What will Happen to Bitcoin when the Economy goes Bust?

By Bitcoinist.net Oct 10, 2015 12:00 PM EST

Many people interested in Bitcoin have a less than optimistic view about the health of the global economy. This skepticism — in some cases pessimism — is fueled by a controversial business cycle theory that is fairly popular in Bitcoin circles. This theory holds that the easy money created by central and fractional reserve banks induce entrepreneurs to embark upon projects that are are not actually profitable. This action sparks a series of events, in which the economy booms, reaches a peak, and then comes crashing down.

Also read: The Blythe Masters Philosophy: Pay no Attention to Bitcoin

key-951783_1280Although this theory is highly contested in academic economics circles, a sizeable portion of the Bitcoin community stands by it; I happen to agree with this theory as well. Thus, believing this theory to hold valuable information about real world markets, us Bitcoiners often wonder about what will happen to our beloved digital currency if the “big one” comes — a recession so bad that the traditional financial system goes offline for good.

Bitcoin supporters tend to view such an event as a devastating blow to society, but a potential opportunity for Bitcoin to prove its salt. As the old fiat currencies collapse, people will flock to Bitcoin as a modern safe haven asset — the 21st century version of gold. Consequently, Bitcoin will see an eruption in purchasing power and global acceptance, quickly becoming the global currency of choice in a post-collapse economy.

There have already been some smaller-scale demonstrations of this potential. In 2013, the government of Cyprus announced a radical move, in which it would tap into the personal bank deposits of citizens as part of a bail out plan. Cyprus residents flocked to bitcoin as a way to keep the government away from their wealth; the bitcoin price and trading volume soared in response to this demand from Cyprus. Two years later in the Summer of 2015, Bitcoin faced a similar situation when the global economy threatened to take a turn for the worst. Greece faced a debt crisis and a possible exit from the European Union, while the Chinese economy took a nasty fall. The bitcoin price took off when many Chinese citizens — in addition to people speculating about a grexit — rushed to the Bitcoin markets to shore up their wealth.

And so many Bitcoiners lie in wait, strongly believing that the next global downturn will be the seminal turning point in Bitcoin’s history.

These people may be in for a disappointing reality though, because it’s possible that traditional finance’s fall will be anticlimactic, while the rise of bitcoin fails to happen overnight. Although many people think that recessions will get progressively worse until the economy collapses, economic theory suggests multiple ways for recessions to vary in length and intensity. The next recession could be extremely severe, or it could be relatively mild — past recessions do not determine the severity of future downturns. Consequently, Bitcoin’s adoption rate in response to recessions will not necessarily be linear. If a recession is particularly bad, Bitcoin might get a significant bump in use. On the other hand, smaller recessions might not worry people enough to consider using a different currency.

So, does this mean that mass Bitcoin adoption is an enthusiast’sstock-exchange-913956_1280? Not exactly. Undoubtedly, traditional finance is not in good shape. It took 6 years for the US unemployment rate to reach the Federal Reserve’s target of 5.5%, and a large chunk of that lowered rate came from people dropping out of the workforce altogether rather than finding jobs. Furthermore, jobs reports have been mixed; some months saw higher than expected growth, while other months have been less than stellar. Outside the US, the rest of the world’s economy is shaky at best. China’s economy has plummeted, with the People’s Bank entering damage control. Greece and Puerto Rico both face potential debt crises, which could rock global markets. Meanwhile, central banking policy seems to be losing its bite; the Federal Reserve has kept interest rates at near 0% for almost 10 years, with not much to show in the post-2008 economy. Traditional fiat may very well fall at some point, but it could be a slow burn. Thus, Bitcoin still has plenty of room to become a fiat-killer, just maybe not as soon as some people would prefer.

Of course, we could still have the “big one.” We might experience a depression so severe that the public flocks to a new monetary system en masse — with Bitcoin being a good candidate. But we must understand that doomsday might not come, and Bitcoiners might have to endure a long and bumpy ride. The world might have to give up on traditional finance bit-by-bit, with Bitcoin offering itself as a worthy alternative.

Do you think there will be a huge crash that will catapult Bitcoin into the mainstream? Let us know in the comments below!


Images courtesy of Pixabay

The opinions expressed in this article are not necessarily those of Bitcoinist.net.

