As Chinese financial instability rocked global markets, placing them on what seems to be the edge of economic collapse, the Bitcoin community erupted with joy. At last, the world economy will fail, and Bitcoin will finally have its time to shine.
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Economic Collapse: The Reality is Not so Pretty
This seems to be a prevailing attitude in the Bitcoin community — if not among the majority of Bitcoiners, then definitely among a very loud minority. These people seem to think that collapse in the mainstream economy will be a great boon for Bitcoin, sending the price and venture capital investment into the stratosphere. The line of thought appears to be something along the lines of: the central banking economy has failed, now everyone knows Bitcoin is the only way to achieve a truly stable economy, so they will flock to it.
Reality is never so straightforward, though, and a global recession probably won’t be as great for Bitcoin as we might think.
The Bitcoin economy does not operate in a vacuum, and it is certainly not insulated from what happens in the mainstream economy. Every part of the Bitcoin economy, from the highly capitalized businesses to the dark corners of the deep web, is affected by the mainstream economy in some way.
Take bitcoin mining, for example. China houses the highest concentration of bitcoin miners in the world, which take up physical space and use real resources. How heavily do these operations rely on Chinese bank capital? If miners do have bank loans and the economy takes a dive, the banks could call in their loans early, and the miners might not be able to pay them. This would force them to default, and likely shut down their operations and liquidate their assets. With the world’s largest miners going offline, confidence in the Bitcoin network will falter, and a massive selloff will likely ensue.
The same is true for financed companies in other parts of the world. If the bottom falls out of the economy, and banks start calling their loans in early, indebted Bitcoin companies will start shutting down fast. Bitcoin-paying jobs will subsequently disappear, and economic activity in the Bitcoin ecosystem will grind to a halt.
We also can’t forget about the Bitcoiners who do not get their coins through their jobs, but purchase them on an exchange with fiat. With only 179 jobs currently listed on one of the larger Bitcoin job boards, it’s safe to assume that the vast majority of Bitcoiners fall within this demographic. What if these people get hit with a wave of unemployment during a global recession, can we expect them to continue buying bitcoin? Probably not. And if they stop buying bitcoin — and sell the coins they have to pay bills — we will lose most of the price support on the bitcoin markets.
The Bitcoin community often ignores the internal politics that threatens the ecosystem when talking about a mainstream recession. The bickering and infighting about the block size will not simply disappear when a recession hits. It will merely add to the stress placed upon the bitcoin network, further placing it in jeopardy. If Mike Hearn’s temper tantrum can send the bitcoin price down 15% in just a couple days, what will happen when drama flairs up at the same time as a global financial meltdown? Furthermore, how will Bitcoin fare when the block size issue moves past community drama, and actually starts producing serious effects on the network? Let’s say I’m wrong on every other point made in this article; if the economy collapses and people do in fact flock to bitcoin, will the network be able to handle it? We’re already approaching 1 MB blocks under normal conditions — with no consensus on what to do about block size — so I can only imagine the calamity that will ensue when hundreds of millions of people try to transact on the blockchain in desperate attempts to protect their wealth.
Some may point to the bitcoin market’s reaction to past speculation regarding the state of the global economy to argue that Bitcoin reacts positively in times of mainstream financial peril. But the thing is, throughout all those close calls since 2008, we haven’t officially had another recession. We also can’t see what goes on behind the bitcoin charts. Sure, when fear of a recession hit in the past, day traders and speculators bought in anticipation of a mass exodus to bitcoin. However, when a real recession hits, those speculators might lose their sources of fiat income, and they’ll have to stop trading. So, when we get the real deal, who will speculate on the price if the speculators are broke?
Of course, Bitcoin won’t be totally hopeless in the event of a financial meltdown. Bitcoin companies might not actually be indebted to banks, not everyone will instantly become unemployed, and lots of speculators probably have enough money that they will still be rich even in a recession. No one really knows what will happen. The point is, though, is that any number of things could go wrong with Bitcoin, and there is no guarantee that it will react a certain way in the event of economic turmoil. We are very much tied to the mainstream economy, and no matter how you cut it, a recession will not be a total boon for anyone.
What do you think will happen to Bitcoin when the next big recession hits? Let us know in the comments below!
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