How Will Bitcoin React In A Financial Crisis Like 2008?

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

If the ownership of bitcoin is as concentrated as some estimate, then the liquidity issue distills down to the actions of the top tier of owners.

Whenever I raise the topic of bitcoin and cryptocurrencies, I feel like an agnostic in the 30 Years War between Catholics and Protestants. There is precious little neutral ground in the crypto-is-a-bubble battle; one side is absolutely confident that bitcoin and the other cryptocurrencies are in a tulip-bulb type bubble, while the other camp is equally confident that we ain't seen nuthin' yet in terms of bitcoin's future valuation.

I've stated here more than once that in my view the real value of bitcoin will only be revealed in a financial/market crisis/crash like 2008-09. Longtime correspondent Mark G. recently proposed three tests that illuminate some of the dynamics that might come into play in the next financial/market crash/crisis.

(CHS NOTE: gold fell from a peak around $1,100 per ounce in March 2008 to $830 in October 2008. It then bounced back to $1,100 in February 2008. The standard explanation for the sharp decline was that gold was sold off to meet margin calls and other obligations arising from the Global Financial Meltdown of late 2008. That gold was perceived as a reliable store of value may have increased its attractiveness as an asset to sell in the mad scramble to raise cash.)

Here is Mark's commentary:

I propose that the performance of gold in 2008-2009 offers an indicator into how bitcoin is likely to behave.

 

I propose three practical tests for bitcoin.

 

Test 1. Is it possible to meet any sort of 'margin call' using bitcoin directly? Is it possible to do so on a large enough scale to affect market liquidity in any particular market? i.e. are any margin loans or the functional equivalent thereof denominated in bitcoin? In 2008 as "margin calls" flowed in from everywhere, all speculative assets experienced the same selling pressure to raise cash to meet obligations denominated in "money".

 

Test 2. Can the physical necessities of daily life be commonly paid for directly and locally using bitcoin? I mean things like food, fuel, medicine, clothing and local debts for utilities, taxes, rents and mortgages. Or is it necessary to first exchange one's bitcoin for 'legal tender' to conduct these transactions?

 

Test 3. Can bitcoin even be used to financially sustain bitcoin's minimum physical infrastructure of servers, brokers and trading desks? Can it pay leases, electric bills and purchase the servers required for this?

 

Are there any lenders of "last resort" ready, willing and able to sustain bitcoin banks, traders and speculators? If not, and precisely because there is a limited supply of bitcoin, it seems a certainty that the financial failures previously seen in the decades prior to the Federal Reserve Act are likely to recur in the bitcoin infrastructure for precisely the same reason: liquidity crunches appearing.

These are precisely the tests that gold and silver failed in 2008/2009. And until bitcoin is ready to pass these tests I think it too will collapse in any future Global Financial Crisis.

Thank you, Mark. Liquidity is an issue in any financial crisis, as sellers may be unable to find buyers at any price. Bitcoin has two liquidity issues:

1. Will sellers of bitcoin find a bid from buyers if a flood of bitcoins hit the market as speculators sell assets to raise cash to meet margin calls (or simply book profits in volatile markets)?

2. Since bitcoin must generally be converted to local currencies to buy the supplies and pay the bills Mark listed above, liquidity must also include the convertibility of bitcoin to USD, euros, yen and yuan, that is, the willingness of traders to exchange USD, euros, yen and yuan for bitcoin.

A liquidity crunch has the potential to unleash a positive feedback loop (i.e. self-reinforcing feedback loop) in which the absence of liquidity triggers panic that then sparks more selling which then worsens the liquidity crunch which then increases panic selling, and so on.

Another potential factor is the ownership of bitcoin. The topic is complicated because one individual can own a number of exchange accounts, wallets and coins in cold storage. On the other hand, one address might represent more than one owner.

To further complicate matters, an unknown number of bitcoins have been lost, i.e. the keys have been lost in hard drive crashes and the like. There is no way to know the number of zombie bitcoins with any precision.

For this reason, charts of bitcoin distribution refer to addresses, not individuals.

The acronym HODL pops up a lot in the crypto space: hold on for dear life, meaning hold on to your bitcoin, Ether, etc. through thick and thin rather than trade or sell it.

If the ownership of bitcoin is as concentrated as some estimate, then the liquidity issue distills down to the actions of the top tier of owners: if some substantial percentage of major owners are forced to liquidate their bitcoin to cover massive margin calls elsewhere in their financial holdings, the sale of big blocks could overwhelm buyers, creating a liquidity crunch.

If most of the major owners have eschewed debt and margin in favor of cash, bitcoin, gold, etc., then they might be in a position to provide liquidity as speculators dump bitcoin to raise cash or lock in gains.

Given the limited number of bitcoin available to trade, liquidity could dry up very quickly if major blocks are dumped on the market.

