ Echofin blog

Is Bitcoin Really in a Bubble Though?

How does one define a bubble in regards to Bitcoin? In “conventional” scenarios, bubbles are characterized by the inflation of the price of an asset way past its intrinsic value. It is sort of difficult to determine the intrinsic value of a string of cryptographic data though. Adoption and use are a couple of obvious factors which would lend a crypto value, and going by that metric, bitcoin has indeed been in bubble-land for quite a while now. Not helped by skyrocketing network fees and transactions that take forever to process, the adoption of bitcoin has been growing at a much slower pace than its price.

Furthermore, BTC ownership is very unevenly distributed at this point. Around 4% of the addresses hold 90% of the coins ever issued. This fact certainly contributes to the scarcity of the asset, and it gives us our first clue as to what would happen in case of a complete BTC meltdown.

So What Happens if a Bubble Really Erases BTC for Good?

Not much really…Investors will swallow the losses and move on. Small timers will huff and puff for a while, and the talking heads heralding gloom and doom will finally have their day. As said above, the vast majority of coins are concentrated in the hands of a few thousand bitcoin millionaires. These rich people will become a tad less rich, as will small-timers who put some money into the asset. Certainly, there will be a few extreme cases too (like people who took a second mortgage out on their house to buy into BTC), but the way the system is currently structured, the repercussions upon the global economy would be barely noticeable.

Sure, the $300 billion market cap would be erased, but one has to bear in mind two things in this regard: as massive a sum as that may seem, it is still but a drop in the bucket as far as global markets are concerned. Secondly, that market cap is a bit of a mirage: the actual capital responsible for the driving of BTC’s price is most likely only in the several billion dollar ranges, due to the above mentioned uneven distribution of coins. The early adopters and miners currently sitting on large amounts of coins are only millionaires in name. They would simply lose that distinction and that’s about it.

Given that there is not much lending and leverage involved in BTC trading yet (though steps have been taken towards pushing cryptos down this road too), the bursting of the BTC bubble wouldn’t be anywhere as destructive as the housing bubble was.

What About the Crypto Market?

The effect of Bitcoin’s demise on the crypto market as a whole is a much more interesting angle to explore. In this regard, the timing of the bubble-burst is of the essence. If it happens soon, the meltdown of the biggest and best-known crypto will certainly bring down the entire industry with it.

If it happens late enough though, Bitcoin’s death would likely mark the birth of a new crypto poster-currency (ETH?) and the bubble would start over.
Of course, there are millions of other variables involved in such a scenario, and we obviously can’t consider them all. Some people see contagion spreading into the stock market. With scores of millennials invested in BTC, many investors would lose not only a sizeable chunk of their portfolio, but their appetite to invest too.