Could Bitcoin collapse?

Could cryptocurrencies actually collapse?

Actor Ben McKenzie has released a documentary calling cryptocurrencies stupid, four years after telling the US senate that they were the “largest Ponzi scheme in history”.

While McKenzie is vocal about his wish to take down cryptocurrency, even local supporters say it’s possible that at least some of them could see their value go to zero. But which, and why?

Cryptocurrencies are a decentralised form of digital currency that can be used for transactions between individuals, but are most commonly held as an investment asset. It is even possible to invest in cryptocurrency

Bitcoin is the best known currency but there are a large number of in circulation including Ethereum and Ripple.

Bitcoin’s price has fallen from a peak of more than NZ$210,000 late last year to NZ$128,489.

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Ethereum has dropped from about NZ$7500 this time last year to $4000.

The values can move a lot because they are not backed by any government, and the price is set by supply and demand factors rather than any specific use case.

Rupert Carlyon, founder of Koura, said there was a scenario where Bitcoin values could fall to zero.

“Do I think that’s likely? No, I think that there is too much behind it now. And I think that Bitcoin has become a little bit of the gold standard and the piece that sits in behind the whole industry. Would I be entirely surprised if one of those second-tier layers fell to zero? No, not, whether it be Ethereum, Alana, Avalanche, Ripple.

“Will there be one of those that ends up as the winner or maybe two of them as the winner and a few of the others turn into the Alta Vista of the search game? Yes. But Bitcoin kind of just seems to stand out on its own and be the bellwether of where it’s at.

“And it’s got so much institutional backing now, it’s hard to see it going anywhere else.”

Some commentators have suggested the recent fall in value is because people who would have previously invested in cryptocurrencies have withdrawn money to move to AI stocks.

University of Auckland professor Alex Sims said if enough holders sold and switched their investments, that had the highest chance of sending the value of cryptocurrencies to zero.

“I’m not sure that will actually occur, reasonably switched on crypto holders will be wary of the AI bubble. Plus, there is a lot of institutional holding of crypto. But if some of those large institutional investors do decide to sell as well, then crypto has a chance of going to zero.”

Carlyon said the situation was complicated. “For a long time, crypto kind of stood out on its own as a high-risk investment play.

“Investors have got a range of things. They’ve got the AI stuff… personally I disagree with the hypothesis that tech is speculation, but that’s a different point. You’ve got these chip makers that are growing at 50 percent, 100 percent a year…. Assets that are showing absolutely phenomenal, abnormal returns. You’ve also got Polymarket and what is happening in the betting markets where online gambling and online betting is getting bigger and bigger every day.

“There are other things that are looking for that retail investor’s desire for cash… personally I think it’s oversimplifying it, though. There are clearly other demands there and there hasn’t been a massive story for Bitcoin over the last six to 12 months.”

The currencies can be very volatile. Bitcoin was worth less than NZ$30,000 in late 2022.

“The low level of liquidity means that a slight change in the narrative makes very strong changes in where we’re at. The narrative has changed because we’ve got increased action out of the White House, but also the whole debasement of the US dollar with Treasury Secretary Besson talking about how the US government twill start buying bonds, basically moving us back into a money printing world in order to keep interest rates low,” Carlyon said.

He said some people might have switched their attention to stablecoins, which could have affected demand for bitcoin. Stablecoins are designed to have steady value by being linked to an asset like the US or NZ dollar.

“If you think about it, a lot of people are using Bitcoin as a way to hold value, as a way to kind of avoid the banking system … you can now do that with stablecoins. That is probably one of the things just rattling around in the back of my mind going, actually, will stablecoins supplant Bitcoin?

“Stablecoins are never going to be the protection against inflation… But if you just want to hold value somewhere that’s outside of the banking system that you can access and move around freely, stablecoins give you all of that.”

Sims said the death of bitcoin and other cryptocurrencies had been proclaimed “many, many times”.

She said another scenario that could send values to zero would be if there was a breakthrough in quantum computing that meant private keys were compromised and bitcoin could be stolen.

“As I’ve said many times over the years, if quantum computing does advance rapidly so that it defeats encryption, before post quantum encryption is put in place, then cryptocurrencies are the least of our worries. Why? Likely that the water, power, money in your bank accounts, supply chains etc and most other things will go offline as they all involve the use of encryption. “

“There could be fatal flaws or code vulnerabilities in different blockchains. The issue with this is that it would be individual blockchains, and there are thousands of them. It would have to be a flaw in Bitcoin or Ethereum to really have an impact, the occasional blockchain/crypto going down doesn’t mean anything.”

She said anything that was not tangible had a risk of going to zero.

“Which is why gold and silver have increased in price over the past year or so, as they are hard assets. Also, of course, because of the risk of intangible assets going to zero, that’s why diversification is sensible. “

Source: www.rnz.co.nz