Bitcoin: If currency crashed, plunge would harm its investors but not economy

Adam Shell | USA TODAY

Show Caption Hide Caption Bitcoin slumps to $10,000 after losing half its value Bitcoin slid to $10,000 on Wednesday for the first time since Dec. 1, leaving the cryptocurrency down by close to half from its peak hit last month.

If bitcoin, which skeptics say is a bubble, suffers the same fate as past financial manias, look out below.

Fears of a bitcoin crash are growing amid an early-year plunge that has wiped out 50% of the digital currency's value since its December peak of $19,500 per coin.

"There is significant precedent to suggest that the more rapid the appreciation, the more rapid the depreciation," says Scott McGann, a finance lecturer at San Diego State University.

Bitcoin's wild ride continued Monday when it was down more than 11% at $10,050 after cratering last week to a seven-week low of $9,200.

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History is filled with examples of big busts after gargantuan gains. The Nasdaq fell nearly 80% after the dot-com stock bubble burst in 2000. The Dow tumbled 86% following the 1929 stock market crash. The Dutch tulip bulb craze in the 1600s had a similar bad ending.

If the pain following past popped bubbles is a guide, bitcoin believers who cheered the cryptocurrency's 1,400% gain last year should brace for further declines.

The reason: The bitcoin bubble is the biggest ever. Bitcoin's value has risen 65-fold, which tops the 50-fold rise of tulips in the 1630s and tech stocks' four-fold rise in the 1990s, according to Convoy Investments, a New York-based investment firm.

"Historically, most major asset bubbles tend to lose close to 80% of their peak value," says Howard Wang, co-founder of Convoy Investments.

Recent bitcoin turbulence has been sparked by fears of a regulatory crackdown by foreign governments.

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Still, Wang reminds investors that bitcoin has survived many drops.

Bitcoin bulls, like Tom Lee, co-founder of Wall Street firm Fundstrat Global Advisors, see its recent troubles as temporary, saying the $9,000 level marks a major low.

Lee has a year-end 2018 price target of $25,000 on bitcoin, the unregulated digital currency that's not backed by any government. Institutional investors, he says, will get more comfortable with its evolution and commit more cash to it. Tech-savvy Millennials, which are entering their prime income years and are distrustful of traditional financial institutions, will drive adoption of digital currencies, he adds.

The bubble crowd isn't buying the optimistic spin. "Bitcoin is a bubble," Vicky Redwood, a global economist at Capital Economics, noted in a report.

"Most people are buying bitcoin, not because of a belief in its future as a global currency, but because they expect it to rise in value."

Given that bitcoin, despite its first-mover advantage, has no intrinsic value like a stock or real estate or gold, it's only worth as much as people are willing to pay for it.

If bitcoin crashes like skeptics predict, people that own it will lose lots of money, says Eric Schiffer, CEO of Patriarch Organization, a digital investment company.

But massive bitcoin losses, which could be triggered by a government crackdown, a major hacking event or it being usurped by one of the nearly 1,500 other cryptocurrencies, won't cause a financial meltdown, says Redwood.

The reason: Bitcoin's overall market value, when compared with stocks, bonds and gold, is so tiny that a total collapse wouldn't cause major harm to the economy or financial system.

Bitcoin's current market value is $179.5 billion, according to coinmarketcap.com. That's far lower than the U.S. stock market's value of nearly $28 trillion, the U.S. government bond market at roughly $20 trillion, or gold, with its estimated value of $7 trillion.

"If the price of bitcoin fell to zero today, the paper losses would be equivalent to a 0.5% fall in U.S. stock prices," says Redwood.

Big institutions also aren't aggressively invested in bitcoin, which reduces the chances of financial contagion if it crashes.

What's more, the number of Main Street investors in bitcoin is nowhere close to the broad ownership of tech stocks in early 2000 or real estate in 2007. There are no bitcoin mutual funds or exchange traded funds available yet to retail investors. A recent survey of 2,000 U.S. adults by Blockchain Capital showed only 2% of people owned bitcoin.

"Folks losing money in bitcoin may cry, but they don't pose a risk to the financial system," says Axel Merk, president of San Francisco-based Merk Investments.