Pessimists miss out again, split Bitcoin values

After a long period of downturn, Bitcoin has reversed its previous downward trend and shown a positive price trend. According to Bitstamp data, Bitcoin has recorded a multi-day rise since July 21. Despite several pullbacks during this period, its price once climbed above $46,000, up more than 50% from its lowest point since May.

Regulatory measures related to the crypto tax reporting clause in the U.S. Infrastructure Act are seen as a recent market focus. It is reported that the U.S. Senate proposed a bill to raise about $28 billion through cryptocurrency taxes for Biden's "trillion infrastructure" plan, which triggered lobbying from the U.S. crypto industry. After a fierce debate between the two sides, the compromise version of the amendment to the clause was not passed, and the previously submitted amendment will be submitted to the House of Representatives with the passage of the bill. The Senate said it insisted on more extensive supervision of virtual currencies.

The news triggered intraday price fluctuations in cryptocurrencies, with Bitcoin falling below $46,000 per coin. In the view of many industry insiders, the bill will have little impact on the future price of Bitcoin, as "the market has adapted to increasingly stringent regulation."

In the view of David Donabedian, chief investment officer at CIBC Private Wealth Management, it would be a “mistake” to tie fundamental developments to any movement in Bitcoin.

"This trend is driven by market momentum and fund flows, as well as the overall risk appetite in the market, and is not based on any fundamental factors," the person said. "Although it has recently risen 50% from its lows, it has also fallen nearly 50% from April to June. Faced with such volatility, I don't think there is a reliable way to assess its value at the moment."

How to evaluate the value of Bitcoin?

From two pizzas to tens of thousands of dollars

In 2009, Satoshi Nakamoto wrote, “The problem with traditional currencies is all the trust required to make them work. You have to trust the central bank not to debase the currency, but the history of fiat currencies is full of violations of trust.”

Bitcoin was born. Its limited supply and decentralization made its supporters believe that Bitcoin could eliminate the trust of traditional centralized financial institutions and return power to individuals. At the same time, its design could resist unhealthy inflation, and "digital gold" was its current narrative.

The first time Bitcoin had a real price was on May 21, 2010, when someone exchanged 10,000 Bitcoins for two pizzas. Based on the market price of pizza at $30, the price of 1 Bitcoin was $0.003.

In 2011, as Bitcoin was launched on major trading platforms, the price of Bitcoin continued to rise. According to third-party market data, the price of Bitcoin rose from $0.3 at the beginning of the year to nearly $32 per coin in early June. However, the good times did not last long. On June 19, Mt.Gox, the world's largest Bitcoin trading platform at the time, was attacked by hackers, and the market took a sharp turn for the worse. The price of Bitcoin fell to less than $3 per coin at the end of the year. This was the first relatively drastic fluctuation that Bitcoin experienced.

In 2013, Bitcoin experienced its first crazy market. Prior to this, Bitcoin experienced its first halving, which laid the groundwork for its price increase that year. In January 2013, the Cyprus debt crisis broke out, and Bitcoin was regarded as a safe-haven asset due to its decentralization and constant total volume, and received widespread attention.

It took only three months for Bitcoin to rise from $13 per coin at the beginning of the year to $260 per coin. Although it subsequently underwent a significant adjustment, with the help of the media, Bitcoin reached $1,163 per coin at the end of 2013, setting a new record high.

The climax of the price of Bitcoin occurred from the end of 2016 to 2017, with the background of another halving of Bitcoin production and the popularity of ICO (tokens). As can be seen from the figure "Historical Average Transaction Price of Bitcoin", Bitcoin has been rising amid fluctuations since 2016, and investor enthusiasm reached its peak in 2017. During this period, Bitcoin achieved a hundredfold growth.

However, on September 4, 2017, the People's Bank of China and seven other ministries issued the "Announcement on Preventing the Risks of Token Issuance and Financing", banning digital currencies and defining them as illegal fundraising, triggering a huge shock in the virtual currency market including Bitcoin.

"The bull market that year was led by ICO. After it was banned, the cryptocurrency market collapsed. Bitcoin fell by $5,000 in three days. Some exchanges simply closed down and ran away. Everyone thought it was the end." A cryptocurrency investor recalled that this was the first time that China's regulatory policies caused a strong shock in the cryptocurrency circle, "and the severity of that time was no less than this time."