Given the strong views bitcoin arouses, it may come down to how many major owners will HODL in a panic-soaked financial crisis, how many will avoid being forced to liquidate their bitcoin holdings to meet margin calls or other obligations, and how many will have the wherewithal and the courage of their convictions to be buyers when volatility soars.

Put another way, beliefs and confidence can generate behaviors and decisions that may well appear irrational to speculators.

I don't know how the market for bitcoin will react in a 2008-type crisis, but the small float of available coins practically guarantees high volatility. How it all shakes out a year after the crisis is another question that's unanswerable.

One thing we can anticipate with some certainty is that one camp will be right and the other camp will be wrong.

Of related interest:

Bitcoin Rich Wallets Distribution

The Bitcoin Wealth Distribution

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Newsboy's picture

I have a couple of bitcoins here with my gold bullion coins.

POOF!

HRClinton's picture

Well, it won't suffer from The Big Short.

Or get manipulated or stolen.

Manthong's picture

 

Who G'sAF ??

Look… if you speculated on this early….

Get the heck out before the tsunami tide ebbs…………..

It’s supposed to be a currency with some nifty transaction value …..

My guess is that it will revert to something under the price of gold.

 

and I would not give you a $10.00 gold piece for a bitcoin.

 

WTFRLY's picture

It won't, it will get replaced by gov't sanctioned JooCoins

Stuck on Zero's picture

In a market crash gold usually turns down for a short while as speculators draw the cash to cover other positions. Later in the crash rumors about bank failures start a stampede for physical PMs.

Mementoil's picture

We have heard this claim before, but I'm not sure it's true.
Yes, gold has dipped during the 2008 financial crisis, but let's not forget that at the time it was at an all time high and many momentum chasers were holding it without understanding WHY it was rising.
Nowadays gold is in the shitter. Nobody in Wall Street is holding any gold and therefore in a crisis scenario they won't have any to sell!
I think that in the event of a financial crisis , gold will be on a tear.

IH8OBAMA's picture

The answer depends upon whether we have hit Peak BitCON yet or not.

 

Gap Admirer's picture

All I know is that my Beanie Babies are going to go the the moon!!!!

Justin Case's picture

How bout Elmo? He was sellin for over $1200 at wallmart and people fighting for it. Like black friday.

opport.knocks's picture

Anyone else buy their kids cabbage patch dolls? Two years later the garage sales were loaded with them.

Justin Case's picture

It’s supposed to be a currency

When do people hoard currency?

Advoc8tr's picture

Good for you ... if only anyone gave a shit what you would give for a BTC ... you and everyone else here have been wrong for a decade and are just hoping / wishing it will faulter ... you missed the boat and are too damn stubborn to climb on board when down to your last breath.

BTC holders have no debt .. and even if they do they can default on FIAT debt and no-one can touch their BTC ... they ain't panicing any time soon.  They are the new Elite and they know it.

Get in line to pay 100K + when the SHTF

SILVERGEDDON's picture

tmosley's portfolio wil fold like a paper suit in a rainstorm. 

Just like his silver pumping career worked out.

Then, he will evaporate for a few years of tmosley post free bliss for the rest of us.  

Justin Case's picture

Eventually, of course, a vicious price decline turns out to be the start of a bubble implosion. The true believers will naturally hold, thinking that it’s just another bump on the road to a much higher price. They will continue holding while all the gains made during the bubble are given back.

The worst-case scenario is to be a non-believer and non-participant in a bubble, but to eventually get persuaded by the relentless rise in price that special circumstances/fundamentals justify the valuation and that a large commitment is warranted. That is, to become a true believer late in the game. This worst-case scenario is what happens to most members of the general public.

Womb Service's picture

Manipulation is on the way, courtesy of the CME. The futures market for Bitcoin is going to be cash settled. These aren't pork bellies. They can be instantly delivered. So why on earth would the "market" be cash settled? Another gate slams shut. At least the people who claim it was made by the NSA will shut up.

LawsofPhysics's picture

Regardless, I am sure that all my ounces will remain intact.

Remember, when fraud is the status quo possession is the only "law".

Manthong's picture

 

but the PM's weigh moar than electrons......

are harder to move about..

but will still be here after the Internet.

LawsofPhysics's picture

It's less about "money" and more about having the preferred COLLATERAL after the currency "reset"....

PMs remain the preferred collateral regardless of the "fiat du jour".

runswithscissors's picture

At least with tulip bulbs you still had a tulip.

Manthong's picture

 

.. is that a bulb in your pants or are you just happy to see me?

Manthong's picture

 

Actually, the tulip mania was about bank manipulation and futures ….

….not the f’ng flowers themselves.........

Go look it up.

 

and oh... two lips on my drawers....

not necessisariy a bad thing.

 

.. and trolls cannot handle the truth and acccept that they are mentally deficient,, bitter, angry and likely abused their children.

 

Grave's picture

enjoy your sour grapes haha

very smart money went into bitcoin two or more years ago
and is swimming in sky high profits today.

