Economists Reveal the Probability of Bitcoin (BTC) Dropping to Zero
The year 2017 was great for early Bitcoin (BTC) investors. BTC was hovering over $1000 at the beginning of the year and ended at $20,000 at the end. A 20x profit in a year is rarely observed in the traditional stock markets. However, 2018 isn’t exactly going well for investors. Bitcoin recently saw a massive drop and stands at $6,490 at 13:35 IST.
Even though millions of people are invested in this cryptocurrency, Economists Yukun Liu and Aleh Tsyvinski reveal that there is a chance the value of Bitcoin (BTC) could drop to zero.
According to their paper, Risk and Returns of Cryptocurrency, there is 0.4 percent chance that the price of Bitcoin drops to zero. The paper also gives daily disaster probabilities of Ripple and Ethereum at 0.6 percent and 0.3 percent respectively.
The first half of the paper discusses cryptocurrencies and the stock market, focusing on the top 3 – Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP). It shows that there is very little evidence to support the notion that the cryptocurrency market and stock markets work the same way.
It also calculates the average daily negative and positive returns on these cryptocurrencies while stating that they experience high probabilities of “disasters” and “miracles”. “For example, a “disaster” of the daily 20 percent negative return on Bitcoin happens with the probability of 0.5 percent while a “miracle” of the same size happens with the probability of almost 1 percent.”, text from the paper.
Now, you must be wondering that the percentage chance of Bitcoin’s price falling to zero is very low. That is why, to give context, the paper also states the probability of government-backed currencies falling to zero. The chance the Euro would become worthless is 0.009 percent, the Australian dollar is 0.003 percent, and the Canadian dollar measures 0.005 percent, Tsyvinski tells the YaleNews.
Although the probability for Bitcoin’s price to go down is low, it is still higher than the traditional form of currencies by a huge margin.
The rest of the paper states the difference between traditional currencies and cryptocurrencies. It also goes on and explains the limited impact of cryptocurrencies on macroeconomic assets and the different risks they have compared to stock markets and traditional assets.
In the end, it concludes by saying, “We conclude that cryptocurrency returns have low exposures to traditional asset classes – stocks, currencies, and commodities. Our findings cast doubt on popular explanations that the behavior of cryptocurrencies is driven by its functions as a stake in the future of blockchain technology similar to stocks, as a unit of account similar to currencies, or as a store of value similar to precious metal commodities. At the same time, the returns of cryptocurrency can be predicted by two factors specific to its markets – momentum and investors attention. Our findings call into question popular explanations that supply factors such as mining costs, price-to-”dividend” ratio or realized volatility are useful for predicting the behavior of cryptocurrency returns. Finally, we document that the blockchain technology embodied in cryptocurrencies has a potential to affect a number of important industries.”
So, blockchain technology has a huge potential to benefit industries but its first child, Bitcoin, is at a high risk of becoming extinct.