China has a first-mover advantage in the global digital currency race

Affected by this, on April 18, Bitcoin fell below $52,000 per coin, a drop of more than 17% in one day, and then rebounded sharply, putting encrypted digital assets and digital currencies once again at the forefront.

The sharp decline in Bitcoin this time is actually an adjustment that speculators want to make with the excuse of "cash is king, put money in pockets". The current craze for investing in Bitcoin actually only reflects people's expectations and consensus on future scenarios, that is, among the existing financial asset savings channels, Bitcoin's returns are considered to be higher, rather than Bitcoin driving economic growth to form an ecological environment for creating value. In order to cope with the impact of the epidemic and get out of the economic trough, central banks in many countries around the world have adopted a large number of loose monetary policies. Against this background, the traditional financial savings track may be affected by the expected rise in future inflation. Therefore, some investors actually hope that Bitcoin's returns can outperform future inflation. In other words, people's psychology of investing in Bitcoin is not that Bitcoin itself has value, but that they want to get more funds through Bitcoin investment.

This round of Bitcoin craze stems from global inflation expectations

Overall, there are three issues that need attention behind the central banks' increased regulation of Bitcoin and Bitcoin's recent "roller coaster" performance.

First, central banks of various countries have announced to strengthen the management of encrypted digital assets such as Bitcoin. This is also because the market's pursuit of Bitcoin has, to a certain extent, swallowed up the effectiveness of monetary policies of various countries in supporting the real economy. Bitcoin investment is actually a way of allocating resources from the real to the virtual. The market "hedges" the central bank's excessive money issuance by investing in Bitcoin (which also includes the intention of money laundering. Some people evade supervision through encrypted digital assets), which in turn affects the effect of monetary policy, greatly reducing the effectiveness of the policy tools adopted by these central banks to cope with the economic downturn. The loose monetary policies of central banks in various countries have led to a decline in the purchasing power of future currencies and an increase in inflation expectations. At this time, mass consumer demand has weakened, and cash has been invested in financial management channels, resulting in a decrease in the price level. As a result, inflation occurs in the world of financial assets (the recent rise in commodity prices is the effect of capital promotion, which has affected the recovery of the vitality of the real economy). The market is selfish and will not consciously adjust the problems of price instability and employment instability encountered by the macro-economy. For those who are not yet able to enter the Bitcoin track, if the income increase cannot keep up with inflation expectations, it will reduce the willingness to work, which will further affect social stability.

Second, the U.S. Treasury Department released news that it will crack down on financial institutions using cryptocurrencies to launder money, perhaps out of consideration for consolidating the international status of the U.S. dollar. Many ordinary people fail to distinguish between digital currencies and Bitcoin. At the same time, the United States started late in the research and development and promotion of digital currencies. Therefore, the U.S. crackdown on Bitcoin this time is also intended to encourage the market to sell Bitcoin in exchange for U.S. dollar cash, and indirectly break China's leading advantage in the cross-border use of digital currencies, and continue to maintain the monopoly of the U.S. dollar in the existing international monetary system.

Third, a fundamental reason for the volatility of Bitcoin is the need of some speculators to "go short first in order to go long". At present, some people in the market firmly believe that today's credit currency lacks the constraints of a monetary anchor like the gold standard in the past, so the more money countries issue in the future when solving economic recovery, the more the value of people's savings will shrink, and the greater the appreciation space of Bitcoin. The volatility of Bitcoin is precisely due to the high-level adjustments made by these speculators. They wait for those who "lack faith" to throw out their chips and then enter the market again. Therefore, Bitcoin rebounded after the sharp drop that day.

Clarifying the difference between digital currency and digital assets

However, to truly understand the turmoil in the Bitcoin market, we must return to its essential attributes and clarify the difference between digital currency and digital assets.

Recently, Zhou Xiaochuan, Vice Chairman of the Boao Forum for Asia and former Governor of the People's Bank of China, said that it is necessary to distinguish between digital currencies and digital assets. It is not time to draw conclusions about digital assets such as Bitcoin, but "we need to remind and be careful." In addition, Li Bo, Deputy Governor of the Central Bank, also emphasized that Bitcoin is an encrypted asset and an investment option, and it is not a currency itself.

This series of statements is actually to tell the public that the central bank's digital currency is different from Bitcoin. Bitcoin is a digital asset that is not supported by economic fundamentals. People invest in it for the purpose of reserve or speculation. Therefore, it has actually withdrawn from the circulation link and exists only as a reserve asset and financial asset. The digital currency launched by the People's Bank of China and linked to M0 is a currency for circulation, consumption, and trade. Therefore, we can clearly divide digital currency and digital assets from the perspective of usage scenarios. The former is applicable in the payment system that creates value, while the latter is the price effect of asset allocation driven by funds.

After forming the inertia of credit card payment for a long time, some developed countries have difficulty in quickly switching to the new track of digital currency in terms of infrastructure and public perception. For example, the United States not only lacks technology in the application of digital currency, but also faces the risk of being replaced by a new monetary system, and the opportunity cost of promoting the application of digital currency is very high.

China has already built a new centralized digital currency scenario by launching the central bank's digital currency, and is gradually creating a new digital currency ecosystem, and has established a first-mover advantage worldwide. First, Chinese society has become accustomed to the digital payment method of "QR code payment", and it is easy to adapt to the use mode of the central bank's digital currency; second, China has the advantage of a national system, and can fully carry out top-level design, and gradually drive all parties to enter the use scenario of digital currency by "sending red envelopes", which is a condition that other countries do not have. In the future, China can create new forms in the fields of international trade and international investment through digital currency, and then the internationalization of the RMB (6.4995, -0.0108, -0.17%) will be a natural thing.