Economic Daily Comment: Don’t be blind when entering Bitcoin

Source: Economic Daily

Original title: "Don't be blind when entering Bitcoin"

At the beginning of the new year, Bitcoin has attracted much attention due to its surge. In just one week, it broke through the $30,000 and $35,000 mark. As of 20:00 on January 7, Bitcoin has exceeded $38,000, setting a new record.

Throughout 2020, the price of Bitcoin continued to rise, from more than $7,000 at the beginning of the year to above $29,000, with a cumulative increase of more than 300% for the whole year.

Why did Bitcoin, which was once silent, become "boiling" again? The industry believes that this surge in Bitcoin is mainly related to the global risk aversion sentiment.

Affected by the COVID-19 pandemic, the global economy has suffered a severe blow since 2020. Many countries have adopted extraordinary monetary easing policies to save the economy, and global inflation expectations have increased. In an economic environment of high inflation, low growth, and negative interest rates, investors and institutions have greatly increased their demand for safe-haven assets. Bitcoin, based on blockchain technology, has the characteristics of decentralization, limited total volume, and traceability. It is believed to be able to effectively avoid inflation and is favored.

From the perspective of the identity of the entrants, there has been a new change in the players behind Bitcoin, from the early retail investors such as technicians and blockchain enthusiasts to global financial institutions. The entry of giant institutions has brought enthusiasm and confidence to the market, driving up the price of Bitcoin.

The rise in Bitcoin prices is also related to its own characteristics. Bitcoin uses blockchain as its underlying technology, and the upper limit of the number of protocols is 21 million. Data shows that as of December 30, 2020, the global supply of Bitcoin has exceeded 18.58 million, which means that there are less than 3 million Bitcoins to be "mined". The reduction in supply has exacerbated the market's reluctance to sell, further pushing up the currency value.

"Insufficient regulation is an important external factor that drives up the price of Bitcoin." Ren Zeping, chief economist of Evergrande Group, said that due to the large differences in the level of development of financial markets, the power of central governments, and the degree of investor conservatism in countries around the world, countries have different regulatory attitudes towards Bitcoin, and insufficient regulation and relative delays in legislation have provided a relaxed environment for speculation.

Although the current Bitcoin market is showing a "leading the rest" trend, many industry insiders still remind us that Bitcoin has a large bubble, strong volatility, and high risks. Blindly entering the market or even increasing leverage may lead to the risk of a margin call.

On January 4, Bitcoin began to plummet from about $33,000 to a low of $28,000, causing nearly 100,000 people to be liquidated within 24 hours. "Bitcoin, which lacks an issuing entity, is almost uncontrollable and easily affected by external factors. Such uncertainty may cause losses to investors," said Ren Zeping.

Chen Xiaohua, director of the Financial Technology Research Institute of the National University Science Park of Beijing University of Posts and Telecommunications and chief blockchain economic expert, said that the sharp rise and fall in the price of Bitcoin has spawned a large number of trading websites, and the risks of these platforms cannot be underestimated. "As more and more investors pour in, Bitcoin trading platforms lack third-party supervision of customer funds amounting to tens of billions or hundreds of billions of yuan, and the risk of running away cannot be ignored."

More importantly, investing in Bitcoin faces regulatory risks. In my country, Bitcoin and other virtual currencies have always been strictly regulated. As early as December 2013, the central bank and five other ministries and commissions issued a document stating that Bitcoin is not a real currency and cannot and should not be circulated and used as currency in the market. In September 2017, the central bank and seven other ministries and commissions jointly issued a document requiring all types of ICOs (initial coin offerings) to be stopped immediately and related trading platforms to cease operations.

At present, Bitcoin transactions are still in a gray area. With the development and launch of legal digital currencies in various countries in the future, the control or suppression of virtual currencies will be intensified, and the investment space of Bitcoin will be greatly compressed. Experts said that without the endorsement of credible countries or organizations, and without being linked to any physical assets, Bitcoin may be worthless when a sovereign state declares it illegal.