Is Bitcoin Crises Resistant?

 

Bitcoin has so far proved resistant to medium price crashes and bounced backed quickly. 

The same goes for the other cryptocurrencies. Since 2009, however, we have not had a huge financial assets crash. Yes, 2020 with the coronavirus pandemic was a severe shock as the major US stock indices crashed around 30 % from their peaks.

But the 2009 crash had much more severe consequences. Then the economic growth was driven by financial credit and the sudden evaporation of liquidity brought on huge strains for the economy and actually threatened capitalism as the social contract itself.

Personally, I think Bitcoin will withstand a severe financial crisis like in 2009. The main way to survive a crisis, be it financial or personal is to adapt, be flexible. And Bitcoin is flexible, since it is being actually created by the people. The secret of democracy and capitalism is that it is basically decentralised decision making being split or the proverbial distribution of powers.

Bitcoin is the epitome of financial democracy. People create Bitcoin and other cryptocurrencies without a central governing body like a central bank or Ministry of Finance to authorise the process. Why decentralised decision making works is actually connected with information and ego. Each person, I am convinced, knows what is best for him or her, because they know themselves best. Ego comes into play, because everyone is unique and people want to take decisions for themselves.

Bitcoin's supply is mined according to individuals' preferences. What is more, the hashing algorithm  behind Bitcoin should be prone to adaptation by the general public. What is more, Bitcoin is efficient and low-cost, since it does not require the printing presses to be working. Bitcoin is hugely value accretive, since it makes financial transactions much more efficient and attracts many new investors to investing in financial assets.

People are slowly losing faith in the monetary authorities due to the boom and bust crises cycles we have every 5 to 10 years. Actually, these boom and bust cycles are caused by people's greed and and fear. And my findings actually show that fear is negative greed. Fear or down moves are much more severe, but short lived, because investors are very scared of loosing their money and are rushing for the exits at every hint of danger. The classical run or fight primal characteristic of human nature that has helped us survive physically through the ages.

Psychology is pivotal in financial decision making. People's greed is palpable these days as everybody is grasped by FOMO or fear of missing out on the huge moves up of various asset prices, predominantly stocks and cryptocurrencies. Bitcoin's price rise is partly a product of this fear of missing out notion. 

I believe, however, that many people that invest or drive Bitcoin are hoping to do common good apart from profiting nicely in the process. Bitcoin promises to rid us of the biases of Presidents, Prime Ministers, Ministers of Finance or central bank governors. Decentralised decision making must ensure efficiency in decision making which up till now has been compromised by the flaws of human nature. Robots or artificial intelligence are not ready yet to take up that process entirely. In fact, Bitcoin's hashing algorithm is nothing short of artificial intelligence backed by human oversight or combination of the two most popular branches of artificial intelligence/machine learning, namely supervised and unsupervised learning.

Again turning to psychology, humans are fascinated by new technologies and everything new. Much of the reasons we became a dominant species on planet Earth is that we experimented with and accepted new things. In short, we developed new technology which made us superior. That usually manifested itself in an arms race. First it was fire, then stone knives, then arrows and bows, followed by pistols, rifles, machine guns, tanks, war ships and most recently nuclear arms. Each of these developments in technology made humans stronger and better equipped to deal with life's challenges. Artificial intelligence seems like the current final frontier. Artificial intelligence promises to develop universal soldiers, who can withstand pain, survive firearms attack and in the end annihilate the enemy efficiently and protect mankind.

Bitcoin and other cryptocurrencies are the edge in this technology fight. If Bitcoin and cryptocurrencies in general live up to their promises of creating huge financial wealth for the people, humanity will be able to finance the production of much more efficient weapons and extend its domination to other planets. Bitcoin's code tries to speed up financial transactions and decision making itself by breaking it down and distributing it among almost limitless number of participants. Whatever happens, it is 100 % certain that humans will be doing the decision making in the future. Yes, they may supervise the artificial intelligence algorithms they develop but still the code will be developed by humans. It is true that now there is code which can write other computer code, but still the initial development phase was done by humans.

The Japanese' hieroglyph or sign for crisis is the same as for opportunity. The next financial crises could prove a watershed moment for Bitcoin and other cryptocurrencies in general. The obvious bubble in stocks, technology stocks especially, bonds and real estate will sooner or later burst and the largest wealth destruction in the humanity's history will follow. Afterwards, the natural disappointment of people could speed up enormously cryptocurrencies's adoption.

Ultimately, the future of Bitcoin and other cryptocurrencies's adoption depends on the one thing that money rests on - trust.