Cryptocurrency, Bitcoin Bubble: What Happens When It Bursts?

This article reflects the opinions of the author and is not intended to be financial counsel.

Recent wild fluctuations in the value of Bitcoin and other cryptocurrencies have left many observers ready to declare the end of the so-called crypto bubble. Those obituaries have turned out to be premature, but given the way markets operate, a correction in the first half of 2018 seems likely. The number of high-flying crypto assets continues to balloon, with all of them sitting atop blockchains that are largely unable to handle this surging activity. If major cryptocurrencies like Bitcoin and Ethereum experience a precipitous drop in valuation, it could create a nightmare scenario for crypto holders.

It is no secret that many blockchains have difficulty handling heavy transaction volumes. Bitcoin, for example, handles roughly three to four transactions per second — a far cry from Visa’s roughly 24,000 per second. During periods of heavy trading, crypto exchanges sometimes go offline for hours or days. This will be hugely exacerbated by a true market correction. A rush to offload tokens has the potential to cascade onto an underlying blockchain like Ethereum, which could buckle under the strain. As more and more people try to sell, performance will degrade and many exchanges will shut down.

Even if an exchange manages to stay open, it will have difficulty processing increasing volumes of deposits and withdrawals. If customers begin depositing crypto holdings en masse in order to sell them, they will find their funds stuck in a “pending deposit” mode on the exchanges while their market value plummets — assuming the underlying blockchains are even functioning well enough for customers to transfer funds. Blockchains such as Bitcoin and Ethereum are simply not mature enough to handle the volumes that will materialize amidst a major market correction.

Such a correction will be a turning point for the crypto world. Regulators and governments are all but certain to step in as citizens cry foul, having lost their crypto-millions because the industry was not mature or robust enough to offer sufficient protections and operational continuity. Many outside observers will chalk up crypto as yet another tulip bubble. From that moment on, the landscape of the blockchain and crypto asset industry will be different. Entrepreneurs and investors will face sobering decisions about blockchain’s future — decisions that will determine how it grows and succeeds as a technology.

Governance presents the first major challenge. There are some who view blockchain as a counter to the perceived overreach of governments, corporations and regulators. However, for blockchain to achieve broad mainstream adoption, it will need government support. Crypto’s surest and quickest path to a sustainable future is to work within existing frameworks to provide solutions that improve upon what has already been built. The community should work with governments, regulators, industries and others to ensure that blockchain is addressing real problems and to prevent bad actors from using it for malicious purposes. The potential of the technology to address some of the world’s most pressing economic issues — including meaningful improvements to financial transparency and integrity and defenses against various forms of monetary manipulation — can be realized in collaboration with existing players.

We must also consider what a mature blockchain industry should look like in the years ahead. Much of the recent coverage in the media has created an impression that the technology is nothing but a branding fad, or worse an outright fraud. But while scams certainly exist, there are also many areas where blockchain can have a major positive impact. Realizing its potential to deliver value and improve society will mark the next major watershed.

Finally, we have to weed out the bad apples. Honest players in the crypto community must all work to eliminate scams and promote transparency in their own ventures. Fraudsters, always opportunistic, have attempted to take advantage of the uncertainty and excitement surrounding crypto. Their scams, unfortunately, have garnered much public attention and created a degree of stigma around blockchain projects. So while a market correction will be a nightmare for people who bought into dubious projects, in the long run, it will be good for the industry and will wipe away the bad actors and leave behind only genuine businesses. It will chasten the market to be much more selective when investing in crypto assets, and reinforce the importance for founders to implement and support industry-wide transparency and best practices.

When the crypto crash comes, the blockchain world is going to find itself at a crossroads. How it proceeds will determine if this technology matures into a major force for good — or whether it is just another tulip bubble. I am hopeful that it will choose the former.

Marshall Swatt is an entrepreneur and an expert in blockchain technology and financial exchange.