Bitcoin and Ethereum: Waiting for the Big Crash?

Cryptocurrency such as Bitcoin and Ethereum are an exciting new investment opportunity, even outshining AI stocks, and they’re attracting investment by the hundreds of billions. It’s the digital gold rush and some believe BTC is headed for $1 million per coin.

Quite a bull run for BTC but for investors like you, there is cause for exercising caution in buying Bitcoin and Bitcoin stocks. With Trump’s August tariffs event and a potential profit-taking selloff ahead, you should just pause and consider the macro picture. For an asset with no substantial asset backing and no regulation, it has to give you some concerns.

As BTC and ETH reach new record prices, we can’t help but think about the possibility of major losses or a correction, either in volatile price swings, short positions, or outright transaction mistakes (including AI-generated fraud).

Like teenagers on a hot, humid day, Americans are diving in head-first without looking at what’s below the water. I’m far from a cryptocurrency economics expert, however I think many of the dangers are obvious, complicated, or not even known right currently. We’re wading fearlessly into a south Florida pond with dreamy eyes and big smiles.

What Drives Bitcoin’s (BTC) Price?

With BTC reaching its record price of $120,000 per coin, we know FOMO greed is driving the price of Bitcoin. Yet, it’s being driven by other factors too including:

• Trump’s banking and finance deregulations
• Wider adoption of cryptocurrency around the world
• Governments and companies creating their own bitcoin reserves
• Resentment of traditional currencies and USD devaluation and BTC as a USD backup/hedge
• A belief in stable coins which are tied to traditional currency such as the USD (cutting risk and being a safer store of value)
• Pension funds are beginning to buy into it, thus the price could rocket if they do

What are the Odds of a Crypto Bitcoin Crash?

But just for the sake of argument, what if something happens to crash this digital currency?  Back in May of 2022 the entire cryptocurrency market crashed sparked by the collapse of the stablecoin Terra. It resulted in the FTX exchange dissolving with criminal charges laid against their C Suite. With more deregulation of a new, unknown, complex asset and platform, couldn’t the same happen again. Won’t greed make it happen?

When President Trump announced the global tariffs in April, Bitcoin only fell 30%. However, the stock market suffered a major correction. We’ve had a reprieve with the tariff pause, but lasting tariffs might affect BTC price. In April, investors got scared and backed off all risk assets. The Dow Jones, S&P 500, NASDAQ Composite, and Russell200 all plunged significantly. Now that we’re at record stock market index levels again, we know it was all a knee-jerk reaction, partly political and partly a loss of greed.

But what happens if a US/China/Russia war breaks out? Can any major government game the system? Could evil AI cyberhackers bring the crypto system down? And is crypto the new Euro?  What happens if countries decide to back off and create their own digital currency?  Will some countries be devastated by a loss of control over their national currency? Will the US dollar collapse?

In light of international economic competition and each countries self-interest, why would countries honor the cryptosystem? So many tough questions to answer.

Why the Need for Cryptocurrency (e.g., Bitcoin)?

Bitcoin, Ethereum, and other cryptocurrencies emerged from someone’s belief that a decentralized global digital currency would offer many new opportunities and advantages over traditional financial systems:

• Decentralization and Freedom from Intermediaries: This is one of the key “needs” addressed by Bitcoin. Traditional finance relies on central authorities (banks, governments) to verify transactions and manage money. They have points of control, potential for censorship, and susceptibility to a single point of failure. Bitcoin, operating on a blockchain, allows for peer-to-peer transactions without the need for a trusted third party. This can be particularly valuable in regions with unstable governments, unreliable banking systems, or where financial censorship is a concern.
• Financial Inclusion for the Unbanked: For billions worldwide who lack access to traditional banking services, cryptocurrencies can offer a pathway to participate in the global economy. All that’s needed is an internet connection and a digital wallet, potentially enabling remittances, savings, and payments for those traditionally excluded. This isn’t much of a benefit for Americans, and is instead a risk.
• Reduced Transaction Costs and Faster Settlements: Traditional international transfers often involve high fees and can take days to clear. Cryptocurrency transactions, while sometimes subject to network fees, can theoretically offer faster and cheaper cross-border payments, especially for larger sums. It’s being hailed as wonderful by some Realtors and homeowners as a great way to bypass the banks and other agencies that are parasites in real estate sales.
• Transparency and Immutability of Records: The blockchain is a public, immutable ledger. Every transaction is recorded and verifiable by anyone on the network. This transparency can reduce fraud and increase accountability. However, that “anonymity” in crypto is more accurately described as “pseudonymity” as transactions are linked to wallet addresses, which can sometimes be traced back to individuals.
• Inflation Hedge (in some contexts): In countries experiencing hyperinflation or currency instability, some people view Bitcoin as a potential store of value, similar to gold, to protect their wealth from depreciating national currencies that they’ve purchased. The fixed supply of Bitcoin is often cited as a key factor in this appeal.
• Innovation and New Financial Systems (DeFi): The underlying blockchain technology has paved the way for a myriad of innovations beyond just digital currency. Decentralized Finance (DeFi) platforms, built on blockchain, aim to recreate traditional financial services (lending, borrowing, trading) in a decentralized and permissionless manner, potentially offering greater efficiency and accessibility.