Originally posted on: What will Happen to Bitcoin when the Economy goes Bust?

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  • jp

    there are methods that can get it into millions of transactions but yeah you need to increase the size to handle the billions it needs to

  • jp

    ceo? what ceo? bitcoin doesn’t have a ceo because that would imply someone other than the miners have any significant control at the moment

  • Nick Grasslin

    Just because central banks are storing gold doesn’t make gold more valuable and worthwhile to invest in. Maybe from a conventional standpoint. The problem is, gold isn’t really good for much outside of some industry uses and jewellry. Used as a money though, it’s pretty darn terrible if you ask me (its main issues being divisibility and portability).
    You see, the central banks aren’t controlled by young tech savy individuals. They are controlled by old men with outdated ways of thinking. It has gotten them far, but them being stuck in old ways of thinking may come back to bite them in the ass (unless satoshi is affiliated with them, if thats the case they are already on top of bitcoin too).
    Bitcoin is far superior than gold, its just that most of the world doesn’t know it yet. Luckily for me, I do.
    You would be wise to start knowing it yourself, if you want to benefit from early adoption.
    Please though, if you convert your currency to bitcoin don’t just hold it all. Use it for some purchases so you can help with adoption, and then hold a bunch as well so you can become more wealthy over time.
    Thank you.

  • The little guys will be left holding the bag.

  • You’re a fool! Even the Federal Government is getting ready for a huge crash due to 0 dividends. All the banks have used 0 dividends stocks, these stocks are not real they are used to manipulate the stock market. Fed’s most extreme hypothetical scenario in this year’s tests envisions the U.S. economy falling into a deep recession causing the stock market to plunge and the U.S. Treasury securities would go negative—thus way they have been advertising for you to transfer your retirements and savings into gold and silver. More than 75% of the banks failed the stress test given by the U.S. Treasury and of those banks that barley passed will last maybe 5 days. Bitcoins seem to be a very good investment but using them is still a major issue–because not enough businesses accept Biticoins. So, if you are smart you will divide your investment into 3 parts and buy 2/3 actual gold and silver and 1/3 bitcoins. Don’t worry if you need more Biticoins you can sale some gold or silver and add it to your account.

  • Sarel

    I and more than 14 000 others in our Investor Club believe that both Real Bullion Gold and Digital Gold (Bitcoin) is the way to go. But we don’t speculate with Gold. We buy physical gold (not stocks) and keep long term to hedge against inflation. We also don’t speculate with Bitcoin. We invest in Bitcoin Mining and see between 5 and 10% returns per month (not year). So, if the Bitcoin price goes up, I score. If the Bitcoin price stays the same I still score, because I have more Bitcoin than I had last month 🙂
    Ask me how BitcoinProtects.me and how GoldProtects.me 😀

  • mike

    Central banks are buying gold. China and Russia are buying gold. They aren’t buying bitcoin.

    Look, I’m not saying Bitcoin is something to sneeze at, and I am not saying it is impossible for bitcoin to fare better than gold. But you would be crazy to dump more money into bitcoin than gold.

    Like you said, we are in the very early stages of bitcoin. It could take 50-100 years before Bitcoin will be where you see it and even then you can’t hold it in your hand like gold and silver. Gold and silver have been money for thousands of years everyone knows what it is and everyone knows that it has intrinsic value.

    Just in the past month I was telling a few random people a story that was indirectly related to Bitcoin, where I had to be like you know Bitcoin? And each of them had no idea what it was or had even heard of it. And then I was like you know that digital currency…and only 1 of the people were like “Oh yeah I’ve heard of it.”

    Bitcoin is going to take a LONG time to unfold, if it even makes it. Didn’t the CEO just get murdered? Yeah… not going to happen anytime soon.

  • Mr. feeling

    i had no idea or knowledge about bitcoin at all, but i was wondering what will happen if bitcoin takes place over dollar? the only matter to this is economic inflation. do this thing is the “answer”? to save us from the 2nd great depression? (sorry if i took this place so much. just curious tho..)

  • Tom Mornini

    > it appears to be so, yet you can’t prove it is so thus your argument is invalid; same for me I can’t prove you wrong or right but I’m skeptical and everyone else should be

    While I agree that the future is unknowable, mathematics are provable. But a Bitcoin’s implementation is not at this point, so yes, skepticism is warranted.

