How safe is Bitcoin and can it depreciate?


Bitcoin is one of the most lucrative assets over the course of decades. At first worth a few cents, it was able to hack its way to its all-time high of $66,000. It is currently traded at $40,000, but the first-ever crypto is predicted to skyrocket to nearly $100,000 by the end of the 2022. Future expectations for it are undoubtedly optimistic. Nevertheless, many people who are not familiar with the crypto industry still have questions: how safe such a valuable asset is? Crypto skeptics continue to hold that the industry is a bubble which will soon burst and become a fundamental mistake of this very century. So what is the first-ever crypto secured with and is it in danger of full depreciation?

Skeptics’ comments on the issue

Bitcoin has been around for more than 13 years. It may seem like it has come a long way, but in fact, the entire crypto industry as well is still just getting started. 

All the time bitcoin has been a thing, it is surrounded by both crypto-enthusiasts and crypto-skeptics. The skepticism is that many believe since any cryptocurrency is decentralized, it all looks like a pyramid scheme. The scheme is quite similar: those who had time to buy bitcoin at low quotations now multiplied their investments by dozens of times, while others who acquire BTC today get a smaller profit. It sounds very far-fetched, however people do have that opinion. And they do not care about the fact that a great number of publicly-held companies invest large sums in cryptocurrency, just as institutional investors do. A complex billion-dollar infrastructure is built around a coin, involving tens of thousands of people.

What does the world of science think about this?

In 2018, two economists at Yale University, Yukin Liu and Aleh Tsyvinsky, published a study titled “Risks and Returns of Cryptocurrency,” where they, among other things, analyzed the probability that the price of BTC would drop to zero in a single day.

The authors of the study mentioned historical bitcoin returns and found that the odds of bitcoin collapsing to zero ranged from 0% to 1.3%.

Perhaps some part of our readership is now tensed to acknowledge that there is a chance of collapse after all. However, it is important to realize that the study was conducted four years ago, when the first-ever crypto cost approximately $7000. Numerous experts unironically believed that the previous highs of $20,000 per BTC will not happen. Nowadays, the situation took on quite a different turn. Not only did bitcoin surpass the then historic high and cost more than $60,000, but large companies and institutional investors invested in it as well. Therefore, the prospect that BTC could reach $100,000 does not seem so bleak. Hence, the likelihood of bitcoin sliding to zero, especially during one particular day, is offset.

What exactly is bitcoin secured with?

The next powerful argument for bitcoin to devalue is the lack of its intrinsic value. Cryptocurrency is actually unsecured and represented in the form of a code.

There are crypto-enthusiasts who make a counterargument: bitcoin is secured by the energy it takes to mine it. Surprisingly, this is a fallible judgment. The energy used during bitcoin mining is only needed for mining itself. Coin cannot be exchanged back for the energy expended. It demonstrates the cost of the coin, but it doesn’t mean it’s worth anything. 

A simple example: if you extract sand from the ocean floor, it will take a lot of resources, but there is no guarantee that there will be a buyer for it.

Anyway, this is not to say that bitcoin is invaluable. Indeed, it has no collateral in any physical asset, but neither does a fiat have collateral. The dollar, for instance, is backed by U.S. GDP, its national debt, and the Fed’s commitment to provide a predictable, reasonable value for the currency.

Just because bitcoin has no collateral does not mean it has no value. Not only does it exist, but it is also unique. The main value of bitcoin is that it is a unique payment system that has made it possible to freely make transfers anywhere in the world and has given full control over one’s digital assets. And the technology embedded in the blockchain network makes it a trustless environment where users do not have to rely on third parties, such as banks, to conduct secure transactions.

Bitcoin’s value also rests on the number of users. This can be described by Metcalfe’s law, according to which the utility of a network is proportional to the number of its users.

Can Bitcoin depreciate?

For the bitcoin price to slide to zero, you actually have to wipe everything associated with it off the face of the earth. 

Now bitcoin is more than just cryptocurrency. It is a huge multi-billion dollar financial sector with a developed infrastructure supported by large companies, crypto exchanges and exchanging, giant mining farms and a multi-million dollar audience of users around the world. For bitcoin to depreciate completely, it must stop being needed by anyone. It seems impossible now. Furthermore, the demand for bitcoin will continue the next few decades, and probably several centuries.

Why isn’t bitcoin in danger of devaluation?

In the long term, bitcoin will only surge, so do not assume that its price could drop to zero. There are fundamental reasons for this confidence:

  • Limited issue. The first-ever crypto is designed to get more expensive. Bitcoins will never be more than 21 million coins. Now 90% have been extracted, of which several million have been lost forever. But even after the last bitcoin is mined, there is a major risk that the demand for this asset will remain, and therefore its price will hike;
  • Mining. Mining new coins is a very power-consuming activity. Although mining does not secure bitcoin, it allots  a prime сost to the currency. The more expensive it is to mine one bitcoin, the higher the price at which miners will be willing to sell it;
  • Decentralization. This is a unique point and advantage of bitcoin. Cryptocurrency is not issued by anyone, and its blockchain network is resistant to hacking by hackers;
  • Major players. The fall of bitcoin is not beneficial to the big players, the so-called bitcoin-kits, who have invested tens of billions of dollars in BTC.
  • Growing acceptance. First-ever crypto is increasingly entering the real economy, with millions of people using it daily;
  • Alistair Milne will buy it all back. Eventually, Alistair Milne, entrepreneur and bitcoin investor, who placed an order on the Bitfinex crypto exchange in July 2020 to buy 18.52 million VTC in case the coin drops to $0.01, will come to the rescue. In doing so, Milne promised that bitcoin would never fully go down in value.

Conclusion

The likelihood of bitcoin’s full depreciation passed it by years ago. It has already experienced several major collapses, but this has not disrupted its overall upward trend.

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