Long-Term Dangers of Cryptocurrency

While the potential benefits are significant, the long-term dangers of widespread cryptocurrency adoption, particularly for currencies like Bitcoin and Ethereum warrant serious investigation.  BTC stills isn’t widely accepted as a valid currency for world trade or retail consumer payments.

Here are a few notable costs and risks of Cryptocurrency use:

• Environmental Impact (Energy Consumption and E-Waste): This is perhaps the most widely discussed and pressing long-term danger. Bitcoin mining, which secures the network and verifies transactions through a process called “proof-of-work,” requires immense computational power and, consequently, enormous amounts of electricity (added to the electricity consumed by AI).
  • High Energy Consumption: The annual energy consumption of Bitcoin mining alone is comparable to that of entire countries, such as Poland or Ukraine. A significant portion of this energy still comes from fossil fuels, adding to carbon emissions. Excessive demand for electricity pushes home electric costs up.
  • Electronic Waste (E-waste): The specialized computer hardware used for bitcoin mining has a relatively short lifespan (estimated around 1.3 years) due to constant upgrades and becoming unprofitable as mining difficulty increases. This generates a considerable amount of electronic waste, adding to environmental pollution.
• Price Volatility and Speculative Bubble Risks: Cryptocurrencies, especially Bitcoin, are notorious for extreme price swings. This volatility makes them highly risky as investments and unreliable as a stable medium of exchange for everyday transactions. Bitcoin as an example, is driven by speculation rather than fundamental value, leading to potential bubbles and crashes that can wipe out investor wealth. A Bitcoin panic can occur.
• Regulatory Uncertainty and Lack of Consumer Protection: The decentralized nature of cryptocurrencies means they largely operate outside traditional financial regulations. This lack of oversight poses several risks:
  • No Deposit Insurance: Unlike traditional bank accounts, cryptocurrency holdings are not covered by government deposit insurance schemes. If an exchange or wallet provider collapses, users can lose everything.
  • Fraud and Scams: The unregulated environment is ripe for scams, Ponzi schemes, and other fraudulent activities. Recovering stolen or lost funds is often impossible due to the irreversible nature of transactions.
  • Market Manipulation: The largely unregulated market can be susceptible to manipulation by large holders (“whales”) around the world (including China, Middle East, and Russia) who can influence prices through coordinated buying or selling.
• Illicit Activities and Money Laundering: While often exaggerated, the secretive nature of cryptocurrency transactions could facilitate illegal activities such as money laundering, terrorist financing, and ransomware payments. It’s been joked about for sometime that only criminal networks use Bitcoin. This poses big challenges for law enforcement and can undermine financial integrity. Any system without confidence is open to panic and failure.
• Systemic Risk to the Financial System: As cryptocurrency adoption grows, especially within traditional financial institutions, its inherent volatility and lack of regulation could introduce new systemic risks to the broader financial system if not properly managed and regulated. A decline in a single currency isn’t a global threat, however, a major crypto market crash could have ripple effects on the stock market, housing market and the global economy.
• Widening the Digital Divide: While proponents argue for financial inclusion, widespread reliance on cryptocurrency could also exacerbate the digital divide. Without physical cash, those without access to reliable internet, smartphones, or lacking digital literacy could be further marginalized from economic participation.
• Loss of Monetary Control for Governments: If a significant portion of economic activity shifts to decentralized cryptocurrencies, governments could lose control over monetary policy, fiscal policy, and their ability to manage national economies. This could have profound implications for economic stability and governance.

The full extent of dangers that cryptocurrency investment entails isn’t known to us now. It’s still new like AI. The point to make is about whether our confidence is warranted, and whether we’re even trying to see the downside.

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