How Bitcoin Volatility Could Trigger a Great Depression-Level Crash

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Bitcoin Volatility and a Market Crash: A Scenario, and Postulated Series of Events That Extends Throughout the Financial System, Producing a Crash on the Level of the Great Depression.

This essay is a collaboration between myself and Perplexity AI. I had concerns about the risks inherent in Bitcoin—particularly its volatility and its growing integration into traditional finance—and I wanted to explore how these factors might lead to broader financial instability. By working with AI, I was able to develop and refine these ideas into an accessible explanation that I hope will help others better understand the potential risks.

How a Bitcoin Crash Could Trigger a Global Financial Crisis: A Warning

What if Bitcoin’s next crash didn’t just hurt crypto traders—but triggered a financial crisis that rippled through the entire global economy? It might sound far-fetched, but as Bitcoin becomes more deeply tied to traditional finance, the risks of its volatility are no longer limited to cryptocurrency enthusiasts. Stocks, pensions, and even banks could all be affected.

Here’s how a 40% drop in Bitcoin—something that has happened many times before—could spiral into a full-blown financial disaster.

A Simple Scenario: The BRICS Nations and Bitcoin

Imagine this: A group of powerful countries—Brazil, Russia, India, China, and South Africa (known as BRICS)—decide to use Bitcoin for trade instead of the U.S. dollar. This makes Bitcoin’s price skyrocket because everyone believes it is now essential for global trade.

But after a year or two, the BRICS nations announce they’ve created their own digital currency (let’s call it the "BRICS Coin") and will stop using Bitcoin in three months. They begin to sell off their Bitcoin to prepare for the switch.

This announcement causes panic. People realize that one of the biggest drivers of Bitcoin’s value is disappearing, and the price begins to fall, first 20%, then 30%. Traders who borrowed money to buy Bitcoin (using leverage—essentially borrowing money to make bigger bets) are forced to sell because they can’t afford their losses. This creates a chain reaction, driving prices down even further—40%, maybe more.

Why This Could Be a Big Problem

Here’s where things get serious: Big institutions like hedge funds and banks are now involved in Bitcoin. They’ve invested billions or issued loans backed by Bitcoin as collateral (meaning if borrowers can’t pay back their loans, the bank takes their Bitcoin).
When Bitcoin’s price crashes:

Hedge Funds: Hedge funds lose massive amounts of money because they bet on Bitcoin going up. Some go bankrupt.

Banks: Borrowers who used their Bitcoin as collateral can’t repay their loans because their collateral is now worth much less. Banks take huge losses.

Pension Funds: Pension funds that invested in Bitcoin-linked products see their value drop, putting retirees’ savings at risk.

To cover these losses, these institutions start selling other assets like stocks and bonds. This spreads the panic in to other markets, causing stock prices to crash and making it harder for businesses to borrow money.

How It Could Spiral Out of Control

The problem doesn’t stop there:

Stock Market Crash: As institutions sell stocks to cover their losses, stock prices plunge. Regular people see their retirement accounts shrink.

Bond Market Trouble: Governments and companies find it harder to borrow money because bond prices fall too.

Emerging Market Crises: Countries that adopted Bitcoin or relied on it for trade face economic collapse as their reserves lose value.

Confidence Crisis: People lose trust in both cryptocurrencies and traditional financial institutions. Banks face runs as customers withdraw their money out of fear.

In this scenario, what started as a 40% drop in Bitcoin ends up affecting the entire global financial system.

This Isn’t Just About Bitcoin.

This isn’t just a "Bitcoin crash." If something like this were to happen, it could trigger a Great Depression-level event. The interconnectedness of today’s financial systems means that when one part collapses, especially something as volatile and widely adopted as Bitcoin, it can drag everything else down with it. Stocks could crash, banks could fail, pensions could evaporate, and entire economies might be thrown into chaos.

Why I Provided This Scenario

This scenario isn’t just speculation. It is based on real-world trends like the institutional adoption of Bitcoin, geopolitical shifts (e.g., BRICS de-dollarization), and how speculative markets behave under stress. We’ve seen similar dynamics before, like the 2008 housing crash, where risky bets tied to leverage caused widespread economic devastation.

AI helped form this scenario based on my questions about how deeply interconnected Bitcoin has become with traditional finance and how its volatility might translate into systemic risks. My goal was to show how something that starts as an isolated event, a 40% drop in Bitcoin, could ripple outward into a full-blown financial crisis affecting not just crypto traders but everyone reliant on the global economy.

What You Should Take Away

If you’re dabbling in Bitcoin or thinking about its future:

Understand that volatility is part of what makes Bitcoin risky—it can drop 30-40% in no time.

Realize that as more big players get involved (banks, hedge funds, governments), these drops could have far-reaching consequences beyond just crypto markets.

Be cautious about assuming that Bitcoin is "too big to fail." Its integration into traditional finance makes it both more important and more dangerous during downturns.

Bitcoin may be revolutionary, but its volatility combined with broader adoption means we should all be aware of how quickly things could unravel if something goes wrong.

Final Thoughts:

This is not meant to scare anyone away from investing or participating in cryptocurrency markets. It results from my own thoughts and considerations about Bitcoin and the overall economy, and is meant as a warning about what happens when speculative assets become deeply tied to traditional finance without proper safeguards in place.
As exciting as Bitcoin's rise has been, we must be mindful of its risks—not just for individual investors but for the stability of the entire financial system. Economies could be thrown into chaos. It has happened many times before. The average is every 7-10 years for a downturn. Put this scenario into the mix and you have the ‘Great Depression’ or something similar.

More Companies Are Betting on Bitcoin https://www.nytimes.com/2025/01/08/business/bitcoin-crypto-company-treasury.html?smid=nytcore-android-share