【Talk about the central bank’s dilemma on Bitcoin】

I originally wanted to use "Talking about the Game between Bitcoin and the Central Bank", but frankly speaking, although Bitcoin is an entity equivalent to legal currency, Bitcoin and the Central Bank are far from being in the same weight class, let alone the qualifications for the game. If the Central Bank is willing to pay the price, although it cannot kill Bitcoin, it is enough to keep Bitcoin on the ground for a while. Therefore, it is better to just talk about the dilemma faced by the Central Bank when it suppresses Bitcoin .

Dilemma 1: Is Bitcoin a currency?

While governments do not have the power to define what is a “currency” — just as they do not have the right to define what is a “metal” — they only have the power to define what is a “legal tender,” but they can treat Bitcoin as either a “currency” or a “non-currency.”

In the definition of the five-ministerial notice, Bitcoin is a "commodity", like Chinese cabbage, and Bitcoin exchanges are like vegetable markets. It is a bit inappropriate for the central bank to manage the vegetable market. If the central bank does not recognize Bitcoin as a currency, it will be difficult to manage Bitcoin according to financial rules within the legal framework . This has led to the central bank being able to frequently influence Bitcoin through non-institutionalized and non-permanent means such as "talks".

The disadvantages of these methods are:
1. The effect is getting weaker.

To be honest, the market today was beyond my expectations again. The inability to withdraw coins (even temporarily) seems to me to be a serious matter, but the market has not reacted much. So far, it has only fallen from 7,500 to 6,700 (a 10% drop). The market has become aesthetically fatigued by the frequent actions of the central bank in a short period of time .

2. There are limited methods. You have to rack your brains to come up with various reasons every time. You can’t use the same reason twice, otherwise the market will not react. This time it is "withdrawals are suspended due to the development of the anti-money laundering system". When the anti-money laundering system is developed, what other reasons are there? It’s quite troublesome. The central bank’s means are limited, but as long as the fiat currency is still being abused, the price of the currency will rise infinitely .

3. Every action is news and increases the popularity of Bitcoin.

Dilemma 2: How to treat Bitcoin exchanges?

Honestly speaking, if Bitcoin was not highly decentralized and could not be shut down, Bitcoin exchanges would have been shut down 100 times. But if the central bank shut down relatively obedient exchanges, it would have to face more complex and uncontrollable over-the-counter transactions, or even underground transactions. Russia directly banned Bitcoin in February 2014 (NetEase Technology "Russia joins the ban, Bitcoin transactions extend offline"). But from the Russian trading volume on LocalBitcoins.com (the largest over-the-counter Bitcoin trading platform), we can see that this ban is basically meaningless. Instead, it will completely transfer Bitcoin transactions to the over-the-counter and underground, becoming a paradise for money laundering and foreign exchange flight .

The best example of the compliance role played by exchanges is the Yishidun money laundering case. Yishidun, which made a profit of 2 billion through high-frequency trading in the stock market, once tried to transfer funds using Bitcoin. If it were not for BTCC's strict anti-money laundering review, the 2 billion would have been laundered overseas long ago (NetEase Finance "Yishton made 2 billion by manipulating futures and considered using Bitcoin for money laundering").

Therefore, although the central bank can shut down an exchange with just a flick of its finger, the reason why the central bank does not shut down the exchange is not because of its excessive power, but because of the strong vitality of Bitcoin .

Dilemma 3: How to limit the price of coins through exchanges?
The central bank has already taken three measures: suspending financing and currency lending, charging service fees, and suspending currency withdrawals. The impact of the first two measures has been analyzed in detail in "[Bitcoin Economics] Talking about the long-term impact of financing and currency lending and service fees on currency prices", which can be considered as long-term positive, so the market responded and the currency price went up again. The suspension of currency withdrawals is a short-term negative, but it will promote the healthy development of China's currency circle in the long run.

Most of the users in the Chinese cryptocurrency community have not experienced the pain of the collapse of a major exchange like Mt.Gox, so they are often more willing to keep their coins in exchanges rather than in their own custody. This is a very big problem from both the security and decentralization perspectives. The development of Bitcoin depends on the accumulation of Bitcoin users, and every exchange accident will cause a large number of users to pay a heavy price, completely leave Bitcoin, and even affect their future lives .

People are lazy unless they encounter a painful experience. Today, a bunch of people asked me how to keep their own Bitcoins. Here is a tutorial: [Basic Science] How to use a mobile wallet to safely store Bitcoins (and talk about the recent situation). Through such exercises, the Chinese cryptocurrency circle has made everyone realize the importance of storing their own coins, which is much better than foreigners learning bloody lessons through Mt.Gox.

After a large number of users buy and withdraw, the circulating coins in the exchange and the market will further decrease. Originally, the coins were placed in the exchange, and people always wanted to operate them. After withdrawing the coins, they may not have the desire to sell them. When the hoarders are highly locked up and there is an extreme shortage of coins in the market, the phenomenon I described in my previous article will become more obvious: there are no coins to smash, but any money can be used to sweep up the price of coins by hundreds of yuan .