    > bitcoin is as safe as any digital information transmited over the internet.

    But this statement is entirely false — much Internet traffic is entirely uncrypted and stored in ways that are much less reliable than Bitcoin is.

    So, as long as we’re pointing out the truth that NOTHING that hasn’t already happened and been 100% accurately observed (possible?) I’ll also point out the fact that progress tends to happen and predictability increases quickly in the modern computing environment.

  • DickDasterdly

    it appears to be so, yet you can’t prove it is so thus your argument is invalid; same for me I can’t prove you wrong or right but I’m skeptical and everyone else should be; bitcoin is as safe as any digital information transmited over the internet. the problem with bitcoin is that there’s no way to hold anyone liable if it fails but you can do this with banks. ultimately it will become just another currency since owning the mining majority or amount majority of it will replicate the same thing that banks represent. it would still have an edge as the fees are much lower.

  • Curious Guy

    I’m sorry dreamers, but I so doubt Bitcoin to become a worthy alternative

    If the world gives up on traditional finance bit-by-bit, forget about all kinds of Monetary, Gold and Bitcoin, and think more along the lines about traditional bartering or a completely natural world without money existing anymore at all

    For example read this blog post about Bitcoin:
    http://blog.paylane.com/bitcoin-or-not/

    And also for a much bigger and clearer picture and understanding, read this information about our world without money:
    http://www.freeworldcharter.org/en
    http://www.freeworldcharter.org/en/more
    http://www.freeworldcharter.org/en/charter

  • Ryan Clark

    I’m a big fan of bitcoin, but how could it handle an influx of millions of users as it is now? The block size needs to be increased.

  • There is, but I’m not going to highlight it here. Give it a year or two though. We are still so very much in early days and a lot of people are working on a lot of projects to address the issue you highlight.

  • Robert DuBeau

    I’m not talking about a controlling interest in mining (which is what I think you are getting at here). We are already ridiculously close to the death of Bitcoin from centralization of mining. The only thing preventing the complete downfall is that miners are quite deliberately backing away from collusion and other forms of attack. I’m talking about a controlling interesting in bitcoin ownership, through taxation and strong arm behavior, same as governments and central banks have always used. Anyway, my idea as stated here is merely to put a different possibility on the table for discussion. I don’t insist it’s correct. Just something to think about.

  • Tom Mornini

    If it was possible to get a “controlling interest” (whatever that means…) in Bitcoin the BitTorrent network would have been controlled a long time ago.

  • Robert DuBeau

    Bitcoin does not have the same weaknesses as physical gold, and will likely outperform gold as a currency asset, but it will be subjected to taxation and banking law. I’m not saying that’s a good thing or a bad thing, just that it appears inevitable to me, and proceeding right on track so far. What you cannot legally do with gold, you cannot legally do with bitcoin. Sure, there will be a black market, but most of us (certainly me!) will not choose to try that route. I say, if the banks like bitcoin, then they are already well positioned in it or getting there fast. And then it will go up, as the other inflating assets will do, only maybe much more so due to bitcoin’s baby status at present. I’ll go even further and say many banks in this country do like bitcoin, and that’s a positive sign. My main point is that a successful bitcoin will be a world class currency, on the order of trillions of dollars, and will save rather than destroy other world class currencies. Sooner (like before now) or later (through taxation), governments and banks will get hold of a controlling interest in bitcoin. If they do not, it won’t be because they can’t fight it. It will be because it failed.

  • Russell Spears

    99% of global m2 is in digital form

  • Tom Mornini

    > that exists only as an electric impulse

    Not *an* impulse.

    It exists in the world’s first publically accessible, permission less, independently verifiable, ledger — replicated across around 6,000 machines worldwide.

    All of which absolutely guarantees its integrity and makes it impossible to counterfeit or defraud.

    > in a traditionally insecure storage medium

    Bitcoin is exciting because it turns what had been an insecure storage medium into a secure storage medium.

    As opposed to the current banking system which is hacked on a daily basis? And don’t say you’ve never lost money, because every time fraud happens you pay for it in fees, inflation, bailouts, etc.

    Or as opposed to precious metal storage which has always been insecure as well?

    > that can be shut off, or shut down at will by the government

    Ignorance is not biiss. Do try to make informed comments in the future.

