Is the Bitcoin Bubble about to burst?
Bitcoin is witnessing a kind of mini-crash; its value recently plunged from a high of $20,000 to about $5,000 before picking up again. Investors panicked wondering whether the bitcoin bubble is about to burst.
The question we are trying to answer here is “Could we witness a Bitcoin crash in 2018?” While all this may just be market speculation, insider trading and crypto exchange indicators mean we have to consider possibilities. In this article, we discuss some of the possible scenarios that could lead to bitcoin bubble crash.
Can an attack on Bitcoin’s Blockchain happen?
Though it is difficult to attack the Bitcoin blockchain code, there are possibilities.
- Since peers in the network run the same code, it is possible for one weakness to take down the whole system.
- The blockchain system depends on the network of a physical computer system that is prone to corruption and destruction. If majority users decide to change the rules of the system, then nothing can stop the entire system from disintegrating.
- Each node runs on either a computer controlled by an individual or an organization. It is possible for either to alter the system if in case they find a loophole.
Public blockchain immutability is possible due to proof of work that requires participants to solve complex mathematical problems to create these blocks and get rewards.
- There are supercomputers that organizations use to resolve these issues.
- If a group has the financial capacity, it can install a system that has 51% mining power that will suppress the entire system.
- They can then mine a secret branch have only the transactions they approve and delete or censor the rest.
- While it is expensive to undertake such a project, a country like China that has a lot at stake to protect can quickly create such a system and collapse the entire network.
What Happens if Bitcoins Price Stabilizes?
Bitcoin mining relies on proof-of-work systems in which one is supposed to show evidence of solving a mathematical problem. These problems require supercomputers that utilize a lot of energy.
- If the network stabilizes, it will diminish profits and make it unprofitable to mine especially for individuals.
- The value of this cryptocurrency is dependent on its difficulty to mine. Securing the network means that the prices will stagnate, making the mining equipment costly to obtain.
What Effect Would Quantum Computers have on Bitcoin?
At the moment, quantum computers are still in their infancy regarding speed. They cannot destroy the bitcoin network that is based on complex mathematical functions such as factorization.
However, these computers could breach the bitcoin elliptic curve signature scheme security feature in the next ten years. It’s possible Bitcoin’s network security will also probably have been improved.
Possible Scenarios of a Bitcoin Crash Due to Soft Fork Issue
The soft fork is backward compatible and might expose the network code, in the process of altering the code.
- Upgraded nodes reject blocks from non-upgraded ones
- This split requires a majority hash power so if it remains in the old code; it might pose a security threat
- Upgraded codes could be supported by a minority hash power and get orphaned
- The soft fork can also work as a hard fork and splinter off.
Possible Scenarios of a Bitcoin Crash Due to Hard Fork Issue
Will the hard fork issue lead to bitcoin crash? Could this be a reason why bitcoin is not the future? Let’s check a few scenarios.
- A hard fork will split the bitcoin chain into two dropping the currency’s value.
- It will make bitcoin software incompatible with the original and will require an update which again might affect price negatively.
- Change of rules may lead to some peers creating a destabilizing element in the network.
- Some miners may decide to stick to the old rules, while others opt for the new. Such stalemate might lead to its crash.
Without unanimity of rules, it would be difficult to carry out transactions of any kind due to security issues.
Possible Scenarios Hackers Can Create a Blockchain Failure
The world is not new to hacking threats. Whole governments are vulnerable to the damaging effects of hackers. Is hacking going to lead bitcoin crash in a few years? A bitcoin crash could occur as early as 2019 if hackers were to be replicating the following scenarios worldwide.
- Stealing private key: The hacker can use this key to transfer all digital money in the victim’s wallet.
- Hacking into machines that mine bitcoins and redirecting the computing power into the hacker’s computer hence controlling a large section of the network. The hacker can then carry out dual transactions by creating chains longer than the original.
- Software vulnerability
- Integration links are weak spots that hackers can target.
Bitcoin Trading Bots
Trading bots are software that helps people trade without having to keep watching the charts. Malicious organizations, people or government can create stronger software to interfere with the bots if no one is monitoring them and lead to bitcoin failure.
Big Players Dump Big Amounts
Big players can use the pump and dump method to crush bitcoin.
- They will first pump a lot of cash into the system then create a hype that will see the coin rising.
- They then sell the coins when they reach the desired price as quickly as possible.
- This triggers the market pushing the price downwards as other traders make panic sales. Panic sellers could go even below the market value pushing bitcoin price to the ground.
