A brief discussion on the impact of the epidemic on digital currency: How digital currency promotes social collaboration and value exchange

Author: Liu Zhiyi, digital economist.

Recently, the impact of the epidemic on the economy and society has become an important topic in the economics community. I hope this article can give market participants during the epidemic some calm thinking. I believe that the discussion on the laws and nature of the market economy will help everyone make more rational decisions.

The recent performance of the digital economy is quite eye-catching. Not only has Bitcoin finally exceeded 10,000 yuan again, but many encrypted digital currencies are also rising. This article is an analysis of how the epidemic affects the nature of digital currencies, and how to understand the construction of Bitcoin's long-term value. Finally, we will also discuss whether the central bank's digital monetary policy will be affected. Recently, the impact of the epidemic on the economy and society has become an important topic in the economics community. I hope this article can give market participants some calm thinking during the epidemic. I believe that the discussion on the laws and nature of the market economy will help everyone make more rational decisions.

First, let's discuss what are the factors that drive the price increase of universal digital currencies? We may need to review a period of history: In July 1944, in Bretton Woods, New Hampshire, the United States, 44 countries around the world passed an agreement led by the United States, which linked the US dollar to gold and other currencies to the US dollar. The British pound eventually gave way to the US dollar, which has since replaced the British pound as the world's only reserve, settlement and trade currency. In 1973, the United States unilaterally announced the decoupling of the US dollar from gold, but inherited the status of the dominant monetary system of the Bretton Woods system, with the result that the US dollar became the only international currency unit of account. The 2008 financial crisis showed us the cyclical and sovereign traps of the fiat dollar. Both gold and Bitcoin are a kind of consensus solution. When people are disappointed with the global financial capitalism driven by the fiat currency credit mechanism, they will choose gold or Bitcoin (digital gold) to solve the problem.

After systematic thinking, we can analyze the actual reasons into three parts. Here is the basic logic for you:

· First, in the eyes of the public, Bitcoin, as digital gold, has the ability to fight inflation. When people are pessimistic about the economy, the circulation and transaction data of Bitcoin will increase. Although the actual situation is that the price fluctuations of gold itself show that it cannot fight inflation, people's choices more show a split in consensus: when the crisis comes, people (mainly referring to a small number of people who recognize and agree with Bitcoin) do not have enough information about legal currency, so they choose Bitcoin as a way and means of storing value;

· Second, market volatility and a decline in trading volume before the Spring Festival holiday are very common phenomena. As the long holiday ended and the market resumed operations (February was also a strong month for digital currencies in the past few years), continued economic uncertainty and the epidemic have catalyzed people's panic. The decline in trust in traditional financial markets has not only driven up the price of Bitcoin, which is digital gold, but also driven up the price of gold. In fact, another set of data also shows this phenomenon. Global central banks have been net buyers of gold for ten consecutive years: global gold reserve assets increased by 3 tons in 2019, and the annual increase was the second highest in fifty years. The essence of this is that the financial crisis since 2008 has indeed challenged people's fundamental trust in legal currency;

· Third, based on the understanding of the above two concepts, the price of digital currency actually reflects a core issue in economic history: how credit and consensus are achieved. Both gold and the US dollar have gained the consensus credit of the market in a specific historical period (comparatively, the trust in gold has a longer period of time and is more deeply rooted). The fact is that when these strong currencies are challenged by new entrants, what needs to be done may not be to turn a blind eye and avoid it, but to find ways to embrace the monetary logic under the new technology and find better solutions to promote the development of the global economy.

In short, the rise of Bitcoin comes from the risk aversion driven by the epidemic (including the increase in global economic uncertainty), which has led to a split in the consensus on currency, thus driving the price fluctuations. With the general rise in prices, investors in many markets have begun to wonder whether the so-called Bitcoin bull market has arrived. Here I will discuss what necessary conditions should be met for a so-called real bull market?

As a rational market participant, you need to understand that to promote the change of any currency price (especially the currency as an investment product), you need to increase the consensus on its general rise. In other words, the external relief is the increase in global risk aversion brought about by the epidemic, and the decline in risk appetite will also drive people to look for investment products. However, such a rise is not continuous but cyclical. To promote it into a so-called bull market, the following three conditions must be met:

(1) Promote Bitcoin to become a consensus target for the general public, with investment properties consistent with gold. It should be noted that gold embodies the consensus and credit of people on metal currency over tens of thousands of years, while Bitcoin currently only has the consensus of a very small circle of people, and it requires the support of computing power and electricity;

(2) Promote the application of Bitcoin in more sovereign countries. The target of investment attributes needs to be supported by actual economic scenarios. Considering the increasing uncertainty of the global economic cycle, although it has not reached the collapse predicted by economist "Dr. Doom" Nouriel Roubini, the general lack of confidence is already a fait accompli. In this case, promoting the widespread use of a more "fair" Bitcoin may be a good solution;

(3) Promote the widespread application of Bitcoin in the digital economy, especially in the field of cross-border services. After all, Bitcoin comes from the digital world, and its application scenarios should also be concentrated in the digital field. Therefore, finding its killer scenarios and expanding its circulation efficiency in different scenarios is the key.

