Here's What Might Happen If Bitcoin Crashes

Summary

Bitcoin's price is skyrocketing because of high demand and low supply. Prices can keep climbing as long as there are more buyers than sellers. A selloff will threaten other markets if the cryptocurrency keeps growing.

I am not rooting for Bitcoin to fail and I am not predicting an imminent crash in Bitcoin's value. It's clear that more people want to buy Bitcoins than sell them right now; that will drive prices higher (look at the ratio of buy vs. sell searches in Google Trends.) But as Bitcoin's total value grows, I believe the risk of a selloff increases -- and that risk may spread to other markets. Here are some hypothetical scenarios that might create buying opportunities or inspire defensive posturing.

Is Bitcoin Doomed to Crash?

I think Bitcoin's price will fall sharply one day, but that doesn't mean the cryptocurrency is doomed to fail. The U.S. stock market fell by 90% and bounced back stronger than before. Bitcoin may be just as resilient: Its a global currency that has a purpose beyond speculation. Someone living under an oppressive government may have good reason to transfer his or her assets into a portable format. (Gold once served this purpose, but it's size and weight made it impractical.) Cryptocurrencies may follow the same boom, bust, and gradual adoption cycle that so many new technologies did in their early years.

Will the Stock Market Crash If Bitcoin Crashes?

I don't think a sharp drop in Bitcoin's price will crash the U.S. stock market, but I do think that some stocks will follow Bitcoin downward. Computer hardware companies, like Nvidia (NVDA) and Advanced Micro Devices (AMD), are vulnerable. These companies make graphics processing units that are in high demand among cryptocurrency "miners" (i.e. the people who use their computers to unlock fractional parts of encrypted digital currencies). A sudden sell-off in Bitcoin may cause a knee-jerk reaction that drags these companies down, even though the market has already realized that the good times won't last forever.

Similarly, the stocks of companies like Overstock.com (OSTK) and Square (SQ) are now correlated with Bitcoin. Overstock.com stock is trading 278% higher than its 52-week low price, largely because the company announced plans for its own cryptocurrency offering. Meanwhile, Square stock is up more than 200% from its 52-week low, because the payment platform is testing the ability to buy and sell digital currency within its app. What cryptocurrencies have giveth these stocks, cryptocurrencies can taketh back.

I'd also watch the stocks that Bill Miller owns, especially stocks with small market capitalizations. Miller's MVP 1 hedge fund is crushing the stock market this year because of his Bitcoin holdings. But if Bitcoin falters and his investors run for the exits, Miller may have to sell stocks to raise money for those redemptions. The stocks of huge companies, like Amazon (AMZN), can withstand selling pressure from a single, large investor; however, a smaller company may fall victim to that kind of selling pressure.

Source- https://seekingalpha.com/article/4128965-might-happen-bitcoin-crashes?page=2