Could a Bitcoin crash have larger economic effects?

Inside Subprime: December 20, 2017

By Andrew Tavin

Bitcoin is super hot right now, both literally and figuratively. With every Bitcoin transaction using as much energy as the average American home goes through in a week, and its value soaring by the day, it seems everyone and their mom is now looking to get a piece of this cryptocurrency. At the time of this writing, the value of one Bitcoin is sitting pretty at $16,500, a far cry from the $700 it was worth in January of this year.

But this price is highly volatile. This morning, it was nearly $19,000, and who knows where it will be by dinnertime. What goes up must inevitably come down, and many watching the chart rise and fall in real time have begun to wonder whether a serious crash is on the horizon. 

So what would happen if (or more probably, when) Bitcoin prices take a sudden and massive plummet? According to The U.S. Financial Stability Oversight Board, not much. The watchdog group recently published a new report on future financial challenges, and found that a Bitcoin crash is unlikely to affect the average American’s finances at all. Unlike the subprime mortgage crisis if the late 2000s, a Bitcoin price drip won’t hurt the economy overall because Bitcoin doesn’t have even close to the buy-in that subprime lending did before the housing bubble burst. While everyone from giant banks to local creditors and insurance companies bought into subprime mortgages in some way, Bitcoin has relatively few investors.

It is possible that there could be a more serious effect if big institutions, like Goldman Sachs, start investing heavily in Bitcoin. But at the moment they’re holding back and leaving Bitcoin mining to individual investors.

Axios values the Bitcoin industry at around $250 billion, and while that is a big number, it pales in comparison with the tens of trillions the subprime lending market was worth when it crashed in 2008. If you’re looking for something to worry about, your anxiety will be much better spent focusing in on the student loan bubble that’s set to fail, or even considering the very real possibility of another subprime mortgage crisis.

You could also stop pacing your house refreshing Twitter every few minutes and try and do something productive, like create an emergency fund, just in case. After all, maybe Bitcoin won’t crash at all. Maybe it’ll just get more and more valuable until it becomes the basis of the entire global economy.

But probably not.

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