CH1's picture

These guys are hoping against hope for BTC to magically die.

Hell of a philosophy for life.

Raffie's picture

They are ignorant crypto haters possessed by animal spirits who suffer from PM Tunnel Vision who run around with eyes wide shut.

They are mildly amusing at times though. 

Two Theives and a Liar's picture

Can't all the forms of "money" just get along?

My cold wallet hangs out with my stack. No problem!

Advoc8tr's picture

Indeed ... but there is no denying the cold wallet is up 1000% on the stack over 5 years.

Raffie's picture

my stacks remain the same, even the price as well, but my cryptos are growing super fast and doing great.

HRClinton's picture

Well, it won't suffer from The Big Short.

Son of Captain Nemo's picture

"Well, it won't suffer from The Big Short."

Yeah!!!

"Wanna Cry"/DDOS attacks is to "Buttcoin" what parallel line of sight data pipes and "circuit breakers" are to the NYSE/S&P and NASDAQ!

Fireman's picture

Two bit tales from the electronic corral of the banksters and their bitcoin blips of bullshit with about the same credibility as Elon Musk's burning Teslas and Mars voyage, all just a set up to get the sheeple hooked for the final fleecing when the IOU Saudi Mercan petroscrip toilet paper dollah gets flushed and the USSAN Potemkin Village idiot "economy" of global slaughter for the zero 1% (on Chinese credit) finally goes down the pipe with the rest of the Washing town turds.

Roll up roll up....Fed Coin...coming to a Ponzi virtual reality near you soon.

 

"Dear G,

Bitcoin is a virtual game that is being made look better than gold or silver, to sell the concept of a world wide virtual currency.

It should change its name to “Nintendo Virtual Foolishness,” as its purpose is to win the hearts and minds of a public.

After that to construct a “Dollar Index Bit Coin” backed by tickets to Mars from Space Inc. with a picture of Elon Musk.

There is no computer game that cannot be hacked, and there never will be. 

Regards,

Jim Sinclair"

 

Bitcoin at the incredible velocity of 5 transactions per second is positively Flintstonian in its power, Visa can pump debt at 50 thousand scams a second and youtube can process over 350 thousand delusions per second. And still some folks imagine this ethereal "currency" WILL go global and can't be jammed and hacked! Good luck with that when the big money decides to pull the plug not to mention the much ballyhooed Korean EMP fries USSA and the lights go out for 20 years, then of course you will be able to "invest" your leftovers in their "Fedcoin" scam and the rigged "market" can continue on its merry way in our cashless gulag "all watched over by machines of love and grace".

 

Blipcoin vanished after the lights went out in Puerto....Pobre!

https://www.youtube.com/watch?v=GjzeFOKUR04

Advoc8tr's picture

Luddite and proud of it ... way to go !  How's that horse and carriage stacking up against the Merc ?

Fireman's picture

PLEEEEEEZ Do NOT sell your Blipcoins! This electric tulip can go to da moon!

VWAndy's picture

 No way is that going to be a safe haven folks. Might as well leave it in Bof A.

GodSpeed_00's picture

No, you leave your money in BofA. I'll trust Bitcoin.

VWAndy's picture

 Mine is in tools and skills bitch. They will need to do alot more than punch a few keys on a computer to get mine.

Nature_Boy_Wooooo's picture

I sold my tools to illegal immigrants. They said they are looking for work, have extremely low overhead,  and are willing to beat any price their competition offers.

Good luck!

 

VWAndy's picture

 Wow you are stupid. Steroids?

GodSpeed_00's picture

Well good for you, who gives a shit? Attacking Bitcoin shows you're more insecure in your skills than anything else.

VWAndy's picture

 Ha my skills are the one thing Im most secure in. Been practicing ur mental gymnastics I see. lol

GodSpeed_00's picture

 You're counting on the collapse of society, maybe even looking forward to it. But I'm not. I don't think we'll all be riders in the wasteland 50 years from now. I think all your "skills" could end up irrelevant. So I plan for a future where society is still operating.

VWAndy's picture

 History shows the people with skills tend to come out better than most. Paper pushers not so much.

GodSpeed_00's picture

Skills can always be learnt, especially when they're actually needed. No better teacher than necessity. I choose to picture a bright future, if everything collapses I don't want to live in that world anyway. Which probably won't make me a very nice person to be around.

VWAndy's picture

 You cant teach some shit that you dont know yourself. Trial and error aint going to work out for ya.

GodSpeed_00's picture

It doesn't matter dude, I don't know where you live but if you think you're going to be running around like MacGyver you got a really big surprise coming. Think Hordes. 

VWAndy's picture

 One mans hordes is anothers minions. jus sayin

Advoc8tr's picture

What a load od tripe ! the "paper pushing banksters and Politicians have taken over the world ... the plumbers and builders are scratching around like chickens.  Where have you been living ?

tmosley's picture

In his head, he rules the world.