Will a “mining accident” occur after the crazy rise of Bitcoin?

The craze for Bitcoin has swept the world, from $1,000 per coin at the beginning of the year to breaking through the $10,000 mark, and then to $20,000 on some platforms on December 17, and then to a series of corrections, with the price falling below $14,000 on December 22. Bitcoin has become the most watched investment product this year.

As the saying goes, "scarcity makes things valuable." The reason for the surge in Bitcoin prices is largely due to its scarcity. There are only 21 million Bitcoins in the world, and now more than two-thirds of them have been mined and distributed to the public. According to preliminary estimates, the number of Bitcoin holders has far exceeded 25 million. Moreover, the wealth distribution of Bitcoin is highly consistent with global financial wealth.

In addition to its inherent deflationary function, it allows users to enjoy the privilege of paying and receiving funds anytime, anywhere, and the transaction cost is extremely low. Its anonymity function protects the user's personal information security, and transactions are irreversible, reducing the fraud rate. Bitcoin users can fully control their transactions through secure encryption. Most importantly, its decentralization and distributed accounting functions provide a transparent, neutral and predictable platform for Bitcoin transactions. It is precisely because Bitcoin has the function of currency that it can participate in the real economy, play the role of measuring the value of all commodities and serve as a medium for commodity exchange. For example, Denmark has set up Bitcoin ATMs, gradually replacing cash with virtual currency and evolving towards cashless, allowing virtual currency to gradually participate in every real industry. Taking advantage of Bitcoin's international recognition, breaking international and regional restrictions, maximizing its two functions of value scale and means of flow, and reducing the friction cost between the real economy and cash.

The shortcomings of Bitcoin are also obvious. It is not like a sovereign currency. The right to mint coins is in the hands of "miners". The price fluctuates greatly and is easily affected by speculation. It is not like commodities such as gold and oil that have practical value. Its qualifications are questionable and Bitcoin can only be purchased with local currency. There are security issues. It will be difficult to redeem it if it is attacked by hackers or lost. Its decentralized principle poses a big problem for supervision. The value of Bitcoin depends on the confidence of users. Once people expect its usefulness to decline, Bitcoin will disappear in an instant. Previously, the "mining disaster" in 2014 was very famous. The price was halved in just half a month. The most direct impact was that "miners" sold computer equipment such as graphics cards, but it did not significantly affect other real economies. This "mining disaster" was caused by the manipulation of international speculators and multiple trading platforms.

As Bitcoin is gradually being widely used, will the 2017 surge be followed by a "mining accident"? Will it lead to a financial crisis similar to the 2008 one? We know that the 2008 financial crisis, also known as the subprime mortgage crisis, was caused by the fact that the real economy's demand for money could not keep up with the expansion of financial assets and financial innovation. The subprime mortgage crisis was highly contagious and is estimated to have caused more than $600 billion in losses to the global financial industry. The average daily trading volume of Bitcoin is less than $50 million, and trading is not active. At the current price, the total market value of Bitcoin is about $300 billion.

Judging from the trading volume of futures exchanges, the contract trading volume of Bitcoin in March 2018 was at the low end of double digits, far lower than the trading volume of CDS (credit default swaps) and CDO (collateralized debt obligations), which were also derivatives before the subprime mortgage crisis. Assuming that a "mining accident" really happens, the activity and influence of Bitcoin are far less than the subprime mortgage crisis. The most important thing is that the 2008 financial crisis was caused by huge debts and the excessive integration of the real economy and finance, which burst out with huge destructive power. However, the integration of Bitcoin and the real economy is not large. There are few cases of corporate transactions involving Bitcoin, and it is very rare to apply it to residents' commodity consumption and house sales, and it does not involve debt crisis issues. Therefore, the "mining accident" of Bitcoin is not as contagious as the subprime mortgage crisis, and there is no huge credit demand that can cause liquidity crisis and panic runs in the banking system. Then this kind of "mining accident" is more about the manipulation of speculators, and the price is affected by private transactions, and it does not involve widespread real economic applications. It will not bring the biggest feature of the 2008 financial crisis - "too big to fail". Moreover, most of those implicated in the subprime mortgage crisis were ordinary people, and the wealth distribution of Bitcoin is highly consistent with global financial wealth, so even if a "mining accident" occurs, its impact will not be very wide.

Of course, the Bitcoin mining accident has caused investors to lose confidence in technology stocks. As a representative of blockchain technology, the price plunge of Bitcoin will seriously affect investors' valuation of technology stocks related to blockchain technology. In June of this year, the price of Bitcoin plummeted from about $3,000 to $2,500, a single-day drop of more than 16%. This was followed by a drop in the prices of many technology stocks. Among them, the decline of the four major technology stocks (Apple, Google, Facebook and Amazon) had a great impact on the US market, with the market value evaporating by $60 billion in one day. The plunge in Bitcoin and technology stocks this time was caused by technical failures that prevented millions of retail investors from going online. If a "mining accident" that is more terrible than the plunge occurs, investors will lose confidence in blockchain technology, which will seriously affect investors' valuation of technology stocks, and panic selling will inevitably occur, and there may be a crisis similar to the bursting of the technology bubble in 2000.

However, its damage and spread are far less than that of the subprime mortgage crisis, so the Bitcoin crisis cannot be compared with the financial crisis in 2008. However, how to regulate virtual currencies, how to regulate and standardize financial innovation, and even how to regulate the development of the financial technology industry will inevitably be the future research direction of governments and regulatory agencies.

(The author is a professor of finance at Peking University HSBC Business School and chief economist of the China Banking Association)