A reader asks: What would happen if Bitcoin went to zero?

A reader asks: What would happen if the value of Bitcoin went to zero?

Archer replies: The Indian mathematician Brahmagupta is credited with formalizing zero as a number in his best-selling seventh century Sanskrit text Brahmasphuṭasiddhānta (roughly translated as “the treatise of the universe, revised edition”). In it, he described rules for arithmetic operations involving zero – addition, subtraction, etc., according to ChatGPT. Then, as now, twice nothing was still nothing.

The concept of nothingness has always been a tricky one: from what does nothingness arise? This has tended to be more an epistemological question than a financial one. But Bitcoin arose out of nothingness, beginning life at effectively zero value in 2009. In 2010, 10,000 Bitcoin were used by a software engineer and early adopter to purchase two pizzas. But then something happened. As of year-end 2024, the total value of all Bitcoin in circulation was around $1.2 trillion. As of October 2, that number stood at $2.36 trillion.

It did not appear to the casual observer that Bitcoin became radically more useful over that period. As a thought experiment consider this: what would happen if Bitcoin returned to zero value, or something close to it? In 2010, it might have meant having to pony up another ten or twenty thousand Bitcoins for pizza. But now, with Bitcoin priced at $125,000 per, it’s a different story.

For comparison, consider the real estate value at risk going into the 2007-2008 Global Financial Crisis (GFC). While the numbers are a little squishy, the total value of commercial and residential real estate in the US stood at around $31 trillion in 2006 (again using ChatGPT as a source). Following the crash, that number fell to roughly $24 trillion, a decline of a little better than 20%.

This massive correction wiped out the equity of many homeowners and commercial real estate investors and brought the world to the brink of a second Great Depression. For the moment, Bitcoin’s market value is more than an order of magnitude smaller than all real estate prior to the GFC. And while many Americans owned or had exposure to real estate (primarily their house or, in the case of a few, their multiple “primary residences”), Bitcoin ownership is more concentrated. A wipeout would be painful for some, but likely irrelevant for most.

Is there a tipping point? A moment at which the market cap is big enough, and the ownership widespread enough, that a collapse in price would bleed over into the real economy? I have no idea (clearly not investment advice).

One thing we know: the Trump Administration has been aggressively normalizing the use of digital currencies and bringing them into the regulatory system, even as our grifter in chief and his relations float various self-enriching digital currency schemes. What does one do with a Trump coin, anyway?

A major aggravating factor with the GFC was leverage, primarily in the form of mortgage-backed securities. Leverage no doubt exists in Bitcoin, too, but it’s harder to pin down. The kaleidoscopic interplay among cryptocurrencies, stablecoins, tokenized assets and crypto-treasury asset hoarders like MicroStrategy can be a bit boggling.

The Buddhists would recognize this as “samsara,” the endless circle of life, as illustrated by Bhavachakra, or the “wheel of becoming” (or in Ray Dalio’s latest book, often described by critics as “interminable” reaching across several lives). Borrowing against the rising price of an asset is a classic form of introducing excessive risk.

Archegos Capital Management provides a recent example of just how wrong that can go. Founder Bill Hwang used margin and swaps to invest in a handful of stocks, pushing their prices higher and then using the higher valuation to borrow more money and buy more stock. But margin calls and a subsequent forced liquidation drove the prices back down. Bloomberg reported he lost as much as $20 billion in two days. Jail awaits.

This is not to say that Bitcoin will unwind in a similarly dramatic way or at all, for that matter. It may be every bit as revolutionary as its proponents claim. But at some point, you would think, it needs to demonstrate a utility commensurate with its value. The value keeps going up. The utility – at least what exists outside the hermetic, crypto-native world – that’s harder to say.

One perennially popular use case: replacing the dollar as a global reserve currency. Both Blackrock’s Larry Fink and the aforementioned Ray Dalio have suggested that rising national debt and a collapse in the dollar could lead to a further shift towards alternative currencies. Of course in that Blade Runner world it’s just as likely that an AK-47 will become the coin of the realm.

In an amusing Seinfeld episode, George attempts to play the role of the “bad boy” to get the girl. “Why not?” Jerry asks. “You’ve been the bad son, the bad employee, the bad friend.”

To date our esteemed leader has managed to debase the presidency, debase the Oval Office, debase the military, debase the judiciary and debase the Constitution. Why not trash a century of dollar dominance while you’re at it?

Maybe that’s the point: in that post-apocalyptic world maybe we’ll all be buying lawn furniture using Trump Coins.

Woof.