Unintentional Bitcoin Trading Bots
A flash crash is a situation where a new code is created but is compatible with the original code and is reversible.
- Unintentional bitcoin trading bots cannot cause a flash crash as they do not conform to the peer rules. They cannot change the systematic trading pattern.
- Even if prices were to be affected, they’d still go back up. In fact, this could be good for bitcoin and prove that it isn’t a bubble.
Traders- Miners Cooperation
Traders speculate on prices while miners solve complex mathematical problems to create blocks that reward them bitcoins.
They then sell them in exchanges to traders who use them for various purposes including liquidating them to fiat cash.
While it is not easy for traders and miners to cooperate since all transactions have to be verified independently at stake and the bitcoin platform rules, it can be a possibility. Such a move would significantly lower the price after the player’s exit.
Speculative Bubble Burst (Keynes)
Bitcoin vertical curve is a bit of a risk to investors. It is a speculative bubble that is waiting to burst.
- A speculative bubble is as a result of exaggerated expectations of future growth.
- The exaggeration pushes trading volumes higher enticing more investors who hope to cash in on the growth margin.
- Buyers become more than the sellers. It reaches some point traders begin selling in masses leading to a steep decline in price due to panic selling.
- It is at this point that the bubble then bursts, pushing prices as low as possible to a certain standard.
Bitcoin seems to be moving in the same direction, and if the value of bitcoin were to hit one million, then it is possible to see the markets go bust.
Short Squeeze Aftermath
A short squeeze occurs when the price of a stock rises; going against short sellers.
In the case of bitcoin, if someone had bet against the currency, then they have by now. If they did not exit their position, then they experienced huge losses.
When investors buy shares expecting a rise in price to make a profit, they go long. In a scenario when a sudden drop in prices occurs, the long holders are compelled to sell to cushion themselves from dramatic losses due to panic sales.
They are, however, rare since value buyers can bring the price up when they begin buying at a price they consider low enough.
So, it is safe to assume that this isn’t likely to be the cause of Bitcoin’s bubble burst.
A flash crash is a rapid adverse change in security prices within a concise period.
- It occurs when trades are done by black box trading and when there’s a high frequency of transactions.
- It can lead to massive losses or gains depending on your position. Such a case happened with bitcoin at the end of November 2017.
- Bitcoin price first jumped to $11,399, and then pushed to $11,500. It then suddenly crashed within a matter of minutes to $10,075 losing 12%.
Major Crashes on Exchanges in the Past
The stock market or exchange failures occur when there is panic.
- In 1623, Kipper Und Wipper collapsed after some people minted fraudulent foreign coins.
- In 1637, the Tulip Mania Bubble happened in the Netherlands after the contracts for the tulips rose to extravagant prices.
- Recently, in 2010, Dow Jones Industrial Average dropped by 1000 point in the 2010 flash crash.
- In 2015-16, Chinese stock market crashed sending financial panic across the global market brought about by other economic factors leading to a rapid decrease of stock prices across the board.
There have been some Exchanges failures in the past.
Five General Bitcoin Crashes in the Past
- June 2011, bitcoin had spiked to $32, but then crashed to $2 after mainstream media turned against the currency.
- In 2013, Bitcoin’s protocol experienced a soft fork split. This split allowed investors to spend the same funds twice due to the duplicity of transaction logs. Traders panicked and began selling plummeting the coin by 23%
- Between June and July 2017, bitcoin dropped by 38%. This drop was as a result of the soft fork news that was to split bitcoin into two separate currencies.
- Around mid-September the same year, it again lost a whole 40% following worrying news from China and South Korea. China, the country with the largest cryptocurrency mining centers stated that it would stop all ICOs and shut down all digital currency exchanges as they were breeding fraud in the country.
- At the beginning of November, the coin lost 29% after the platform abandoned SegWit2x.
These examples indicate that it is possible to have a bitcoin crash. The question everybody is asking is whether bitcoin will crash again.
Five Scenarios of Trading Exchange Fraud and Intentional Crashes
Traders can submit a rush of orders when the fix is set, to create a perception of demand and supply thus affecting the securities prices. Such traders usually have insider information.
- Traders at HSBC colluded with several other firms trying to drive down the fix for the sterling-dollar exchange rate. They made about $162,000 for HSBC.
- Citi traders managed to push the euro/dollar fix up. They shared information on buy order and transferred the same to Citi. The fix rose making Citi a $99,000 profit.
- A trader on Yesterday platform placed a multi-million dollars sell order causing the system to fail and dropping ether prices by about 99% from $300 to $0.10. The system then recovered in a matter of seconds and hit back its initial price.
