The world of cryptocurrency is thrilling, soaring with dizzying gains and plummeting with heart-stopping losses. But amidst the hype and speculation, one question lingers on every investor’s mind: can crypto go negative?
This is a complex query shrouded in technical jargon and conflicting opinions. Fearmongers paint a bleak picture of bottomless pits, while optimists tout crypto’s inherent immunity to unfavourable valuations. But the truth, as always, lies somewhere in the nuanced spectrum between these extremes.
In this blog, we’ll embark on a deep dive into the heart of this question. We’ll dissect the underlying mechanics of cryptocurrency, explore the concept of “negative value” in this context, and unravel the myths woven around this complex topic.
To understand the answer to “Can cryptocurrency go negative?”, we must first understand how cryptos are priced and traded.
How Are Cryptocurrencies Priced?
Unlike government-issued fiat currencies and other forms of officially recognised money, cryptocurrencies are not backed by centralised government regulations. Since it is highly regularised, the value of fiat money is agreed upon by different governments and central banks worldwide. Hence, fiat currencies can’t have a negative value.
But cryptocurrencies work differently.
Understanding the Basics
Given cryptocurrency’s Decentralised nature, its value comes from factors other than centralisation. These factors include supply and demand, cost of production, competition, government regulations, etc.
The law of supply and demand applies to cryptocurrencies. The concept that the link between supply and demand ultimately determines pricing is called the law of supply and demand. When there is more supply of a product or service than demand for that product or service, prices will go down.
If there is more demand than supply, then prices will go up. In the case of cryptos, the price will increase when more people try to buy a particular cryptocurrency. On the other hand, the price may drop if more people try to sell a specific cryptocurrency.
The cost of producing cryptocurrencies also affects their prices. (Cryptocurrency Mining is the process that generates new cryptocurrency tokens.) Verifying the next block on the blockchain is an essential part of mining for cryptocurrencies. It is done on a computer.
The decentralised network of miners makes it possible for cryptocurrencies to function as they do. In return for the work done by the miners, the protocol creates a reward in the form of cryptocurrency tokens on top of any fees that the parties involved in the exchange may owe to the miners. Mining is a costly affair. It requires a lot of computer power. The value of crypto has to be adjusted sometimes to remunerate miners and encourage them to keep mining.
The above two factors explain how the price of a cryptocurrency could go up or down. When demand is thin and there is a supply overflow, it could even go near zero. But can it go below zero?
Let us see how cryptocurrencies are traded to find that out.
How Is Cryptocurrency Traded?
Cryptocurrency markets are decentralised. That means they are neither issued nor backed by a central authority such as a government. Instead, they are distributed among a group of interconnected computers.
Cryptocurrencies may be purchased and traded on exchanges and kept in different wallets. In this system, you can sell when there is a buyer. But unlike stocks, the exchanges or the wallet will sometimes buy and hold the stock to sell when a buyer is ready.
Can Crypto Go Negative?
So, considering the above two factors, if a cryptocurrency has a negative value, it practically implies that you have to pay the buyer to be able to sell a crypto that you own. Such a situation is not practically possible because of two reasons –
- According to the supply and demand theory mentioned above, the price can decrease if the demand is low and/or supply is high. However, the law makes it impossible for the value to go below zero, as selling is always associated with a price. Also, as said above, mining is often rewarded with tokens. Miners will continue to mine only if there is value in what they mine.
- According to how cryptocurrency is traded, it is virtually impossible for its price to be below zero. For instance, if the cryptocurrency’s value is negative, the seller has to pay the buyer to sell it.
In many ways, cryptocurrency’s value is comparable to stocks’ value. The value of the stock itself can’t go below zero. Only if the company goes bankrupt would it ever reach zero.
If you purchased the stock and the price dropped, you would be the only one to experience a negative outcome.
Similarly, if you buy a cryptocurrency whose value declines, you may have a negative outcome, but the value will not breach zero.
What Happens If Cryptocurrency’s Value Goes Negative?
In the world of cryptocurrency, prices fluctuate constantly. This volatility can excite investors and present opportunities for gains. However, it also poses risks, especially during market downturns.
When the demand for a specific cryptocurrency decreases, its price inevitably drops. This downward trend can result in substantial losses for investors who must be vigilant.
Here are some of the events that might occur if a cryptocurrency goes negative:
Mining Crypto Can Give Unprofitable Results
The future of crypto is uncertain. If the market takes an adverse turn, miners may encounter significant challenges. Mining could become less profitable, causing a ripple effect across the crypto landscape.
