Can crypto have a negative value? More often than not people wonder how exactly the value of Bitcoin and other crypto coins are determined.
Well, the value of crypto coins and crypto assets are typically assigned by the different market forces and factors.
It also depends heavily on the demand and supply ratio along with the changes in utility.
When you buy Bitcoin or any other crypto token, the price you pay for it consists of the market value as well as the trading fees paid to the crypto exchange.
This ultimately becomes its value. Yes, you can also earn crypto coins in other ways as well such as through mining or through different products or services.
In these cases the value of the crypto will be the prevailing market price of it.
Now, you may wonder what is the probability of a loss in value and to what extent the value of Bitcoin and other crypto coins may drop to, given that it is subject to changes.
This is a natural question that may come to your mind along with another following it which is whether or not a crypto coin has a negative value.
Well, generally speaking the value of a crypto coin cannot literally go any lower than zero.
Yes, ‘zero value’ is a possibility but a ‘negative value’ is probably impossible.
You will have a much clearer idea about it when you read this whole article.
Can Crypto Have a Negative Value?
The value of a crypto coin is primarily determined by the demand and supply ratio of the particular crypto coin in question.
Since the demand of crypto is unlikely to fall to zero, unless anything drastic happens, the value of crypto dropping to zero is pretty difficult though likely, at least the growth rate indicates likewise.
Even if it does for some reason, economists and crypto experts say that it is highly unlikely to fall below zero and go negative.
The market will turn around and the price will again start to rise.
The price of all crypto coins can fluctuate quite wildly based on the market conditions and speculation by the participants in it.
However, just like any other asset, property, currency or security, the value of crypto coins also cannot be lower than zero.
This means that you will always need to pay something to someone when you want to buy Bitcoin or any other crypto coin.
However, there is a chance of the balance of your crypto account to go negative. But that does not mean it is due to the negative value of the crypto coins you hold in it.
This loss can happen due to the volatile nature of the crypto coins, especially if you participate in short selling or trade your crypto on margin a bit too much with high hopes.
Several research reports say that more than a few users have lost their fortune simply due to trading their coins on margin a bit too frequently and more than they could afford to lose.
A few over-ambitious crypto traders took the maximum advantage of the unrestricted trading on margin allowed by the crypto exchanges.
In order to prevent you from incurring such losses, you should have some knowledge about trading on margin as well at this point.
There was a time when the crypto exchanges allowed their customers to buy crypto coins 10 or even 20 times more worth the cash they had to cover the cost of these coins.
When you get such leverage and buy coins more than you can afford, you tend to lose big.
This is because there will be a time limit on these borrowings.
Therefore, if the price of the particular crypto coin you bought on borrowed money falls, you will not have enough money to repay your loan by selling the coins off.
This is because the sales proceeds will be much less than the sum of money borrowed, and do not forget the interest accrued on it.
If the margin call date is around the corner, you are set to lose all the coins that you have in your wallet and still may have multiple of the money you invested still to pay back.
This means that instead of getting a leverage of up to 20x, you end up losing that much more money than you invested in dollar value.
In order to prevent the users from incurring a loss greater than the amount they have invested several crypto exchanges put some restrictions on margin trading since 2017.
While a few crypto exchanges even went a step further and shut down margin trading in 2018 some others limited it to as low as 2x ratio.
This is in accordance with the rules of the stock market in the United States.
How is it Prevented?
Before you know how the value of a crypto coin is prevented from going negative, it is important that you know the basics of the crypto transaction process and how it works.
This will help you to know better why it cannot go negative.
All crypto coins including Bitcoin basically works on a P2P technology.
There is a blockchain computer network with different nodes which can be run by anyone. All crypto transactions and algorithms run on this blockchain.
Each of these nodes is provided with a list of history of all of the transactions that happened on the blockchain along with the current balances of each of the crypto accounts for confirmation.
As soon as the transaction is confirmed it is signed before it is validated by the computer nodes by using a specific cryptographic algorithm.
After that, it is linked with the past transactions.
This completes the process to create a new block in the blockchain record books. The data block, once recorded, cannot be changed by anyone.
If, in case, there is insufficient funds in the account, the transaction will be rejected by a specific code residing in the algorithm.
In this process, it is not the balance of the account that is checked.
Rather, it is the input and output that are checked when a new data block is added to the chain.
Here, an input is where an account receives coins and an output is when coins are sent from it.
