If the price of an asset fell by 70% for more than half a year, would you buy it?
Perhaps the answer from most students is - they don't dare to buy, and they feel as if the bubble is about to burst.
Then let me ask: If an asset rose from a few cents to more than 20,000 US dollars in 13 years, would you buy it?
Perhaps the reaction of most students is that they have a sense of immediacy about a big bull stock and will consider buying it.
However, the asset mentioned in both questions is Bitcoin.
Since 2010, Bitcoin has experienced the largest increase among major assets.
In 2022, Bitcoin fell from a high of US$68,000 to below US$20,000 and as low as US$18,000. The 70% drop only took 7 months.
At present, cryptocurrencies represented by Bitcoin have risen, and the total market value of global cryptocurrencies once reached more than 3 trillion US dollars. Regulators in many countries have also begun to tolerate and accept Bitcoin and include it under supervision. At the same time, Bitcoin’s underlying technology—“blockchain”—has officially entered the stage of history.
Against this backdrop, Bitcoin seems to be a core asset not to be missed.
But the question is: Do you really understand Bitcoin?
Understanding Bitcoin is different from simply understanding an investment product, but a key to understanding the future.
01 What is the value of Bitcoin?
In a physical sense, Bitcoin is just a string of encrypted characters, which itself is worthless, let alone the so-called "intrinsic value".
Why is Bitcoin so expensive?
In fact, the starting point for this issue is to compare it with sovereign currencies. Bitcoin has no intrinsic value, does the U.S. dollar do? There are no dollars either, and at most they are fine prints.
The value of the U.S. dollar comes from the credit endorsement of the U.S. government. With the strong credit of the U.S. government, it circulates in the United States and other places around the world. This is true for the sovereign currencies of all countries around the world.
Like paper money, Bitcoin has no intrinsic value. It circulates on the Internet with the help of a new kind of credit - "technical credit."
Technical credit means that Bitcoin borrows a technical system called "blockchain" to create a fully public, distributed, tamper-proof, and traceable database. This database can be viewed by anyone, is open and transparent, and is extremely difficult to tamper with. In fact, It is an existence that is beyond anyone's control, so it has gained the trust of many people.
For any asset, being safe and not being manipulated is very attractive. Since government credit can support sovereign currencies worth tens of trillions of dollars, it is not surprising that technological credit can support Bitcoin worth only hundreds of billions of dollars.
Behind the value of any asset is credit. In this sense, there is no difference between Bitcoin and sovereign currencies. The last thing to compare is the strength and soundness of credit.
02 Why do we have sovereign currencies?
Create Bitcoin?
In modern society, legal tender is issued by the government, and the legal tender of a strong government has a high status. The credit of the US dollar reflects the credit of this strong government.
But this credit is not perfect. After the 2008 financial crisis and the 2020 epidemic, the three major central banks of the United States, Europe, and Japan competed to print money. People's concerns about excessive money supply have deepened, and the demand for alternative currencies and assets has increased.
There are many dangers of over-issuance of currency:
The first is inflation. The hard-earned income and wealth of residents will be diluted by the excessive issuance of currency. Therefore, people are very wary and disgusted with excessive currency issuance.
The second is "rob the poor and give to the rich". You must know that the excessive currency is not evenly distributed among the crowd. Some people always get it first and others get it later. The cost paid by those who get it first is very low, but the cost of those who get it later has to use their own labor and assets to exchange, and the cost is very high.
In every currency over-issuance, the last ones to get the currency are often relatively disadvantaged groups such as small, medium and micro enterprises and ordinary residents, which will lead to greater inequality.
Therefore, although sovereign currency is issued under the leadership of the government, it is far from neutral with respect to the distribution of wealth. The closer people are to the issuing center, the more "seigniorage" they will share.
The birth of Bitcoin came at a time when the money printing competition in the United States, Europe and Japan became increasingly fierce after the 2008 financial crisis. Against this background, the total amount of Bitcoin was fixed at the beginning of its design, eliminating the possibility of over-issuance of currency.
The birth of Bitcoin naturally has the color of resisting traditional financial institutions.
03 What will the currency of the future look like?
The birth of Bitcoin is an impact on sovereign currencies. So can Bitcoin replace sovereign currencies?
Cryptocurrencies will not replace sovereign currencies in the foreseeable future. Cryptocurrencies without sovereign endorsement cannot be supported by the government and cannot be widely circulated.
Therefore, cryptocurrencies such as Bitcoin cannot fulfill the functions of currency. They are more of a digital asset that serves as an investment tool for people.
Although Bitcoin is not a currency, it may trigger huge changes in the human monetary system. The technical elements contained in Bitcoin and the wave of cryptocurrency caused by it will cause the evolution of the mainstream monetary system and even changes in the way business and society are organized. The stable coins that have been issued and the central bank digital currencies that have been developed on a large scale show that this evolution is already taking place.
The future monetary system is still very uncertain. The only certainty is that this system is evolving rapidly.
In order to understand future evolution, we must develop a deeper understanding of the nature of money. Everything we know, including some deeply held beliefs, may be dogma and are in the process of being broken.
For example, in the 1990s, Japan was widely criticized by mainstream economists in the United States for its loose monetary policy. However, during the 2008 financial crisis, the U.S. government was even more easing than Japan, and various theories were invented to prove it.
By 2020, the three major central banks of the United States, Europe, and Japan have started printing money together. There is no need for any explanation, but a race to the top.
The practice of European and American central banks since the 21st century shows that the criticism of Japan in the 1990s is not valid. If Japan did not have easy money, the consequences may be disastrous.
So standing 30 years ago, today's monetary policy can be described as magical.
The signals we can see are that beliefs have changed, history has turned, and the future of the human monetary system is full of variables.
There is no truth in this world, only perception. Humanity's understanding of currency is changing rapidly.
Bitcoin is not a currency, and the future of Bitcoin is unclear. However, the emergence of Bitcoin has accelerated the evolution of currency and revealed what future currencies may look like.
It is almost certain that future currencies will contain some elements of Bitcoin.
Therefore, although Bitcoin is not a currency, it is transformative and a milestone in currency.
Only by understanding the laws of monetary movement can we understand the laws of economics.
I hope this book "Boundary Monuments of Currency: The Economic Logic of Digital Currency" can help you better understand the evolution of cryptocurrency, refine the economic logic behind it, and analyze the impact on future currencies.
I believe that you can find the answers to your questions about digital currency in this book.
