The political and economic changes behind the rise and fall of Bitcoin: an underground highway for currency exchange

These days, former Bitcoin trader, Dutchman Edwin van der Brom, is in endless regret.

Three years ago, Edwin, who had just obtained a master's degree in financial economics from Erasmus University Rotterdam, joined a local Bitcoin trading platform in the Netherlands as a trader. At that time, Bitcoin was in the limelight and broke through the $1,000 mark for the first time. The job looked promising.

However, within just one year, the value of Bitcoin rapidly declined, from the peak of $1,100 in November 2013 to around $220. Therefore, like many Bitcoin traders, Edwin had to withdraw from the low Bitcoin market in early 2015 and switch to other financial projects. Edwin was upset that since the second half of 2016, the price of Bitcoin has continued to rise, and it had a "good start" at the beginning of 2017. On January 3, the trading price broke through the $1,000 (about 6,930 yuan) mark, and two days later it broke through 1,000 euros (about 7,290 yuan), and the peak was close to 9,000 yuan, setting a three-year high. However, on the same evening, Bitcoin immediately "flash crashed".

The next day, on January 6, the People's Bank of China and its Shanghai headquarters held talks with three Bitcoin exchanges - Huobi, Bihang and BTC China - in Beijing and Shanghai respectively, and reiterated that Bitcoin is a specific virtual commodity that cannot and should not be circulated and used as currency in the market; Bitcoin does not have the same legal status as currency, and institutional and individual investors should invest in virtual currencies rationally.

Market analysts believe that this is the reason for the decline in Bitcoin prices, as it is reported that more than 90% of Bitcoin transactions are currently conducted in China.

As of press time, the price of Bitcoin is hovering around 6,200 yuan.

"Compared with the always lukewarm hedge funds, Bitcoin is like a dormant volcano, either sleeping or erupting," Edwin said helplessly to Times.

The value of Bitcoin comes from “community credit”

Edwin and his friends' frustration did not last long. Bitcoin plunged quickly shortly after reaching a new high, and has fallen 25% from its high so far. Some analysts believe that the crazy rise of Bitcoin may be due to currency arbitrage activities. The RMB exchange rate fluctuates more and foreign exchange controls are becoming stricter. Some speculators regard Bitcoin as an "underground highway" for "currency exchange" and use it to speculate.

Bitcoin is currently the most widely used encrypted electronic currency in the world. It is based on a set of password codes and obtained through a large number of complex calculations. In essence, it is a 64-byte private key composed of numbers and letters. In layman's terms, it is an Internet virtual currency based on "algorithms". It is a "currency" reward that Internet players get after solving complex "math problems". Solving math problems is similar to the "mining game" on the Internet. The process of solving problems is the process of producing Bitcoin. The smallest unit of Bitcoin is Satoshi, and one Bitcoin = 100 million Satoshi Bitcoins. At present, the total amount of Bitcoin is about 21 million, that is, 210 trillion Satoshi. Because the production and issuance of Bitcoin are subject to upper limits, it is scarce, and it conforms to the vision and expectations of some people for the "denationalization" and "decentralization" of future currency, so it has become a virtual digital currency that some people invest in and are popular with.

The general currency in circulation, i.e. legal tender, is issued based on national credit, while Bitcoin is based on algorithmic credit. Algorithmic credit has no value, and what is valuable is the recognition of the algorithm by Bitcoin users. In other words, the value of Bitcoin comes from the common recognition of Bitcoin users, which can be understood as a kind of community credit.

The rise of Bitcoin has its own special time and space background. When Bitcoin came out in 2009, it happened to be the year when the financial tsunami had the greatest impact. In order to save the economy, central banks of various countries desperately printed money, causing global capital to flood and the dollar to fall. Bitcoin has therefore become a safe haven for investors and wealthy people. When Bitcoin was publicly traded in 2010, it was almost worthless, with a market price of only $0.03. The European debt crisis in 2010 and the Cyprus banking crisis in 2013 accelerated the flow of funds to Bitcoin and pushed up the price of Bitcoin. After 2012, there began to be an explosive appreciation, reaching a high of $1,242 on November 19, 2013. The price rose 40,000 times in four years.

At that time, the Fed continued to introduce quantitative easing policies, and strong economies such as the European Union and Japan adopted monetary easing policies, which led to increasing inflationary pressures and questioned the paper currency system issued by government credit. The tolerant attitude of the governments of economic powers such as the United States, France, and Germany also significantly increased the appreciation expectations of Bitcoin. In addition, the European debt crisis caused credit crises in Greece, Spain, Italy, Portugal and other countries. Take Cyprus as an example. After the government imposed taxes on bank depositors and imposed strict capital controls, funds frantically sought a way out, pushing Bitcoin to appreciate by 130% in one month. In recent years, China, where Internet financial innovation is surging, has led to a surge in Bitcoin players; Bitcoin, which is difficult for the government to track, is used as a new tool for money laundering and drug transactions around the world, which is also one of the reasons for its skyrocketing price.

Political and economic turmoil in 2016 brought Bitcoin back to life

The popularity of Bitcoin has attracted many speculators, who either speculate on Bitcoin as a high-leverage futures or use the price difference between Bitcoin markets in different countries for arbitrage, causing Bitcoin prices to fluctuate greatly. The last time Bitcoin attracted widespread public attention was in 2013, when its 5429% increase overshadowed all other types of currencies. Many investors believe that Bitcoin is the greatest financial experiment in the world.

In the following year of 2014, the value of Bitcoin plummeted by 56%, becoming the worst performing currency of the year. Many speculators also chose to leave the sensitive and uncertain Bitcoin market at this time. In early 2015, the value of Bitcoin hovered around $250, and the price did not rise significantly in the following months. But in September, Bitcoin began to rise. The most dramatic change before that occurred on November 4, 2015. On that day, Bitcoin rose 20% during the trading session, soaring to a high of $500. According to the Wall Street Journal, China is considered a major factor in the surge in Bitcoin. That year, the Chinese stock market fluctuated violently.

The Bitcoin storm three years ago seems to be here, as Bitcoin has regained its position in the financial market at a rate of doubling throughout the year. It is understood that before the current Bitcoin surge, Bitcoin prices had already been on an upward trend due to the devaluation of Venezuelan currency and the sudden announcement by the Indian government to cancel the circulation of 500 and 1,000 rupees. Furthermore, Brexit and the US election have proven that isolationism is on the rise in European and American politics. This isolationism has given new hope to Bitcoin, an electronic currency that is not restricted by national regulatory authorities and can be freely traded internationally.

Today, the market value of Bitcoin has reached $15 billion. Although Bitcoin is now on the verge of returning to its peak, many people have begun to sound the alarm that a more drastic adjustment may be coming.

Editor: Xiao Yang