Now, the summary of it all is that it is the code in the algorithm that prevents the crypto coin from having a negative balance.
This is done by tallying each coin that is spent and not allowing any user to allot more coins than they have.
The system also checks every block to find invalid transactions made and if there is any it is stored as well.
This helps in adding the newer blocks quickly.
There is a designated value given to each of the outputs added to the blockchain. This designated value changes when coins are spent.
This ensures that the new sum given is not more than the amount that is being used.
If the rule of crypto enabler is not met at any point in time by a transaction, it will be rejected by the node when it is given for verification.
Or, if the value within the transaction is negative, the block containing it will not accept it.
This way, it not only saves a crypto from having a negative value but also saves the users from overspending.
Another way to prevent negative value of coins is to limit or minimize losses with futures contracts.
This is the process which boosts up the long and short positions partially by purchasing the opposite option contract.
When the value of the futures contracts rises you may regain a portion of your losses even if the coin moves in the wrong direction.
This is however a complicated process and should be practiced only if you are an experienced investor.
Therefore, it is best to invest only that much in crypto that you can afford to lose.
This will not push the value of your investment and the crypto to the negative side of the measuring scale.
The Cost Factors
There is a price for every crypto and it cannot fall beyond zero, as said several times earlier, due to the different cost factors underlying it.
A few specific types of crypto coins may have some specific fees while other may not but the common cost factors that determine the value of a crypto are:
- Overdraft fee
- Spending fee
- Exchange fee and
- Miner fee.
You will need to have enough balance to cover the fees if you want to use a crypto coin or else you will not be able to spend it.
This way the different cost factors ensure that the value does not go into the negative.
All of the above facts and factors are applicable to the value of the cryptocurrency when you use it, spend it, or transfer it.
This means that the underlying value of a particular crypto coin is dependent on the decisions of the buyers and sellers when they trade them.
While buying and selling Bitcoin or any other crypto coin the buyers or the sellers cannot lose more than 100% of the amount invested because the value of the coin will never be less than zero.
In general, there are two explicit situations where one can lose more than the sum of money invested.
These are short selling and trading on margin, as said earlier.
It is the current market value of the coins you short sell or trade on margin which will determine how much you gain or lose on your investment value.
Here is a brief explanation of both the processes to make you understand things better.
This is the process which involves a few simple steps such as:
- Borrowing a crypto asset from some other account holder
- Selling it at the prevailing market price
- Waiting and hoping that the price of the crypto falls
- Repurchasing the coins at that lower price
- Returning the coins borrowed to the lender and
- Keeping the difference.
However, you can make profit on short selling your crypto only when the price of when you repurchase the coins is significantly lower than the price at which you borrowed from the other account holder.
If you are unlucky and see that the price of it is rising, you will incur a loss. The higher the price goes, the more money you lose.
Therefore, the potential loss in such cases is unlimited.
The best and most common way to prevent incurring such losses is to place stop loss or limit orders.
This will allow you to repurchase the coins before the price falls further than the pre-set level.
Ideally, short selling is not a process to be followed by everyone and therefore you should not go for selling your crypto short unless you precisely know what you are doing or getting into.
Buying on margin:
This is the second scenario where you can incur huge loss or make huge profits. Buying on margin is a process where you borrow money and not crypto coins from an exchange of your choice, if it allows.
You can buy your favorite crypto coins with that money borrowed, and more of them than the cash you have to pay for them.
You then wait for the price of the coins to rise and sell them off to make a profit.
You can make huge profits if the return is multiples of what you have invested in buying the coins and the amount of money you borrowed from the exchange.
However, if the price drops rapidly, you will not be able to get the desired amount of money you need to repay your loan.
In that case, you may have to arrange for money to deposit and bring the permitted borrowing ratio up.
If the price of the coin bought drops at a much faster rate than you can arrange this money, the crypto exchange has the right to sell off your coins you hold with them to cover the money you borrowed.
This money you owe will be more than you actually borrowed because interests will be accrued to it.
This means that you not only lose your coins but also put you in debt which will affect your credit score.
Therefore, trading on margin is a double-edged sword and hence should not be attempted by everyone.
Typically, both the situations, if not handled immaculately, will put you in the losing end thereby jeopardizing your investment value.
Like most assets, crypto coins will never have a negative value even if it reaches zero value which will be the lowest limit it can fall to. This is due to several factors and reasons that you may not have known until now, thanks to this article.