Bitcoin currently has a market capitalization of $2.31 trillion and is used in asset management organizations, institutions, and even nations. Millions hold Bitcoin directly and others participate through exchange-traded funds (ETFs), futures contracts, and retirement savings accounts.
But what would happen if the largest cryptocurrency in the world completely collapses? A total collapse would not only result in losses for cryptocurrency investors but could also ripple throughout the economy. Below, the expert analyzes the potential consequences.
A Greater Crisis Could Occur
A sudden decline in Bitcoin will cause losses for many investors, but a complete collapse of Bitcoin to worthlessness is an entirely different issue. Not only will new cryptocurrency investors be affected. Bitcoin is now linked to the overall financial system, unlike a few years ago. Major asset management firms, pension funds, and even some governments currently hold Bitcoin directly or through investment products.
Kevin Rusher, founder of RAAC, said: "With the current level of Bitcoin integration into the global financial system, with the largest asset management company in the world holding $90 billion in the largest cryptocurrency, if it collapses to worthlessness, we will witness a crisis greater than what occurred in 2008/2009."
Vince Stanzione, founder of First Information and author of 'The Millionaire Dropout', said: "The next collapse could be more severe because the current market is much larger and we have many Bitcoin derivative products such as exchange-traded funds and futures contracts."
Younger Generations Could Lose Faith in Financial Markets
Many current Bitcoin holders are young, often belonging to the Millennial and Gen Z generations, who see cryptocurrency as the primary means to accumulate wealth. For some, Bitcoin is their first investment. If Bitcoin collapses, many young investors may lose faith in the financial markets. Rather than turning to other assets like stocks or bonds, some may completely abandon investing.
"Research shows that Bitcoin investors (I do not want to call them investors - they are more like speculators) are often younger than stock and bond investors. One of the widespread impacts of the Bitcoin collapse will be the loss of faith in the financial markets among these younger demographics. When someone loses faith in a specific institution (such as 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 a confirmation of their traditional investment approach, younger investors may see it as evidence that all financial markets are manipulated against them.
Pension Insurance for All Generations at Risk
Younger generations tend to invest more assets in cryptocurrencies compared to older generations. This means that a collapse of Bitcoin could wipe out a significant portion of their savings.
Johnson said: "The second widespread impact will be the decline of pension assets for Generation Y and Z, as these generations tend to allocate more assets into cryptocurrencies compared to baby boomers and Generation X."
Regulations 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, the responsibility could fall on the companies operating exchanges, issuing investment products related to Bitcoin, or managing funds that hold Bitcoin. If the losses are severe, pressure could mount on lawmakers and regulators to intervene.
"The widespread impact could lead to stricter regulations, as the investors who incur losses will look to blame brokers, exchanges, and issuing companies like BlackRock. Investors who once thought they were rich on paper will have to face the reality that their newly purchased assets have vanished," Stanzione said.
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