But if we look at it over a longer period of time, the decline caused by this incident is not so obvious. After a few months of crazy rise like a wild horse running out of reins, the market bubble is also accumulating. At the end of 2017, the Chicago Mercantile Exchange Group (CME) launched Bitcoin futures products, and short-selling tools entered the market. Bitcoin failed to break through $20,000 per coin and collapsed, falling to around $7,300 per coin, and the market was in mourning.

After that, regulatory authorities in various countries, including China, the United States, and Canada, successively introduced policies on virtual currencies, either restricting or regulating them. On the other hand, the problem of hacker attacks became prominent, and the price of Bitcoin also entered a low period. It was not until 2020, when the third halving came, that institutions entered the market one after another, and the price of the currency began to recover.

In 2021, Bitcoin hit new highs one after another. However, after May, China launched a "combination of regulations."

What causes price bungee jumping?

As a centralized digital asset, the Bitcoin network uses Proof of Work (POW), or “mining,” to record network transactions.

The first Bitcoin block was created at around 6:15 pm Greenwich time on January 3, 2009. Since then, 50 Bitcoins have been produced every 10 minutes. After that, the production will be halved every 3.95 years. After three halvings, the current constant production of Bitcoins is 6.25 every 10 minutes.

"Mining" is naturally a factor that affects the price of Bitcoin. The cost of purchasing mining machines and the electricity consumed constitute the cost of mining.

Once upon a time, Chinese mines contributed the highest computing power to the entire Bitcoin network, but now they are gradually disappearing from the map. After China's regulation hit the "mining" industry hard, the computing power of the Bitcoin network once dropped; during this period, the price of Bitcoin even fell below $30,000 per coin, while before that, Bitcoin had reached a historical high of $64,000 per coin.

The reporter interviewed several mining industry practitioners and learned that going overseas is one of the options for Chinese mining companies. Kazakhstan, Russia, North America and other places have become the destinations for Chinese companies to go overseas. This also faces high costs.

On July 28, BitMining (NYSE: BTCM) announced that it would purchase 2,500 new Bitcoin mining machines with a total value of US$6.6 million (approximately RMB 42.57 million) by paying cash. All mining machines are expected to be delivered within a week and are planned to be shipped to Kazakhstan. After the deployment is completed, the company's total computing power will increase by 165 PH/S.

"Under supervision, some miners are selling their coins due to financial pressure, and the coin price will definitely be affected in the short term." A person in the currency circle told reporters.

To some extent, the price fluctuations of Bitcoin seem to be similar to those of the stock market. However, the stock price is supported by the underlying assets (the business conditions of the company), so what about the price of Bitcoin?

Zhang Liangwei of Soochow Securities pointed out in the report that due to the high liquidity of Bitcoin, the lack of supervision, and the lack of administrative restrictions such as price fluctuations and circuit breakers, the bubble of Bitcoin is more violent than other assets. At the end of the over-inflation, the market will be cashed out with profit taking, and the over-sold market will end. It will consolidate at a low level for a period of time, waiting for the next cycle to start. At the same time, according to history, the price of Bitcoin is strongly correlated with its halving cycle every four years. The first three halvings all started a bull market ranging from 10 to 12 months.

Zhang Qidi, a visiting researcher at the International Finance Research Center of the Central University of Finance and Economics, believes that "there may be two main reasons for the sharp fluctuations in Bitcoin prices. One is market sentiment. Once an upward trend is formed, the market will form a herd effect, quickly pushing prices up. Once the upward momentum weakens, there may also be a sharp drop. The other is changes in regulatory policies. Any statement from a regulatory agency may have a significant impact on Bitcoin prices."

On the other hand, Zhang Qidi pointed out that Bitcoin may have a certain correlation with monetary policy, and monetary easing can easily boost Bitcoin prices. However, it is difficult to value Bitcoin, and Bitcoin prices basically depend on market sentiment.

Re-discussing the Value of Bitcoin

Bitcoin was born as a distributed payment network. As time goes by, its payment function becomes weaker and weaker, while its recognition as a store of value becomes stronger and stronger, gradually forming a large-scale consensus around the world. This is regarded by most people as the basis of Bitcoin's price.

Due to some of the characteristics of Bitcoin, some supporters will agree with its anti-inflation properties.

The sharp rise in Bitcoin since the end of last year seems to confirm this point. Many researchers pointed out that the new coronavirus pandemic has triggered a global flood of money, and Bitcoin has become a safe-haven asset of choice for some individuals and institutions.