- Coinbase, the most popular digital currency exchange platform halted trading of Bitcoin as its price came down due to rampant trading. This prevented investors from withdrawing their funds.
Can China’s Ban on Bitcoin crash it?
China banned its citizens from using digital currencies within its borders citing the currencies as a threat to the country’s economy.
It is also illegal for start-ups to raise capital via ICOs and cryptocurrency exchanges are also now illegal. This announcement pushed the prices of these currencies down but later revamped considering that they are decentralized and autonomous.
However, China is on its way towards creating its digital currency despite its move against the rest.
Possible Scenarios of USA Banning Bitcoins
Currency professional Doug Casey predicts that the U.S might create its digital coin called the Fedcoin. The federal bank has not yet attempted to ban bitcoin or any other digital currency for that matter but has individuals monitoring the use of these coins.
If the federal government were to try and ban bitcoins, it would create the Streisand effect, in which it raises more awareness of the coin especially among those that have never heard of the currency.
This situation would probably induce more demand making the coin more valuable.
Sudden Tax Regulation
If cryptocurrencies get listed in futures markets as bitcoin has in Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE), then they will be subject to government tax regulation and control.
This control will defeat the initial peer-to-peer transactions that the platform should operate with no third party.
Enforced Money Monopoly
Enforced money monopoly is a system in which the government gives exclusive privilege to a private individual or organization to supply a particular good or provide a given service.
Considering that Bitcoin mining is difficult and that only a total of 21 million can ever be mined, then it can serve as a standard enforcement like gold only if it gains enough acceptance and strength across the globe.
This, however, doesn’t seem to be the case as more governments continue putting restrictions on digital currencies with some issuing total bans on them.
Governments to Track All Bitcoins
Bitcoin blockchain technology allows bitcoin users to transfer and receive bitcoins pseudonymously.
- It is difficult to track bitcoins but not impossible considering the government machinery. It can force users to verify all online transactions, employ government agents to work online and even have hackers to follow up these transactions.
- While it’s possible for one to pay for a given commodity using bitcoins, you have to physically receive your goods.
- Government agents can easily apprehend bitcoin users and confiscate their user IDs in the same manner robbers forced a man to surrender his user details.
Five Scenarios of Bitcoin Value Decreasing Due to Taxation
Capital Gain Tax
Capital gain tax is the tax levied on the profit a trader makes upon selling an asset.
- In the case of bitcoin, if there are regulations as there will be in the futures market, the value of bitcoin won’t be affected just by tax, but by other market factors.
- Taxation will reduce the profits and not the value.
- If for instance you sell your bitcoins and make a profit, then you will pay the government a portion of that profit, but if you instead decide to use your bitcoins to purchase goods and services, you evade that tax in a way.
However, IRS sees bitcoin as property, not a currency, so you still might have to pay double.
This setback, though, will not have much of a significant effect on bitcoin. It is likely bitcoin will always be valuable, and government capital gain tax won’t work against bitcoin.
The Internal Revenue Service (IRS) has already determined that bitcoin will be treated as property.
Longtime investors consider this a favorable move since they will be taxed at applicable capital gains rate which should be a maximum of 15%.
Ordinary income rates are taxed at 25%. So, the short-term investors are set to make losses. Bitcoin as a property is only going to strengthen the e-currency and give it more legitimacy hence enhancing its value. Again, bitcoin appears to be a good investment.
VAT and Sales Tax on Bitcoin
Because IRS has already declared that it will tax bitcoin as property, any principles applicable to property taxes will apply.
- It will also tax the capital gains or losses from the sales of this digital asset.
- Employers who pay their employees using bitcoins are required to declare the wages, giving the value in dollars.
- Any purchases made using bitcoins will also be taxed as well as bitcoin miners who must declare their earnings from this activity.
All these measures may strengthen bitcoin rather than weaken it. So, will the crash happen today? No, not with measures that will likely legalize it as a mainstream currency.
Declaration of Bitcoin as Property
As noted earlier, bitcoin is an asset and not a currency according to IRS.
All principles applicable to property taxes including a transfer tax will then have to be applied. This, however, will be difficult considering that such transactions are done anonymously and may be difficult to trace.
If the owners declare, then they will be subject to tax as property. This taxation goes against the original idea of avoiding government regulations and institutional fees.
Trading or Tobin Tax
This is a tax levied on all transactions that involve the movement of funds between different currencies. It aims at curbing the massive movement of funds between foreign currency exchanges. Why wouldn’t this lead to a bitcoin crash?