To safeguard your investments in the event of a cryptocurrency going negative, consider the following strategies:
Diversify Your Portfolio
It’s crucial to concentrate only on some of your crypto investments. Diversification is critical in any investment strategy, especially in the volatile crypto market. Spread your investments across different asset classes to mitigate risk.
Stay Informed and Monitor the Market
Keep a vigilant eye on the market trends. If you notice a negative trend in the crypto market, be proactive. Don’t hesitate to sell your assets early. Exiting the market before it worsens is often a prudent move.
Avoid Panic Selling
While crypto markets can be highly volatile, it’s essential not to panic. The crypto market is still relatively young, and fluctuations are a natural development. Instead of succumbing to panic, maintain a long-term perspective on the potential profitability of crypto investments.
Storing Crypto Can Be Expensive
As the value of Bitcoin and other cryptocurrencies continues to rise, the expenses associated with safeguarding them are also rising. Crypto investors must be aware of this ongoing trend.
Various methods are available for storing your cryptocurrencies, the two most common being software and hardware wallets.
A software wallet is a program that manages your private keys, enabling you to carry out cryptocurrency transactions. On the other hand, a hardware wallet is a tangible device designed to store your private keys and facilitate crypto transactions.
Each storage option has its advantages and drawbacks. However, it’s vital to understand that the expenses associated with safeguarding your cryptocurrencies. They will increase along with the escalating values of Bitcoin and other digital assets. Stay informed and make wise choices in managing your crypto holdings.
Transaction Cost Could Rise
In a crypto market downturn, the potential depreciation of cryptocurrency values poses investor concerns. Beyond impacting portfolios, this downturn may elevate transaction fees, compounding worries within the crypto space. Investors should stay vigilant amid market fluctuations to navigate potential challenges and optimise their financial strategies.
If A Crypto Goes Negative, Do You Owe Money?
We have established above that cryptocurrency can’t go below zero. But hypothetically, if your crypto goes negative, do you owe money?
You may experience losses in your crypto investments, leading to a negative balance. This typically happens due to over-leveraging, particularly in two scenarios: short selling and buying on margin. Let’s delve into these situations to understand how they can result in a negative financial outcome.
Margin Trading & Leverage
When you engage in margin trading for cryptocurrencies, you commit a portion of the total position value and borrow the remaining amount from the exchange. Not all crypto exchanges permit margin trading, and the specific terms can vary.
Here’s how it works: let’s say you want to open a margin position. You’ll contribute a certain percentage of the position value, and the exchange will provide the rest through a loan. If the value of the cryptocurrency rises, you stand to make a profit. However, you may need to add more funds if the price drops and the exchange enforces a particular borrowing ratio or margin balance.
You might face a margin call when the market moves against you and the exchange requires additional funds to maintain your position. This means you’ll either have to deposit more money, or the exchange might automatically sell some of your assets to cover the shortfall.
Short Selling
If you want to short-sell in the crypto market, here’s how it works: you borrow cryptocurrency at the current market price, sell it, and then aim to purchase it back at a lower price, pocketing the profit.
However, it’s important to note that if the cost of the crypto you’ve shorted keeps going up, your potential losses can be limitless. The more the price rises, the more you stand to lose. Despite the risks involved, shorting crypto has advantages, making it a high-risk, high-reward strategy.
So, answering if a crypto goes negative, do you owe money? You may have to pay the buyer to sell if the crypto value goes negative when you sell off the bought cryptocurrency.
Can You Lose More Money Than You Invested In Cryptocurrency?
While a negative cryptocurrency is unrealistic, there is a chance for you to lose more money than you have invested. This happens if you margin trade a cryptocurrency. Margin trading is borrowing money, depositing cash to serve as collateral, and then engaging in transactions while utilising the borrowed funds.
If the price of a cryptocurrency drops beyond your predictions, you may breach the margin ratio of the exchange. That means you will have to add more money. If not, the exchange or wallet may sell your holdings to cover their cost.
A similar situation could happen if you try to short-sell. When you short an asset, you invest in a way that lets you make money if the asset’s value decreases. But if the value goes up, the loss can be virtually unlimited.
Conclusion
While answering the question of whether can crypto go negative, it cannot. But there are plenty of ways to lose money in the crypto field. Hence, keeping a close eye on your crypto investments and only investing after thorough research to identify a good cryptocurrency project is essential.
