If bitcoin disappeared, would the investment world weep?
Bitcoin’s 2021 rollercoaster ride has continued, raising questions about where it will go next and what happens if it goes forever.
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Respected global newspaper The Economist posed an interesting question last week: what if bitcoin went to zero?
The crazy cryptocurrency that captured the world’s imagination has had a rough trot in recent months, halving in value between April and July before bouncing back a bit in the past few weeks to about $55,000 a coin.
If it had a really rough trot – like disintegrating completely – there certainly would be tears among bitcoin believers, investors and speculators.
However, I suspect there would be much more tears and disruption if corporate giants such as Apple – worth three times as much as Bitcoin – or Facebook collapsed.
The Economist says a “cryptocalypse” could potentially come if a major crypto exchange gets hacked or regulators clamp down hard, and warns contagion would spread to mainstream finance.
As crypto expands further the potential market disruption would widen, it says, but notes that banks would be immune because they avoid holding digital currencies and most serious investors don’t hold a huge stake of crypto in their total wealth.
The Economist is not predicting the “extreme scenario” of total cryptocurrency collapse, although most investors would agree that stranger things have happened. For example, consider the rise of bitcoin in the first place – a digital currency created in the cloud by nothing but computer data crunching.
I personally bought bitcoin and some other cryptos a few months ago and have since watched them nosedive. I won’t weep if it dies – I didn’t invest more than I was prepared to lose – but many who went in hard would be hurting badly.
The blockchain technology behind cryptocurrencies may become the future of finance, but crypto hasn’t yet gone mainstream as a store of value or purchasing tool.
Visa, PayPal and others are now climbing aboard the crypto train, as are big investment funds.
If it crumbled, those financial giants would bounce back.
One thing we’ve learned in the past 18 months is that when bad stuff happens, humans adapt. And when it comes to financial markets, we’ve learned that pandemics weirdly pushes asset prices to record highs.
However, thinking about complete collapse is a good exercise for any investor to do. I, like many Aussies, lost thousands of dollars when big companies crumbled during the global financial crisis just over a decade ago.
Lessons learned from then are just as important today:
• Diversify your assets, and try to avoid holding more than 5 or 10 per cent in one investment, so if it tanks you don’t lose a huge slice of your wealth.
• Accept that if you invest in enough assets, one or more of them will eventually go belly-up. That’s why we diversify.
• Use dollar-cost averaging, which this means buying investments in small slices over time rather than one big leap into the market.
• Understand the risks. Quality shares and real estate are riskier than cash but safer than speculative shares. And cryptocurrency is among the riskiest assets of them all.
• Don’t be scared off investing by one or two bad experiences. The wealth we can generate by making our money work harder for us can create a life that’s richer in many ways.
Originally published as If bitcoin disappeared, would the investment world weep?
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