On the basis of the above three conditions, Bitcoin can be promoted from a niche to the masses, from individual cognition to the formation of general consensus. It is impossible to promote a sustained bull market by simply relying on the risk aversion stimulated by the accidental changes in external conditions, and the result will only be unsatisfactory. Therefore, we advise all investors to look at the impact of volatile and cyclical market conditions on investment targets more rationally, and think about whether the real driving force for the long-term rise of Bitcoin is available?

Finally, let's discuss whether the central bank's digital monetary policy will be affected to a certain extent? To answer this question, we must first look at the impact of the epidemic on the RMB exchange rate. Judging from the performance of the RMB exchange rate during the epidemic, during the SARS epidemic, my country implemented a single, managed floating exchange rate system based on market supply and demand. During the epidemic, the RMB exchange rate remained around 8.28. At present, my country implements a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. The RMB exchange rate has a stronger market-oriented elasticity. Therefore, the RMB exchange rate fluctuations caused by this epidemic will be higher than those caused by the SARS epidemic.

In other words, there are two effects on the impact of the COVID-19 pandemic on foreign capital. On the one hand, due to short-term risk aversion, some foreign capital has flowed out of the domestic market, resulting in short-term depreciation pressure on the RMB exchange rate. On the other hand, the decline in the price of risky assets caused by the pandemic will also increase their attractiveness. Therefore, there is an impact of foreign capital inflows from a risk-return perspective, resulting in a certain support for the RMB exchange rate. In other words, we can expect three results:

· 1) The epidemic has driven fluctuations in the RMB exchange rate, and will also push the central bank to promote technical solutions for digital currency to better manage the RMB exchange rate; the biggest risk caused by the epidemic is that it will affect market sentiment in stages, putting pressure on the exchange rate in stages, and challenging people's expectations for the future economy. Considering the basic environment of external Sino-US trade, it can be seen that the central bank will face a more complex market environment and need to better manage the exchange rate;

· 2) Considering that the prevention and control of the novel coronavirus pneumonia has entered a critical stage, the public's concern about whether cash payment is safe can be alleviated through digital currency. More people tend to use contactless electronic payment methods during special periods, which will promote the issuance and use of digital currency. At present, the epidemic has given the central bank an opportunity to promote comprehensive paperless currency. In the long run, paperless currency can also help the central bank better manage social credit and formulate rules for currency circulation;

· 3) In the long run, central banks of various countries are concerned about how legal encrypted digital currencies can promote social collaboration and value exchange, and whether such new technological forms can promote faster and better operation of their own economies. Therefore, understanding the central bank's digital monetary policy cannot be understood only from the short term, but from the perspective of how digital currencies can better serve the economy. On the one hand, we can see that the central bank is cautious in dealing with digital currencies. New technologies will not only bring benefits but also risks to the financial system. On the other hand, we can also see opportunities for the internationalization of the RMB. I personally suggest increasing investment from the government and all aspects of society to further occupy the global commanding heights of sovereign "digital currency" technology. On the basis of mature technology, relying on the existing RMB payment and clearing networks and channels, we will carry out international payment and clearing of DCEP. We should see the opportunities contained in the crisis. The internationalization of DCEP is the extension of the domestic monetary system to foreign countries. The improvement of the domestic monetary system is the foundation and guarantee for the internationalization of the RMB and DCEP.

The above is my thinking on the phenomenon of rising prices of digital currencies represented by Bitcoin. The core logic is to understand that the essence of currency is to promote social collaboration (division of labor) and value exchange (transaction). Only by understanding the changes in finance, society and economy brought about by technology on this basis can we truly see the logic of value evolution in addition to price fluctuations. Currency only reflects the changes in people's expectations of the economic system it represents, and more fundamentally, the changes in confidence in the economic system it represents. How to promote consensus and information requires not only understanding the benefits brought by digital currency, but also understanding how to promote the formation of consensus among people in a complex economic system. Finally, we discussed the impact of the central bank's monetary policy. The core point is to help everyone understand that the central bank's digital monetary policy will not be affected only by a certain investment target, but will be based on the healthy operation and development of the economic system as its core consideration.

In summary, the epidemic has brought challenges and opportunities to the global economic system: the challenge is that the risk aversion brought about by the epidemic actually reflects the decline in people's trust and recognition of the current economic system under global financial capitalism, while the opportunity lies in the possibility that new technologies and governance systems will bring new patterns to the original global currency ecology. We hope that China will not miss such an opportunity, and we believe that the central bank can promote the legal digital currency represented by DCEP to build a more robust economic ecology on the basis of the existing economic system. For all investors, rather than believing in the so-called bull market, it is more reliable to believe that the essence of the market economy lies in social collaboration, division of labor and value exchange.