Bitcoin is the best performing asset in 2016

Bitcoin has such a strong explosive power that no other asset can compare to it yet. The Dutch tulip bubble that appeared in history...

Author: Xiao Lei's Market View

This week, the price of Bitcoin denominated in RMB has risen by more than 15%. So far this year, the price of Bitcoin has risen by as much as 130%. During the same period, the price of Brent crude oil, which has performed best in various markets, has only risen by 45%. The price of gold denominated in RMB has fallen back to 16%. Bitcoin can be said to be the best performing asset in 2016.

Due to the sharp rise in the price of Bitcoin, many investors have left messages on my WeChat public account and Weibo recently. The questions are mainly: Is Bitcoin still worth investing in the future? What are the factors that affect the price of Bitcoin? I have been thinking about some issues in the Bitcoin market recently, so I would like to share them with you.

To judge the future trend of Bitcoin prices, we need to clarify several very special factors:

First, the global market's definition of Bitcoin is still very vague. The U.S. Commodity Futures Trading Commission (CFTC) defines it as a commodity, similar to crude oil and gold, but a local court judge in Florida, USA, defines Bitcoin as currency or fund in a specific case; the UK Revenue and Customs defines Bitcoin as private property; the People's Bank of China defines Bitcoin as a "virtual commodity"; the World Bank defines Bitcoin as a "spontaneously formed Ponzi scheme" in a report, but clarifies that it has nothing to do with the deliberate Ponzi scheme claimed by Bitcoin critics.

Secondly, Bitcoin is decentralized, and the supply has long been fixed. Currently, no institution or organization can claim to own a huge amount of Bitcoin to regulate the supply and demand of Bitcoin, or formulate relevant regulatory policies for Bitcoin. In other words, there is no "Bitcoin central bank" yet, or a diamond monopoly organization similar to De Beers in the diamond industry has not yet been formed. The person who owns the most Bitcoin (American brothers Cameron Winklevoss and Tyler Winklevoss claim to hold about 120,000 Bitcoins, with a current market value of only $100 million) can actually hardly shake its volatility in the Bitcoin market with a daily trading volume of $2 billion (the current total market value of Bitcoin is about $14 billion), let alone manipulate prices.

Third, the Chinese market currently accounts for more than 95% of Bitcoin transactions, and almost all international Bitcoin participants must pay attention to changes in the Chinese market. In addition, according to data from HaoBTC, more than 70% of the newly generated Bitcoins are produced in Chinese mines, and the Chinese market almost monopolizes the future supply of new Bitcoins.

Global Bitcoin Trading Volume

As shown in the data above, China's three major Bitcoin trading platforms, Bitcoin China, Huobi, and OKcoin, together account for more than 90% of the world's total Bitcoin trading volume.

Fourth, with the Fed's interest rate hike and the return of the US dollar, the global non-US currencies have fallen into obvious shocks, from Egypt to Turkey, from Russia to China, from Singapore to Malaysia, and even the world's second largest currency, the euro, has become weak. In this context, in order to deal with the credit problems in the local currency market, countries are likely to take extreme measures, such as the "abolition of banknotes" in India and Venezuela, and Pakistan and Australia also have such a willingness to abolish banknotes. Coupled with the generally intensified capital control problem, some investors have the impulse to rush into the Bitcoin market for risk aversion, which has led to the further enhancement of Bitcoin's financial currency attributes, while the attributes of "virtual goods" or "commodities" have been reduced, and the influence of the exchange rate market on Bitcoin has continued to rise.

Based on the above four aspects, the most critical points for judging Bitcoin prices can be summarized into two:

1. The impact of national policies on Bitcoin cannot be ignored. However, the current situation is that, as blockchain technology has been officially recognized, markets around the world are studying the feasibility of blockchain technology and digital currency. The People's Bank of China is also publicly recruiting relevant talents and practicing digital currency. In such a context, countries will be more tolerant of Bitcoin transactions. Paying attention to the application of blockchain technology and the development policies of digital currencies in various countries will be helpful in judging the trend of Bitcoin.

Impact of major events on Bitcoin

As can be seen from the above chart, in the trend of Bitcoin in the past three years, the regulatory policies of markets such as China and the United States, as well as the development and cognition of digital currency and blockchain technology at the official level, have had an impact on the trend of Bitcoin that cannot be ignored.

2. At present, the RMB exchange rate represents the exchange rate trends of a considerable number of emerging countries. In addition, China itself is the largest trading and output market for Bitcoin. The RMB exchange rate and some policies under China's capital account have a more direct impact on the price of Bitcoin.

RMB exchange rate and Bitcoin trend

As shown in the above figure, since the RMB exchange rate reform on August 11 last year, the negative correlation between Bitcoin price trend and RMB exchange rate has gradually strengthened, especially in recent times, this negative correlation has become more obvious.

The debate over Bitcoin’s attributes still affects its future development

Due to its explosive power, there is no other asset that can be compared with Bitcoin. It is difficult to compare it with the Dutch tulip bubble in history because the backgrounds are completely different. The potential target audience of Bitcoin is the billions of Internet users around the world, while the Dutch tulip is merely a regional economic bubble under the traditional trading model.

