Why some investors who rushed to sell Bitcoin miscalculated the situation

Some say that sunlight is the best disinfectant, but the People's Bank of China (PBOC) has just cast a shadow over Bitcoin. According to multiple media reports, the PBOC will inspect Bitcoin exchanges, and this news caused the price of the currency to fall 14% on the day, and 22% compared to the beginning of this month.

Interestingly, although Bitcoin's volatility was relatively low in 2016, such sharp declines are not uncommon in history. In addition, the increase in regulatory efforts is a good thing in my opinion, because I have always regarded Bitcoin as an important digital asset in the field of fintech investment.

The reason why Chinese exchanges are so important is that they account for most of the world's transactions. Currently, the average daily trading volume of Bitcoin exceeds that of gold ETFs, and 95% of it occurs in China. China is crucial to the development of Bitcoin, so the policies of the Chinese central bank cannot be ignored.

Bitcoin has long been viewed as a vehicle for capital outflows, and if the Chinese central bank is trying to confirm this, I think it’s unlikely they’ll find strong evidence.

But we should first understand that the total value of Bitcoin in existence is about $13 billion, but last year China's capital outflow amounted to $320 billion - so even if Bitcoin is indeed the culprit for capital outflow, the amount is too small to be known to outsiders.

The point is that even if the Chinese central bank finds a link between Bitcoin and capital outflows, the amount is so small that the most they can do is restructure the exchange. In addition, as institutional investors are increasingly interested in Bitcoin, this round of price declines can transfer Bitcoin from uncommitted investors to more far-sighted investors.

Predicting the future is difficult. However, now that the new year has arrived and the price of coins remains volatile, it is time to think about the future of digital currencies.

In the long run, the financial revolution led by Bitcoin will create a more perfect, efficient and strong financial system. However, in the new year, I think three things may happen in the Bitcoin field.

1. Bitcoin as a currency

2. Bitcoin becomes a new asset class for investors

3. Bitcoin becomes a store of value in the global currency crisis

Bitcoin is an alternative currency, similar to gold, but with greater usability due to its digital nature. Gold has always served as a currency, but what if you were to use an ounce of gold to book a hotel room? Mission impossible. But Bitcoin can do it. In fact, I have already used Bitcoin to book hotels on Expdeia (online travel company), and I find it more convenient and secure than using a credit card directly. It only takes a few clicks to transfer Bitcoin, and I don't have to submit any personal information during the process, so I don't have to worry about being hacked, and my credit card is still safely in my wallet.

Back in 2009, when Bitcoin was first created, it set off a financial technology revolution. The underlying technology of Bitcoin, blockchain, has become a hot new star in the world of financial technology. Interestingly, the use cases of blockchain technology are not limited to the financial field. It can also show its strength in industries such as inventory tracking, medical and identity authentication. In the medical field, it can track sensitive patient information; Walmart uses it for pork supply chain tracking; it can also solve identity theft problems and ensure the security of personal information.

But in essence, Bitcoin is still a currency. The original purpose of Bitcoin is to realize the currency function. Currently, Bitcoin is also the most perfect use case of blockchain.

In fact, the main factor behind the rise in the price of Bitcoin is the depreciation of the RMB. In the past two years, the relationship between the RMB and the price of Bitcoin has been obvious. The increase in trading volume has made China the center of Bitcoin trading. As a means of preserving value, Bitcoin is becoming more and more popular, and China's average daily trading volume even exceeds that of gold ETFs in the United States. This phenomenon has also attracted more and more institutional investors.

In my opinion, digital currencies and assets will create a new asset class for investors, just as foreign exchange and futures have developed over the past few decades. If the currency crisis cannot be effectively stopped, institutional investors are likely to hold a similar view.

The idea that the US presidential election is partly about attracting more money back to the US to boost the country’s economy is laudable, but there is a major risk. Money flowing into the US means capital outflows from developing markets like China. Over the past few decades, capital inflows have fueled China’s GDP growth of more than 10%. As the economy has grown, companies, investors, and Chinese citizens have accumulated a lot of debt, but this situation could easily be reversed.

The weakening of capital mobility has brought economic instability and is likely to cause continuous currency crises, especially in Asia. This situation is likely to attract more institutional investors to choose Bitcoin. In addition, people who are deeply harmed by fiat currencies will also turn to Bitcoin. Although the currency price has been volatile recently, Bitcoin has outperformed gold in the past two years and its volatility is gradually decreasing.

Bitcoin is a more practical currency than gold and can keep assets safe in a global currency crisis, so it is not surprising that Bitcoin is so popular. However, this does not mean that Bitcoin does not have the characteristics of traditional financial market products. Although I think Bitcoin is a revolution, I know that this digital currency is also affected by market sentiment - fear, greed, excitement and disappointment are all catalysts for people to buy or sell coins - the recent crazy rise in the price of the coin is caused by market frenzy.

As the number of investors, traders, and end users in the Bitcoin ecosystem grows, its volatility will decrease and Bitcoin will become more and more like its fiat currency "relatives"... but there is one major difference; as the number of companies exploring use cases for Bitcoin and blockchain increases, their demand for these assets will increase, and at the same time, the supply of Bitcoin will shrink significantly. There are a total of 21 million Bitcoins, and 16 million have been mined so far. The remaining 5 million will be mined over the next 100 years... yes, it will take another century.

You don’t need a PhD to understand how supply and demand work. So it’s not too late to get into Bitcoin. But like any other asset, it’s best to buy low and sell high.

The price of the currency hit an all-time high on January 4 this year, but plummeted 33% after the news that the central bank was investigating exchanges broke out in China. This round of plunge obscured a lot of positive signals: regulation, review or cleansing of exchange structures will help attract institutional investors. I think those who are busy selling are making a big mistake, which is why I am still buying Bitcoin.