The impact of suspending withdrawals on the market

First of all, this will cause a considerable blow to the confidence of the market, but it is difficult to predict how much impact it will have. Frankly speaking, the current market performance has exceeded my expectations. Or is it because many people simply do not need to withdraw money? They may even feel that just like the stock market cannot withdraw stocks, withdrawing money from the exchange is also an optional option:)

Secondly, the demand for buying coins will not disappear, especially some rigid demand for buying coins, which will turn to exchanges that allow withdrawals (such as BTCC, which allows withdrawals within 72 hours) and over-the-counter transactions. These exchanges will have a significant or even large premium over exchanges that do not allow withdrawals.

Finally, due to the destruction of basic trading functions, the futures prices of OK and Huobi may be strangely distorted - this has already been reflected today, for example, OK futures have seen an unprecedented -25% premium (index minimum 6506, futures minimum 4927). In this case, the risk of futures is already very large, and it is recommended to be cautious. By the way, many people are curious about the results of my quarterly futures "hoarding coins": the quarter opened at 7265, and I started to close the long position at 6973 (9:10pm). After completion, I opened a short position at 6850 (9:15pm), and started to close the short position at 6097 (0:14am). After closing, all the coins have been withdrawn, and the recent futures are no longer suitable for operation.

Beware of the same regulatory risks that Lightning Network large nodes face as exchanges

Today, taking advantage of the central bank’s move, Core supporters are promoting the idea that “the smaller the node, the more secure the network” and threatening that “large nodes will be called to a meeting by the central bank”, which makes people speechless.

How big is considered a "big node"? All those who talk about toxicity without considering the dosage are just playing rogue. If you ask Core people specifically how big a block is that will exceed the tolerance of a loser's computer, they will not answer you, because the answer is very embarrassing . In Gavin's 20MB block test, even VISA transaction-level blocks 20 years later will not put any pressure on a computer in 2012, and storage space is not a problem (old block data can be deleted). So is the central bank going to talk to all loser computers?

On the contrary, the Core roadmap castrates the main chain to a permanent 1M, and drives all transactions to the Lightning Network. The nodes of the Lightning Network (responsible for fund routing) have obvious scale advantages, and will eventually develop into super-large-scale nodes like "Bifubao" and "Bixin". Such large nodes must be operated by companies, and exchanges will inevitably be large nodes of the Lightning Network. These are the "large nodes that will be called to meetings by the central bank." At that time, the central bank prohibits large nodes (operators) of the Lightning Network from transferring money to large foreign nodes in the name of anti-money laundering, and even prohibits Lightning Network transfers. The main chain that has been castrated with only 1M is unable to carry the huge amount of transactions in the Lightning Network, which is a real disaster . There is no Bitcoin without a main chain. Bitcoin must walk on two legs (main chain + side chain) to be safe.

The central bank and regulation cannot kill Bitcoin. Only the wrong direction can kill Bitcoin .

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Expansion & Bull Market Series:

January 22, 2016: [Bitcoin faces a critical choice] We urge all holders to support the 2MB expansion.]
March 11, 2016: [Basic Science] Can Bitcoin support all human transactions?
June 26, 2016: "4,000 yuan is the beginning of the Bitcoin bull market"
October 15, 2016: [Completely end the debate between hard and soft forks] Safe hard forks are soft fork expansions [English Ver]
October 20, 2016: "On the Correct Approach to Bitcoin Upgrading (and Refuting ahr999's "Consensus Rules")"
October 29, 2016: "Pouring cold water on Zcash - With Deep Black, does the market really need Pure Black?"
November 4, 2016: "Beware of Exchange Risks Under Tightened Foreign Exchange Regulation"
November 22, 2016: "Why do we firmly oppose Core's soft fork Segregated Witness? Jiang Zhuoer, who has invested tens of millions of real money in mining, tells you the answer!" [English Ver]
December 22, 2016: Weibo: "Update of the bubble index and other data in "Also on 4,000 yuan is the beginning of the Bitcoin bull market""
December 31, 2016: Weibo post: "Telling you something that is extremely scary when you think about it carefully"
January 4, 2017: Weibo: "This may be the last time that the bubble bull market can soar 10 times"
January 11, 2017: Weibo: "The central bank has finally completed the task of deflating the bubble. This round of bull market has a habit of correcting 40% after each new high."
January 13, 2017: [Basic Science] How to use a mobile wallet to safely store Bitcoin (and talk about the recent situation)
January 13, 2017: "Happy to hear that BTCC and Huobi have stopped margin trading, OK has reduced leverage to 1x, and all fake coins in the market have been wiped out"
February 5, 2017: [Bitcoin Economics] Discussing the long-term impact of financing, currency lending and handling fees on currency prices