From a purely financial perspective, gold and Bitcoin have many similarities, and many people even believe that Bitcoin is digital gold. From the perspective of properties and characteristics, there are indeed similarities. One is that the supply is very scarce, and the other is that investors buy in to avoid credit risk.

The only difference is that the recognition and acceptance of gold has gone through thousands of years of running-in and accumulation, and is built on solid wealth and physical identity, while Bitcoin is only in the primitive conceptual transmission stage, and the trust chain is far less solid than that of gold.

For the Bitcoin price trend, two different assumptions need to be made:

One hypothesis is that Bitcoin becomes the second largest non-credit financial currency asset after gold that can hedge various credit market risks. If the market gradually recognizes and accepts this concept, and even reaches a tacit understanding and consensus, and some financial institutions around the world begin to hoard a portion of Bitcoin assets as financial reserves, then the current price of Bitcoin may just be the beginning.

Compared with the volume of gold, Bitcoin is pitifully small. Currently, the market value of Bitcoin is only $14 billion. The market value of gold in the physical market alone is $7 trillion, and Bitcoin only accounts for 0.2% of the market value of gold. Assuming that the market value of Bitcoin is increased to 2% of gold, it is equivalent to a 10-fold increase in the market value of Bitcoin. Even if it increases 10 times, the market value of Bitcoin is only $140 billion. For the terminal market, this will mean that the price of each Bitcoin will increase 10 times from the current level to $9,000 per unit (about RMB 63,000 per unit). If its properties can be comparable to gold, this is only a conservative estimate.

Another assumption is that Bitcoin, as a new type of financial transaction unit that has emerged when Internet technology has developed to a certain extent, is too free and independent and has not been recognized by most countries. Compared with gold, it has limitations in practical application. From the perspective of assets, in addition to the convenience and security of transfer, inheritance and holding, simply holding Bitcoin will not bring productive benefits in the process of economic growth, nor will it generate any equity benefits.

If there is no major turmoil in the global economy and financial markets, the opportunity cost of holding Bitcoin will become higher and higher. When the price driven by safe-haven demand reaches a certain zero point, funds begin to take profits and transfer to other assets. The price of Bitcoin may experience an avalanche-like decline. It is not impossible for it to fall to 500 yuan per Bitcoin. Moreover, such a decline will cause a severe blow to market confidence, pessimism will be self-reinforcing, and the decline may exceed market imagination.

There is no stronger or weaker one of the above two assumptions; the probability of both occurring is equal.

Bitcoin is no longer a simple digital currency that can be described as a bubble.

Unlike many emerging digital currency concepts, the Bitcoin industry chain is actually very complete. The huge costs and stakeholders hidden behind Bitcoin are no longer a simple issue of a $14 billion market value.

Bitcoin's core development circle, Bitcoin-related exchanges, mining farms, wallet service providers, etc., all have top-notch technical talents. The annual salary cost of these talents alone may be as high as tens of millions of dollars. These talents can not only improve Bitcoin's technological updates, but also create more related products and value.

The entire Bitcoin industry chain needs the support of Bitcoin terminal prices. Conversely, sufficiently high prices and large enough trading volumes will stimulate the upgrading of Bitcoin technology and talents, and more importantly, stimulate the self-marketing and self-realization of the entire Bitcoin market.

A similar situation also occurs in the diamond industry. If you pay close attention to the diamond industry, you will find that when we wear a diamond, the upstream diamond company may have dug up a rough stone from faraway South Africa, then transported it to the ancient Belgian city of Antwerp, and then processed it by top diamond cutters into finished diamonds that exude seductive light, and finally presented them to consumers with various dazzling marketing methods.

It is worth noting that most people know the price of diamonds, but few know that in Antwerp, a top diamond cutter can earn up to 400,000 to 500,000 euros a year. Just like the unknown Bitcoin industry engineers, it is difficult to know what kind of transmission chain is behind a Bitcoin.

Bitcoin itself is nothing, but its well-known brand effect, the talents it has attracted, the companies it has gathered, and the continuously updated blockchain, encryption and other technologies can represent the future digital model and trend of global currency.

For many people who share the same belief as Satoshi Nakamoto (the creator of Bitcoin), buying a Bitcoin is perhaps equivalent to funding a developer who can create the future. As for the price of Bitcoin, it is important to remember that just because the concept is strong enough, it will not support an unlimited rise in price. All commodities, once financialized, are easily leveraged, and once leveraged, it is easy to overdraw the future.

Finally, it is recommended that investors invest in Bitcoin for consumption or collection purposes. It is best to invest with a one-time consumption mentality and not to consider appreciation too much, unless they can withstand drastic price fluctuations or have a very professional arbitrage model to trade (the reason why China's Bitcoin trading volume is so high is mainly because various trading platforms hardly charge trading commissions, resulting in the prevalence of programmatic trading. It can be said that most of the trading volume is facilitated by arbitrage trading). Text/Xiao Lei