Does Bitcoin have intrinsic value?

Author information: Liu Changyong, male, born in 1975, graduated from the School of Economics of Peking University with a doctorate in economics in 2007. Currently an associate professor at the School of Economics of Chongqing Technology and Business University, and a columnist for the digital currency information website "Babbitt". Since 2013, he has been mainly engaged in research and popular science work on digital currency-related economic issues.

Bitcoin has become a popular word in recent years. In June this year, the price of Bitcoin soared by 70% and became a social hot spot. However, many people still remember that from the end of 2013 to the beginning of 2014, the price of Bitcoin fell from a high of 8,000 yuan to 1,000 yuan. Many people are confused. Bitcoin is said to be just a string of code. Why would anyone be willing to buy such a virtual thing? Why did it rise again after being rumored to collapse several times? Why did it rise and fall so sharply? In the end, what is the value of Bitcoin?

Simply put, the intrinsic value of Bitcoin is that it is a better currency, which is the ultimate reason why some people are willing to buy it. However, there are many variables in the realization of this value, and people's understanding of this value is also unclear, which is the root cause of the sharp rise and fall of prices.

1. Are sovereign currencies the only currencies considered as currencies?

The original intention of Bitcoin design is to become a better currency. However, there are widespread doubts in China as to whether it is a currency. The most direct basis is the document "Notice on Preventing Bitcoin Risks" jointly issued by the central bank and five other ministries at the end of 2013. The "Notice" clearly stated: "Bitcoin is not issued by the monetary authority, does not have monetary attributes such as legal tender and compulsion, and is not a real currency." In other words, only sovereign credit currency is a real currency.

The Notice is a temporary policy basis formed based on the early understanding of new things. As an official document, the Notice of the five ministries and commissions needs to make judgments on new things that have already had a social impact within the existing legal framework. Since the founding of the People's Republic of China, the sovereign credit currency system with RMB as the only legal currency has been the foundation of my country's economic system. In the absence of a deep understanding of Bitcoin technology and its impact, judgments can only be made based on the existing monetary system.

As the influence of Bitcoin and its core technology expands, early understanding and judgment will change. In fact, in January 2016, the central bank held a special seminar on digital currency, believing that the development of digital currency brings opportunities and challenges to the monetary system and monetary policy, and explored a series of issues such as legal digital currency and its relationship with private digital currency based on Bitcoin technology. This has broken through the understanding in 2013 and recognized this technology for improving the monetary system, but has not yet formed a new policy document.

Now it seems that the judgment in the 2013 "Notice" that only sovereign credit currency is currency needs to be re-examined. Historically, currency was not backed by national credit from the beginning. Human currency has evolved from physical currency such as wheat, cattle, sheep, and shells to gold, silver, coins, and gold standard paper money. It was not until the 20th century that it gradually developed into sovereign credit currency that was separated from the gold standard and supported only by national credit. Sovereign credit currency overcomes some defects of the gold standard, but also brings a series of new problems. CCTV's large-scale documentary "Currency" made a wonderful interpretation of these.

Sovereign credit currency will not end history, and humans will definitely create better currencies. To say that only sovereign credit currency is currency is like saying that only horse-drawn carriages are carriages. It is believed that as digital currency technology matures, its influence expands, and people's understanding deepens, relevant documents will have more open and forward-looking judgments on the development of currency.

2. A brief history of currency: from physical currency to digital currency

What is money? From the perspective of currencies that have appeared in history, the basic function of money is to serve as a medium for commodity exchange, making transactions more convenient. To determine whether something can become money, we need to see whether its own characteristics are more suitable for being a medium of exchange and whether a considerable number of people use it as a medium in exchange.

The earliest currencies were important commodities in the natural economy, such as wheat, cattle and sheep. They became currencies because people owned and used them daily, and they were relatively easy to store and transfer. However, the value per unit weight of wheat, cattle and sheep was relatively small, making them inconvenient to carry and trade. As a result, humans developed better currencies, such as shells and jade. However, shells and jade were difficult to cut in transactions, and small transactions were difficult to conduct. In the process of improving transaction efficiency, people gradually discovered that gold and silver had the characteristics of high value, easy storage, and easy cutting, which made gold and silver widely accepted currencies by people around the world. Therefore, Marx said, "Gold and silver are not naturally currencies, but currencies are naturally gold and silver."

Whether it was wheat, shells, or gold and silver, these early currencies became currencies because of their natural characteristics. This was the first stage of currency development. Later, people found that artificial transformation of natural objects would be more conducive to exchange. Some powerful people such as big merchants, bank owners, and kings minted gold and silver to make coins with specific weights and fineness. This greatly simplified the weighing and inspection of gold and silver in transactions, making transactions smoother. As a result, coins became a better currency and were widely used.

Moreover, these big merchants, bank owners and kings found that their power enabled them not only to make coins, but also to print paper bills with their marks, replacing gold, silver and coins as a medium of exchange. This bill promised to be exchanged for the corresponding amount of gold and silver at any time. This was the prototype of gold (silver) standard paper money. The advantage of paper money over coins is that it is more convenient to carry and transmit. In this way, paper money became a better currency.

