How does Bitcoin survive?

Editor Zhang Yangyun

According to Xinhua News Agency, a year ago, Bitcoin was a hot investment item that made people crazy, and the price of a single Bitcoin was as high as nearly 20,000 US dollars. A year later, Bitcoin, which was in a "waterfall" market, has reached 3,600 US dollars, with the maximum drop of 82%, and the investment market is in mourning. Only one year has passed, what has happened to Bitcoin? Where will it go in the future?

The price has dropped by 30% in ten days and has not yet reached the bottom

This winter seems to be particularly cold for Bitcoin. The once highly sought-after Bitcoin investment circle is now tasting the bitter taste of falling from a high point.

"Is a 85% drop in assets considered bankruptcy? If so, I'm declaring bankruptcy," a Bitcoin investor said on Weibo. Liu Peng, a senior investor from Tianjin, entered the cryptocurrency circle in 2016 and invested 40,000 yuan, which turned into 300,000 yuan. However, after experiencing multiple rounds of "cryptocurrency crashes" in the second half of this year, his profits have now been completely lost.

It is the latest round of "waterfall" market that has brought the once silent Bitcoin back into the spotlight. Starting from November 14, Bitcoin, which has been hovering around $6,400 for more than two months, suddenly plummeted and has not yet truly bottomed out.

On the 14th, Bitcoin started its flash crash, and the next day it hit a one-year low of $5,400. Ten days later, on the 24th, the price of Bitcoin was only $4,300, a drop of more than 32%. On the 25th, Bitcoin fell below the most important psychological barrier of $4,000 in recent times, and the so-called support level became increasingly vague.

During the Summer Davos Forum held in Tianjin this year, analysts from Japan, the United States and other countries have judged that after the value correction, Bitcoin will hover between $4,000 and $6,000 for a long time. This judgment is based on the cost of mining (the process of using computers to produce Bitcoin). But now, the mining cost is hard to support. Recently, a video of a large number of Bitcoin mining machines being sold by the pound as scrap has been widely circulated online.

Some unwilling investors are also ready to make a move. Currently, there is no direct exchange for Bitcoin trading in China, and it is mainly OTC trading and exchanges registered abroad. However, Xiao Lei, director of the 500 Gold Research Institute, an investment research institution, reminded that Bitcoin is in a "bear market" and there is no fundamental positive factor to support the current price.

Why did the market value evaporate 1.6 trillion yuan in one year?

From the first announced Bitcoin exchange rate of 1,309.03 Bitcoins per U.S. dollar in 2009, to the peak price in 2017, only eight years have passed and the price has increased by more than 20 million times.

Under the cover of crazy market sentiment, a group of "cryptocurrency bosses" stepped out from behind the scenes to the front stage, advocating and driving up prices, taking the opportunity to sell. A large number of "air coins" also emerged in the cryptocurrency circle, and they quickly "harvested leeks" by hyping worthless virtual currencies through ICO (initial coin offering) and other means.

However, the higher you stand, the harder you fall. Many countries around the world, including my country, have repeatedly warned of the rapid rise of virtual currencies represented by Bitcoin and introduced policies to curb overheated investment.

On the one hand, the situation of incremental funds rushing into the market has been curbed. On the other hand, the existing funds in the cryptocurrency circle have been repeatedly harvested by "cryptocurrency bosses", bad exchanges, and ICO project parties, and are unable to continue to support the rise in currency prices, causing Bitcoin to continue to slide since the end of last year.

So why did Bitcoin begin to collapse on November 14?

Guo Yuhang, chairman of the China Blockchain Application Research Center, analyzed that the most direct trigger was the competition for computing power in the market after the hard fork of Bitcoin Cash (a virtual currency forked from Bitcoin), which led to panic selling by some users. Xiao Lei also said that the Bitcoin Cash fork led to periodic fluctuations in computing power, making Bitcoin holders worry that attacks on Bitcoin would become possible, and risk-averse selling intensified.

"Currently, there are serious bubbles in a large number of blockchain projects, and practitioners continue to raise market expectations to unrealistic heights. However, after being repeatedly slapped in the face by reality, market confidence continues to be lost." Guo Yuhang believes that this is the root cause of Bitcoin's sharp drop.

The Bitcoin market is relatively small, and the global virtual currency market value is only the size of a listed Internet giant. As investors who hold large amounts of Bitcoin dump their stocks, it is easy to cause the price of the currency to fluctuate greatly. Statistics show that in the past year, the market value of Bitcoin has evaporated by 1.6 trillion yuan from its peak.

Xiao Lei said that the long-term sideways movement of Bitcoin will inspire investors to make choices. Overall, the market is still fragile. Bitcoin itself does not generate profits, and holders can only expect price increases, so price drops will accelerate the selling effect, and the market outlook is not optimistic.

Will the value return or the bubble burst? Where will the future go?

After the plunge, will Bitcoin die out? There is controversy in the industry.

Some people are still staunch followers of Bitcoin, mostly small and scattered investors. In their eyes, the total amount of Bitcoin is limited to 21 million, and it presents the characteristics of a safe-haven asset in the midst of international local turmoil, so some people call it "digital gold."

Xiao Lei said that Bitcoin has a relatively short history and it will take longer to establish a consensus on its properties. It cannot be compared with the consensus mechanism formed by gold over thousands of years.

At the end of last year, the Chicago Board Options Exchange and the Chicago Mercantile Exchange issued Bitcoin futures. The industry expected that large amounts of funds from financial institutions would enter the market to support price increases, but now it seems that the level of participation is still limited.

Another group of people continue to be bearish. Some people compare Bitcoin to the famous tulip bubble in history. Some people believe that Bitcoin will sooner or later die if it relies solely on computers to perform "meaningless digital calculations", and now the bubble is being punctured.

Guo Yuhang said that Bitcoin does not have the basis to die out in the short term, but with the continuous research and tightening of policies by regulatory authorities in various countries, the space for regulatory arbitrage will further shrink.

Although there is still controversy over the survival of Bitcoin, the industry generally has high hopes for blockchain technology. Blockchain and Bitcoin were born at the same time and initially existed as the underlying technology of Bitcoin. Huobi founder Li Lin believes that as an underlying technology pointing to the future, blockchain has great potential in combination with the real economy and has great potential in a wide range of economic and social fields such as notarization, arbitration, tax registration, and charity donations.

Not long ago, the Digital Financial Assets Research Center of the School of Economics and Management of Tsinghua University was established with donations from Bitmain. Bitmain CEO Wu Jihan said that in the future, blockchain technology will be more integrated with traditional financial regulatory agencies and traditional financial businesses to greatly improve financial efficiency.

"Blockchain is by no means equal to Bitcoin." Guo Yuhang called on the blockchain industry to accurately identify pain points, implement practical applications, and achieve significant cost reductions and efficiency increases before it can become a new generation of information infrastructure.

Editor-in-charge: Niu Pengfei