When Blockchain Loses its decentralization effect
The loss of decentralization in blockchain systems is not inevitable but often stems from choices made during development, governance, and infrastructure design.
There is a possibility that the establishment of Bitcoin as a strategic reserve could backfire, causing systemic instability and upsetting its fundamental economic principles.
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Although the concept of a Bitcoin Reserve Act would appear to be bullish at first look, this is not necessarily the case.
The following is an analysis of how this scenario might play out, which could result in the price of Bitcoin falling below $20,000 and leaving the halving cycle that is so famously recognized obsolete.
1. The Utilization of Bitcoin as a Geopolitical Pawn
Once Bitcoin is recognized as a reserve asset that is under the control of the government, it runs the risk of being tied to other reserve assets that are already in existence, such as the United States dollar or gold.
On account of this, a number of unfavorable events could occur:
The value of Bitcoin would be pegged to the United States Dollar or gold, which would essentially eliminate the unpredictable price swings that attract traders and long-term investors.
The value of Bitcoin would be pegged to the United States Dollar or gold, which would essentially eliminate the unpredictable price swings that attract traders and long-term investors.
Governments would emphasize price stability over freedom at this point.
Attempts to Manipulate It: It is possible that the decentralized nature of Bitcoin might be weakened if central authorities control the supply and demand of the cryptocurrency in order to achieve macroeconomic goals.
Loss of Appeal to a Decentralized System: It is possible that Bitcoin's value proposition as a hedge against fiat inflation could be diminished if it were to link itself with state reserves. This would in turn alienate core users and investors.
Disruption of the Cycle of Halving Operations
Bitcoin's narrative of scarcity and predictable price growth is fundamentally based on the four-year halving cycle that characterizes the cryptocurrency. A Bitcoin Reserve has the potential to eliminate the need for this cycle by:
Artificial Price Controls: Governments that amass large amounts of Bitcoin might implement systems to stabilize or control prices, so eliminating the natural supply shocks that are induced by halvings.
Supply Hoarding: Because large-scale reserve purchases would consume a sizeable amount of Bitcoin's circulating supply, the market could become less liquid as a result of this phenomenon. Both individual investors and institutional investors can be dissuaded by this.
Due to the fact that Bitcoin prices are pegged to those of other assets, the psychological impact of halvings on price movement would diminish, so upsetting the cyclical boom-and-bust pattern that has traditionally attracted market players.
Bitcoin exchange-traded funds and reserve overlap
The existence of Bitcoin exchange-traded funds (ETFs) and a Bitcoin reserve could result in a dispute that causes the market to become unstable:
ETF Dumping: Bitcoin exchange-traded funds (ETFs) are dependent on Ethereum holdings to back their shares. It may be difficult for exchange-traded fund issuers to obtain Bitcoin if governments acquire it in large quantities. This could result in a decline in investor confidence and the possibility of widespread redemptions.
Liquidity Crisis: With reserves hoarding supplies and exchange-traded funds (ETFs) depending on liquid markets, the absence of circulating Bitcoin might generate a liquidity constraint, which would drive prices into a downward cycle.
Price Crash: Bitcoin might face large sell-offs in the event of government policy shifts or mandated reserve liquidations (for example, during economic crises), which would ultimately result in values falling below $20,000 or even lower.
4. Excessive regulation and the erosion of industry trust
Having a Bitcoin Reserve that is backed by the government raises the possibility of excessive regulation, which might be detrimental to the cryptocurrency ecosystem:
Private investors, particularly those who place a high value on Bitcoin's uncontrolled and decentralized nature, may be dissuaded from investing if the reserve management system is subject to stringent laws.
There is a possibility that Bitcoin will lose its reputation as a "digital gold" and instead be seen as merely another commodity that is controlled by the state.
Fragmentation on a Global Scale: If international nations compete with one another to develop reserves, this could result in Bitcoin legislation and policies that are fragmented, which would reduce global confidence and acceptance.
5. The Domino Effect Caused by the Inventory of Reserves
The concept of a Bitcoin Reserve is based on the assumption that governments will keep Bitcoin for an extended period of time; however, economic or political crises may pressure countries to liquidate their reserves:
Price Collapse: A big liquidation event would swamp the market with Bitcoin, which would drive prices downward, maybe to levels that have not been seen since before the bull run in 2017.
Panic among Investors: The market might view such a move as a lack of trust in Bitcoin's viability, which would result in widespread panic selling.
lengthy Bear Market: In contrast to prior cycles, in which halvings prompted recovery, the absence of cyclical price catalysts may result in a lengthy period of stagnation or decrease in the market.
6. Bitcoin that is pegged to either the US Dollar or gold
A Bitcoin Reserve might mistakenly link the value of Bitcoin to the United States Dollar or gold, which would profoundly alter the nature of Bitcoin's market:
Bitcoin's speculative appeal, which has been a primary driver of adoption and investment, would be eliminated if it were fixed value. Pegging Bitcoin to another asset would erase this appeal.
Bitcoin's role as a decentralized and independent store of value would be undermined if it were to become another instrument in the arsenal of traditional financial systems. This would result in a loss of independence regarding Bitcoin.
Reduced Volatility, Reduced Opportunity: While a reduction in volatility could entice some investors, it would turn off others who make their living off of Bitcoin's price fluctuations.
An example of a collapse involving $20,000
The following sequence of events might take place in accordance with this alternative narrative:
The initial pump causes a temporary increase in the price of bitcoin as a result of the anticipation of reserve purchases.
Price levels that are not sustainable are caused by overextension, which is caused by reserve policies that create artificial demand.
A policy reversal occurs when governments are forced to sell reserves as a result of economic or political upheavals, which results in a liquidity shock.
As the confidence of investors continues to erode, the market value of Bitcoin continues to tumble, and it may even fall below $20,000 in the near future.
Redundancy in the Market: Because Bitcoin is pegged to traditional assets and halvings are no longer significant, the distinctive market dynamics of Bitcoin have disappeared, which has led to stagnation.
Despite the fact that the Bitcoin Reserve Act may appear to be hopeful, it actually poses substantial risks to the fundamental principles of Bitcoin as well as the dynamics of the market.
A Bitcoin Reserve has the ability to transform Bitcoin into a regulated commodity, which is a significant departure from the original idea for the cryptocurrency. This could be accomplished by breaking the halving cycle, adding centralization, and creating the potential for large-scale manipulation.
Prior to moving forward with such a significant change, investors and policymakers need to give careful consideration to the risks involved.
Disclaimer
The information provided in this content is for informational and educational purposes only and should not be considered as financial, legal, or investment advice. Blockchain technology and cryptocurrency investments involve significant risks, including market volatility, regulatory changes, and technological vulnerabilities. Readers are encouraged to conduct their own research, consult with qualified professionals, and evaluate their risk tolerance before making any decisions related to blockchain, cryptocurrency, or related technologies.
This content does not guarantee the accuracy, completeness, or timeliness of the information presented. The views expressed are not endorsements or representations of any specific platform, project, or initiative. Readers should be aware of the potential risks of centralized or decentralized systems and exercise caution in their interactions with the evolving blockchain ecosystem.
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