China Youth Daily: Bitcoin is a high-risk asset, and young people are not encouraged to leverage and speculate in it

Source: China Youth Daily

Reporter: Wang Lin

"A Bitcoin worth 210,000 yuan is a witness to history!" On the evening of January 2, Beijing time, Xu Zhou, born after 1995, was "shocked" by the Bitcoin market.

Before the first working day of 2021, the price of Bitcoin has once again reached a record high, approaching $31,000. If calculated by total market value, it is higher than Berkshire Hathaway, owned by "stock god" Buffett, and Maotai, the "market value king" of A-shares.

Xu Zhou has been following Bitcoin for several years and has personally “speculated on Bitcoin” several times. Just like the previous bull market, he is eager to know what is driving the price of Bitcoin up? Does the new round of surge also contain a bubble in the price of Bitcoin?

As the global economy slows down, financial institutions increase their investment in Bitcoin

Since December last year, the price of Bitcoin has continued its bullish trend. After reaching $20,000 on December 16, it has been soaring, soaring from $21,000 to $27,000 in just 12 days. From a longer-term perspective, the price of Bitcoin has increased by more than 10 million times in the past 10 years.

A research report recently released by Zhongtai Securities analyzed that the essence of the rise of Moutai, housing prices, and Bitcoin is the same. When the currency is over-issued, buying gold, Moutai, core stocks, and core real estate is a process of rediscovering scarcity. The scarcity of Bitcoin is its main feature that distinguishes it from paper money and tulips, which can be printed and produced infinitely.

Over the past decade since the birth of Bitcoin, the mining capacity has gradually stabilized. However, due to technical limitations, the total number of Bitcoins is limited to around 21 million. Under the influence of the macroeconomic environment, many institutional investors have entered the market, and the price of Bitcoin has risen in the face of huge market demand.

William, chief researcher at OKEx Research Institute, believes that the recent rapid rise of Bitcoin does have elements of speculation and hype, but the direct reason still comes from the entry of high-net-worth investors and institutional investors.

Since the second half of 2020, financial institutions such as the US insurance giant MassMutual Life Insurance Company have bought Bitcoin, and online payment giant PayPal and Singapore's largest commercial bank DBS Bank have also announced that they will launch cryptocurrency payment services. According to data from Bitcoin Treasuries, a Bitcoin holding statistics platform, more than $6.9 billion worth of Bitcoin is currently held by listed companies.

In fact, in recent years, Bitcoin has gradually gained attention on Wall Street as a new way of asset allocation. Many financial institutions have submitted applications for Bitcoin ETFs (an open-end fund with variable fund shares that is listed and traded on an exchange) to the U.S. Securities and Exchange Commission (SEC). However, U.S. financial regulators oppose the issuance of Bitcoin ETFs due to concerns about market volatility, industry manipulation, and liquidity scarcity.

Hong Shuning, chief strategy officer of Zhejiang Yongqi Blockchain Technology Co., Ltd., said that in the second half of 2019, the Grayscale Bitcoin Trust Fund has been actively purchasing Bitcoin. Investors can use the trust fund to purchase Bitcoin with US dollars through legal channels and conduct trust management, but funds in this channel will flow one-way to Bitcoin. By 2020, due to the impact of the COVID-19 epidemic, the Federal Reserve "flooded the market", and many investors were worried about inflation, so they invested more funds in Bitcoin through the Grayscale Bitcoin Trust Fund.

William analyzed that the deep-seated reason behind the massive purchase of Bitcoin by financial institutions is the changes in the global macroeconomic situation this year. On the one hand, affected by the epidemic, the global economic recovery slowed down in 2020; on the other hand, the central banks of some countries, represented by the US central bank, introduced extremely loose monetary policies, pushing up inflation expectations in the financial market. In an economic environment of high inflation and low growth, in order to avoid the loss of nominal principal and the need to pursue higher returns, investors' demand for hoarding cash naturally evolved into demand for gold and Bitcoin.

It is not recommended that young people leverage their money to speculate in cryptocurrencies

The news of Bitcoin's price surge again always spreads first in the cryptocurrency trading circle. Recently, many people have come to ask Hu Hao (pseudonym): "I heard that Bitcoin has risen to more than 100,000 yuan per coin. How much did you earn?" For such questions, this young man born in 1992 always laughs and says: "What does it have to do with us?"

Hu Hao started to get involved in virtual currencies such as Bitcoin and Ethereum in 2016. At first, he bought mining machines with a few classmates to "mine". When the market was good, "a mining machine costing more than 10,000 yuan could be recovered in one month". That year, many people in small counties in the northeast still illegally installed wires to "steal electricity for mining".

Hu Hao noticed that the main group of people who "speculated on cryptocurrencies" at that time were young people in the county. They generally did not have stable jobs, but learned about the myth of Bitcoin and other virtual currencies through the Internet. "There were about ten of my elementary school classmates who were playing with cryptocurrencies. Most of them had never been to college or worked in a big city."

Hu Hao earned his first money by mining and bought 0.5 bitcoins. At that time, various "copycat coins" were launched one after another, and ICO (initial coin offering) once again created a wave of wealth creation myths. Hu Hao also joined the ranks of "copycat coin speculation" and exchanged all his bitcoins for other small currencies. However, the new ICO policy in September 2016 exposed the true colors of most virtual currencies, and the value of the coins in Hu Hao's hands shrank from more than 100,000 yuan to 20,000 or 30,000 yuan.

Hu Hao has been playing with virtual currency for nearly 5 years and has lost more than 50,000 yuan. Like many young people who "speculate in cryptocurrencies", he often calls himself a "leek". Recently, the price of Bitcoin has hit a new high, and another friend came to him to ask for advice. Hu Hao always tells his own story and gives good advice at the end: be prepared to lose everything, and it is impossible to make a fortune and change your fate by using it.

But the experience of our predecessors often cannot stop the enthusiasm of later generations.

During the epidemic, Xu Zhou bought some Bitcoin at a unit price of nearly $4,000 and withdrew when the price doubled. Recently, the price of Bitcoin has risen to $23,000, and many newbies have come to him for advice, hoping to "make another fortune" with him. Although "I regretted it so much that my thighs were swollen", Xu Zhou still rejected the invitations of these newbie friends. His reason was: "Everyone can only make money within their own cognition, and I don't understand the current market situation."

Being at the core of virtual currency trading, William noticed that this round of Bitcoin bull market was initially dominated by institutions, but now it is turning to be dominated by small and medium-sized investors. One piece of evidence is that when the price of Bitcoin broke through the $20,000 mark, a large number of investors began to pour into the cryptocurrency market, causing some cryptocurrency exchanges to freeze or crash, and some investors even used credit cards or loans to "speculate in cryptocurrencies." In market research, they also found that some investors increased leverage by more than ten times or even dozens of times to "speculate in cryptocurrencies." "This is not something worth promoting."

In fact, the Bitcoin market is still known for its volatile volatility. According to calculations based on past Bitcoin price charts, there have been 10 cases of a cumulative drop of 20% or more since 2016. There have been 7 cases of a drop of 30% and 4 cases of a drop of more than 48%. Hong Shuning also reminded that the accelerated rise in Bitcoin prices will inevitably form a large bubble, and special attention should be paid to risks.

"The market's excitement was further amplified, pushing up the price of Bitcoin rapidly." William reminded that young ordinary investors need to remain rational and correctly realize that Bitcoin is a high-risk asset, not a safe-haven asset, and its price fluctuates greatly. Therefore, they should not increase leverage easily, otherwise it will further amplify the investment risk.