Zhang Qidi analyzed that in a low-interest environment, asset returns are generally low, and a large amount of funds have nowhere to go. As long as global monetary easing continues, more and more funds will flow into Bitcoin, which will in turn boost Bitcoin prices.

Ray Dalio, founder of Bridgewater Associates, who was once skeptical of Bitcoin, said in a conversation with CoinDesk chief content officer Michael J. Casey that in the event of inflation, "personally, I would rather own Bitcoin than bonds."

Dalio pointed out that the recent decline in the US dollar exchange rate has put it on the verge of reaching the depreciation level of 1971, and its status as the world's reserve currency is under threat. He believes that in such an environment, Bitcoin looks increasingly attractive as a store of value due to its gold-like properties.

Of course, some people believe that Bitcoin may not work as a hedge against inflation. A report from Bank of America pointed out that the supply of Bitcoin is capped at 21 million, which seems to be immune to the "printing of money" that devalues ​​traditional currencies, but evidence from the past few years does not support this view.

“Overall, we find Bitcoin unattractive as an inflation hedge given that commodities and even equities have better correlations with inflation. As a result, we believe that major portfolios holding Bitcoin are either for diversification, volatility reduction, or inflation protection, or purely for price appreciation, which assumes that demand for Bitcoin will far exceed supply in the long run,” the report noted.

Payment or speculation, the future of Bitcoin

In Satoshi Nakamoto's vision, Bitcoin can be used for payment, from buying coffee to renting a car. However, judging from previous data, there is still a long way to go before the payment wish can be realized.

According to a 2019 data from blockchain research firm Chainalysis Inc, from January to April of that year, transactions related to exchanges still accounted for 89.7% of total Bitcoin transactions. On the other hand, at the peak of the crypto bubble, merchant services accounted for only 1.5% of total Bitcoin activity.

“Bitcoin economic activity continues to be dominated by exchange trading,” Kim Grauer, senior economist at Chainalysis, said in an email. “This suggests that the largest use case for Bitcoin remains speculation, while mainstream use of Bitcoin for everyday purchases has yet to materialize.”

"It is human nature that drives human progress based on self-interest. I don't deny that some people truly believe in the spirit of resistance to the centralized system, but firm believers have most likely realized wealth growth through virtual currency. Those functions surrounding Bitcoin that have not yet been implemented are not currently the focus of most people," said an investor in the cryptocurrency circle.

Wang Yongli, former vice president of the People's Bank of China, believes that Bitcoin investment is fine to hold, but don't make money from it. "The more people who are willing to invest in an investment product, the higher its value will rise. When you don't believe in it, its price will definitely fall."

Some people have more radical objections. Charlie Munger once said at the Berkshire Hathaway shareholders meeting that Bitcoin's success in the past few years made him sick. "I hate Bitcoin's success. I don't like this virtual currency hijacking our existing monetary system. Bitcoin is like a financial product that came out of thin air. I am not satisfied with this. I think this is contrary to the development of our civilization." Charlie Munger said.

A cryptocurrency researcher told reporters that the core problem of Bitcoin is that it has not solved the problem of "how to incorporate it into production activities". Before this problem is solved, Bitcoin will always be a commodity rather than a currency.

"As a commodity, Bitcoin mostly remains as an intermediary for tax evasion, money laundering, and black market transactions. It is not used in the mainstream. Its commodity value cannot be reflected significantly, and its fluctuation is normal." The aforementioned researcher said that Bitcoin is still facing regulatory risks from mainstream regulatory agencies. Unless there are regional financial sanctions, or Bitcoin participants truly solve the problem of how the currency circulates in mainstream application scenarios and production activities, Bitcoin will have great development opportunities.

For the future, Bitcoin may need to look at a bigger picture.

At the recently held 2021 World Blockchain Conference, Li Daokui, Dean of the Institute of Chinese Economic Thought and Practice at Tsinghua University, said that now we are gradually entering the late stage of the first development stage of blockchain, and Bitcoin and other cryptocurrencies will still exist and continue to maintain their due popularity. "Because many institutions and individual companies in the world hate the excessive intervention in international exchanges. An important function of Bitcoin is to facilitate international exchanges and facilitate many financial transactions to be carried out quickly, bypassing excessive market intervention and government supervision. This reason will always exist. But because Bitcoin has largely challenged the authority of sovereign currency issuers, if Bitcoin completely replaces the RMB or the US dollar, this prospect is relatively small. This is the first stage of development." Li Daokui said.