Bitcoin is a different kind of currency. It would be difficult to apply such a tax on it as it is perceived differently and used differently from fiat money.
It has already been difficult to get a universal standard using fiat currency.
Digital currencies are not subject to financial institutions such as banks and as such undergo no regulations, thus being difficult to apply such a tax.
Additional Taxes that May Apply to Bitcoin
- Income Tax
- Sales Tax
10 Possibilities of Bitcoin Losing Value
Criminal Activity Leading to Big Players Cashing Out
If in case there is a criminal activity disrupting the network, traders might panic and attempt to cash out to avoid losses. These include even the big players who will have a significant effect on the value price of bitcoin.
Big players affect any market when they begin exiting as they catalyze panic leading to rapid sales.
Whenever the sellers become more in number, supply surges upwards pushing down the demand.
When the demand is low, the price of a security or commodity goes down.
Crashing of Other Digital Coins
While Bitcoin is a currency with its virtual network and platform, it is economically connected to other digital currencies forming a digital family.
Ethereum, for instance, is a very important and valuable coin second to bitcoin. If such a currency happens to drop or crash, it might send ripples in the entire digital world affecting every other e-currency.
In most cases, such crashes create panic leading to investors trying to cash out.
Continental Power Outage
Mining bitcoins is dependent on strong computing power to calculate and solve the complex mathematical codes.
Mining requires a lot of electrical energy to run the supercomputers.
In case of a massive power outage in regions where mining is concentrated, it might affect not only the supply but also the transactions in the network.
Such a scenario will cause bitcoin to lose value again due to panic among investors.
Russian or Chinese Involvement
Russian and Chinese governments have blamed digital currencies for the fraud that is affecting the countries’ economies.
- China has gone ahead to ban all cryptocurrencies exchanges and raising of capital funds using ICOs.
- If such big governments decide to act directly on the digital trading platforms, they might create bigger and better infrastructure to cripple the currencies’ networks.
- If the networks are transferred to other countries, then they may impose strict transaction policies and institute punishments for the use of such currencies.
Considering that most mining centers are in these countries, then such moves will affect the value of bitcoin or even crash it completely.
North Korean Hack
It is possible but very difficult for North Korea to hack these networks.
It is difficult since the country would require the cooperation of foreign governments especially China and Russia.
This might be difficult considering the country’s isolationist principles cutting it off from the rest of the world.
Crackdown by Regulators
Bitcoin has been used by criminals to buy illegal products on the black market.
If this trend continues, government regulators may be forced to pull the currency down. Lately, various regulators from different countries have had a keen eye for the use of bitcoin.
Additionally, if bitcoin threatens the government’s ability to collect taxes, then the government might take action to tame the currency pulling its value down.
There have been various cases of hacking.
- In 2011, hackers breached Mt.Gox exchange stealing about half a billion USD worth of bitcoins.
- In 2016, Bitfinex of Hong Kong exchange was infiltrated and lost $65 million.
Bitcoin prices declined steeply following these hacks. Will one such hack cause bitcoin to collapse and crash?
Critical analysts are questioning the societal value of digital currencies. Bitcoin, for instance, does not seem to have any intrinsic value.
Even though the currency is meant to facilitate peer-to-peer trading avoiding bureaucracies, they are still impractical due to the high cost incurred of mining them.
Lack of a Back-up Value
Fiat currency like dollars was initially backed by gold deposits, but now it is government resources that back up fiat currency.
- Digital currencies seem not to have any backup resources.
- Without such a backup, it might be difficult to keep the value of bitcoin up just on speculation and demand.
An increase in the Amount of Bitcoin
Bitcoin mining is limited by expensive infrastructure and difficult mathematical problems.
But there are possibilities of developing faster and smarter computers that would solve these codes easily.
- If such a scenario happens, it could lead to an influx of bitcoin in the market scaling the price down.
- Even if it is said that only 21 million bitcoins can ever exist, it is possible for those who created the code to add more or create a new chain.
It is possible that bitcoin or any of the other major cryptocurrencies could crash. If this were to happen, its effect on the world would be far-reaching. Indicators are that Bitcoin will continue to grow in stature as a digital currency.
Its performance on the two Chicago exchanges has proved that it has stabilized and retailers have more confidence in it. This has further boosted its price, and the bubble seems to be holding up.
Here we will continue to monitor the virtual currency market and bring you all the news and trends. Explore the site for more valuable insights about Bitcoin.