Bitcoin currently has a market capitalization of $2.31 trillion and is on the balance sheets of asset management companies, organizations, and even national treasuries. Millions hold Bitcoin directly, and others participate through exchange-traded funds (ETFs), futures contracts, and retirement accounts.
But what would happen if the world's largest cryptocurrency completely collapsed? A total collapse would not only harm cryptocurrency investors but would also ripple throughout the entire economy. Below, experts analyze the potential consequences.
A Bigger Crisis Than 2008 Could Happen
A sharp decline in Bitcoin will harm many investors, but a complete collapse of Bitcoin to zero is an entirely different issue. Not only new cryptocurrency investors would be affected. Bitcoin is now tied to the broader financial system, unlike a few years ago. Major asset management companies, pension funds, and even some governments now hold Bitcoin directly or through investment products.
Kevin Rusher, founder of RAAC, said: 'Given Bitcoin's current level of integration into the global financial system, with the largest asset management company in the world holding $90 billion in the world's largest cryptocurrency, if it collapses to zero, we will witness a crisis greater than that of 2008/2009.'
Vince Stanzione, founder of First Information and author of the book 'The Millionaire Dropout', said: 'The next collapse could be much worse because the current market is much larger and we have many bitcoin derivatives products like exchange-traded funds and futures contracts.'
The Younger Generation May Lose Faith in the Financial Market
Many current Bitcoin holders belong to the younger generation, often Millennials and Gen Z, who see cryptocurrency as the primary means of wealth accumulation. For some, Bitcoin is their very first investment. If Bitcoin collapses, many younger investors may lose faith in the financial market. Rather than turning to other assets like stocks or bonds, some may completely give up on investing.
'Studies show that Bitcoin investors (by the way, I don't want to call them investors — more like speculators) tend to be younger than stock and bond investors. One of the spillover effects of a Bitcoin collapse will be a loss of faith in the financial market among this younger demographic. When a person loses faith in a specific institution (like the financial market), they often withdraw from that activity,' according to Robert Johnson, founder of Economic Index Associates.
While previous generations may view the collapse of Bitcoin as confirmation of their traditional investment approach, younger investors may see it as evidence that all financial markets are manipulated against them.
Retirement Security for All Generations at Risk
The younger generation tends to invest more assets in cryptocurrencies than older generations. This means that a collapse of Bitcoin could wipe out a large portion of their savings.
Johnson said: 'The second spillover effect will be the decline of retirement assets for Generation Y and Z, as these generations tend to concentrate more of their assets in cryptocurrencies compared to the baby boomer generation and Generation X.'
Regulation Will Face Major Disruption
A collapse of Bitcoin could change the game for the entire cryptocurrency industry. When people lose a significant amount of money, they often look for someone to blame. For Bitcoin, that blame may fall on the companies operating exchanges, issuing investment products related to Bitcoin, or managing funds holding Bitcoin. If the losses are severe, the pressure may increase on lawmakers and regulators to step in.
'The spillover effect may lead to even tighter regulations, as losing investors will look to blame brokers, exchanges, and issuers like BlackRock. Investors who once thought they were 'paper rich' will have to face the reality that their newly acquired wealth has evaporated,' Stanzione said.
