Bitcoin: Bubble or Money?

Last Saturday, the price of a single bitcoin hit an all-time high of $2,000. Two days later, the price of a single bitcoin reached a high of $2,100-2,800 — not far off from twice the price of gold.

This is incredibly surprising. What is this all about? Is it like a pretty good TV show, but also like a return ticket to New York? Is this a bubble?

Bubbles are hard to identify in real time. When prices drop 50% or return to zero, it’s almost a bubble. But until then, it remains a mystery whether the wild rally will make Bitcoin a more important alternative currency or quickly become a speculative bubble in memory.

When the price of Bitcoin rose from $1 to $100, some observers argued that Bitcoin was a bubble; they did the same when it rose from $100 to $1,000. But demand still outstrips supply, and by 2017, the price of Bitcoin had tripled.

This involves two questions: What is demand? What is supply?

In some ways, the second question is easier to answer than the first. Bitcoins are mined by computers, many of which do very complex calculations. In fact, there is now difficulty with a type of integrated circuit called an application specific integrated circuit (ASIC) because it uses older CPUs and even first generation integrated circuits, which makes Bitcoin mining more expensive.

Obviously, the cost of mining Bitcoin is currently $1,200, which is much more profitable than mining gold, which explains why there is a peak in "mining" Bitcoin now.

This also explains why knockoffs and alternatives have emerged: “Wikipedia lists 24 other cryptocurrencies, the most recent being Zcash, which was founded in 2016 by Zooko Wilcox and described as “the first open, permissionless financial system powered by zero-knowledge proofs.”

“Zero knowledge” is worthy of criticism in my opinion. The current price of Zcash is $112.23 per unit. After October last year, it rose to $1,800, which is not a good sign.

Let’s look at market leader Bitcoin. There are two things that distinguish it from gold and help explain its superior price-performance ratio: First, the Bitcoin network adjusts the difficulty of mining every two weeks or so, gradually increasing the difficulty to ensure that the mining output rate of Bitcoin remains stable as computing power around the world increases. Second, the total number of Bitcoins is limited to 21 million.

I heard that 14 million have been mined so far. What will happen when 21 million is reached? We are now faced with an interesting problem in monetary theory, especially since central banks around the world have no restrictions on the mining of dollars, euros, and yen, and are mining billions every week with almost no electricity consumption.

In the past, central bank currencies had to be backed by gold that was actually mined from the ground and refined, as was silver, but this was abolished on August 15, 1871, because the value of the dollar had fallen to one-sixth of its normal level at the time.

So in a sense the demand for Bitcoin is related to people's demand for money, which cannot be reduced by politicians and central banks. The supply of money is limited, and creating money is always difficult, not because of economic principles that are easily misinterpreted and changed.

As one discerning Bitcoin investor noted last week:

“I think there’s an alternative to the currency frenzy. It may be Bitcoin, it may not be, I don’t know what it is, but I worry about the integrity of the monetary system. You can’t understand everything by working within the monetary system. So you have to be outside the system, and Bitcoin happens to be outside the system.”

Can it reduce the crazy speculative behavior under the existing monetary system, especially in the gold market?

Paying a ransom can be useful, especially in situations where hackers have locked your computer files and are asking you to pay Bitcoin to unlock them.

This suggests that there are non-investment uses for Bitcoin, many of which involve evading censorship.

But there are many legitimate online retailers and service providers that accept Bitcoin, including Microsoft, Bloomberg, Webjet, Yacht-base.com, and Croatian yacht charter companies.

While the rise in the value of Bitcoins can bring good profits between sales and bank earnings, how they will deal with the rapid rise in Bitcoins is something we can only guess. After that, will the Bitcoins be deposited in the bank? I guess not.

Yes, you need to keep your eyes open, be in awe, and leave a little more Bitcoin.

Will a $2,800 price tag make Bitcoin a more reliable alternative currency, or will it become a financial bubble that will soon become a memory?

I'm afraid I don't know the answer to that question.