  • Dark Daze

    With emphasis on ‘alternative and option’.

  • Dark Daze

    So you’re trying to tell us that some representation of wealth, that exists only as an electric impulse, in a traditionally insecure storage medium, that can be shut off, or shut down at will by the government is safe? It requires technology at a minimum, which in a crisis would very likely not be available, is continuously becoming obsolete and so forces holders to use wealth to access wealth (continuously upgrade technology), i.e. there is still a natural ‘decay’ factor built in, but, unlike fiat it pays no interest to compensate for the decay. And you think that will catch on.

    I don’t think so.

  • Tom Mornini

    Banks were created to solve Gold’s weakness: difficulty of safe storage and transport.

    Bitcoin does not share those weaknesses, though it is currently a bit difficult to store for those not technically sophisticated, but that’s changing with hardware wallets and other solutions…

  • Buddy Bell

    I think you nailed the Fed’s thinking. As a member of the dumb populist group, it’s hard for me to figure out how the Fed is going to get rid of the almost 4 Trillion on it’s balance sheet, and those who borrowed at low interest to invest in inflating assets, not be affected by supply and demand. Seems like someone is going to be left holding the bag.

  • Martin C

    We are already in a slow mega crash of the global economy of epic proportions in my strong opinion. China has crashed over 40% lately and dozens of other countries have already entered bear market territory. I do believe it is probable that a black swan event will cause an acceleration of the collapse. Many of these scenarios logically should propel bitcoins price when they happen. For example another Lehman brothers type of mega failure say Glencore or some other such corporation leads to a panic or a bank hacking attack that leads to bank holidays. When people start to realise how very UNSAFE their toilet paper dollars are in banks, that are planning openly to BAIL IN everyone’s funds they will flock to rare secure assets like bitcoin ,gold,silver,collectibles etc.

  • I don’t see many profitable bitcoin companies. Must be the easy money…

  • Hastla

    First they ignore you, then they laugh at you, then they fight you, then you win.
    Mahatma Gandhi

    Just think what the potential for the public the blockchain is nowadays & think what it will be in 10 years with real broadband usecases. A real scaleable ,secure tech what is needed nowadays & in future for exisiting problems. Just think what huge amounts could be saved alone in the record keeping & transaction market with unbeatable security (assets, stocks, …). There will be huge benefits for all from this tech – from society, to business and finally too banks.

  • Anon Wibble

    Trouble is banks are blockcading bitcoin, by shutting down people’s accounts. If there was a place were you could convert money to bitcoin without letting the government know, i think a hell of a lot more people would use it.

  • Pantelis Roussakis

    In past crashes there’s been nothing to fall back on, inevitably the system put itself together again. There’ll be a few more crashes over the next decade or two. The difference this time is alternative equity classes like bitcoin will offer a viable option for diversifying risk, instead of getting up on the same old horse again. Then I suppose one day the west will wake up and the system will be broken there’ll be no choice but to use bitcoin, because it works.

  • Robert DuBeau

    Well there are different theories about that. I say, it doesn’t make central banks any more obsolete than gold does. BUT, it will likely do better than gold as a commodity currency. So, there’s that.

  • Zverev Aleskeevich

    Speculation is only one reason among many to use BTC..

  • Zverev Aleskeevich

    BTC doesn’t need central bank support to succeed. BTC makes central banks obsolete..

  • Robert DuBeau

    No there will not be a huge crash. Bitcoin will be just one of the new tools that help prevent just such an outcome. Instead of a crash that catapults Bitcoin mainstream, there will be bitcoins, many other assets new and old, some serious dollar inflation, but no crash. Think of it this way: Bitcoin can only succeed as a world-class currency asset if central banks buy it up and hold it up. If they do that, it will also save the dollar and some other currencies. If they don’t… well, this will mean they do not accept it and it will unfortunately in that circumstance not succeed. This could be for a number of reasons, meaning they did not like it. They will still prevent the dollar crash with other assets. The goal of all this QE has been to absorb the dollar printing, inflate assets (just wait and see) and then sell those assets back to the public, thus recalling printed dollars and halting the dollar from falling further. Banks that borrowed from the Central Banks at low interest and invested in inflating assets will pay off their debts and come out way ahead. The world will march forward. So as always.

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