Although both coins and paper money have added artificial features to become better currencies, they are still based on the natural properties of gold and silver and have not completely broken away from the birthmark of natural currency. It was only when paper money broke away from the gold standard that human currency made a qualitative leap: from "natural currency" to "artificial currency."

The convenience of paper money and economic growth have led to the use of paper money exceeding the gold and silver it represents. In times of economic crisis or war, people will use paper money to run on gold and silver in order to avoid risks, causing the collapse of the banking system. As a stopgap measure, the government forced banks to stop paying, on the condition that the right to issue paper money was taken back by the state. This is actually backed by the power of the state and the trust of the people in the state, so it is a sovereign credit currency. It does not require guarantees and acceptances, but its purchasing power is guaranteed by national laws, so it also becomes legal tender. However, due to the lack of such a credit basis between countries, national economic and trade exchanges still adopt the gold standard, and settlement is made in gold or US dollars accepted for gold. It was not until the disintegration of the Bretton Woods system in 1973 that the paper money of various countries was completely decoupled from gold, and mankind fully entered the era of sovereign credit currency, which was also the first artificial currency stage of mankind.

With the development of the Internet and the electronicization of banking, from bills of exchange and telegraphic remittances to online banking, Alipay, WeChat Pay, etc., payments that were originally mediated by paper money are increasingly being conducted in electronic and digital ways. Although the essence of this currency is still sovereign credit currency, the natural form of paper money is being replaced by the virtual form of digital. From the development trend, currency will inevitably get rid of its natural currency tail - paper money, and enter the era of digital sovereign credit currency, and its artificial currency nature will be more thoroughly manifested.

Among the voices against Bitcoin, there is also the view that Bitcoin is just a virtual thing and cannot be a currency. Now it seems that legal currency is rapidly becoming virtualized. Virtualization is not a shortcoming of Bitcoin, but the reality and future of currency.

3. Is Bitcoin a currency?

The establishment of the sovereign credit currency system proves that humans can create artificial currencies that surpass natural currencies. However, sovereign credit currencies rely on national credit and are completely controlled by the government, which also brings a series of problems. The biggest problem is inflation. After being freed from the restrictions of gold reserves, the government continues to issue more currency for the purpose of expanding financial resources, stimulating the economy, and pleasing voters, leading to widespread and long-term inflation after the end of the gold standard. This means a continuous shrinkage of public wealth.

In order to eliminate the inflation problem of legal tender, a person with the pseudonym "Satoshi Nakamoto" designed a new artificial currency, Bitcoin, based on the exploration of his predecessors. As the name suggests, this is to establish a completely digital currency, but its basic feature is not digitalization, but to strip away the currency's dependence on sovereign credit and instead establish it on the basis of a social consensus mechanism that everyone can participate in, that is, the so-called "decentralization."

After years of digitization, the sovereign credit currency system has essentially become a bookkeeping currency system that records the ownership of currency and payment transactions in a computer system. This bookkeeping system is recorded and maintained by the banking system under the ultimate control of the central bank. The core issue of artificial currency is how to ensure the reliability and credibility of currency ownership and transaction records. Sovereign credit currency is guaranteed by the reliable and credible national regime represented by the central bank. Bitcoin is also a bookkeeping currency system. It uses four key technologies or mechanisms to allow each participant to compete to record currency ownership and payment transactions based on their own interests and ensure their reliability and credibility.

The first key technology is the distributed consensus mechanism.

It transforms the general ledger of fiat currency controlled by the central bank into a distributed general ledger that everyone can copy and save. The ownership and payment of currency are based on the consistent records of more than 51% of the general ledger. When the general ledger is distributed among hundreds of millions of participants around the world, the difficulty of colluding to tamper with or forge accounts exceeds that of hackers conquering any bank system.

The second key technology is blockchain technology.

It compresses all the information of each account page of the general ledger into a short summary through a hash function, and then embeds it into the next account page. In this way, each summary contains the information of all previous account pages through the summary, thus linking the entire account book into an information chain, so that: 1) all details are locked in the latest string of summaries (i.e. hash values), and distributed ledgers around the world only need to check the hash values ​​to reconcile; 2) all historical transactions are locked in the latest account page, and any tampering with history will be discovered; 3) each account information is tied to other account information, and tampering with an account information will be resisted because it harms the interests of everyone. This technology brings credibility to the Bitcoin blockchain that is no less than the credit of the central bank, and this credibility continues to increase with the accumulation of historical data in the general ledger and the expansion of the user base.

The third key technology is asymmetric encryption technology.

It connects real people with accounts in the general ledger through two asymmetric codes, "address" and "private key". The address here is equivalent to the account in the general ledger, and the private key is equivalent to the corresponding payment password. The so-called "asymmetric" means: 1) The corresponding address (account) can be inferred from the private key (password), but the private key cannot be inferred from the address, so the public address will not disclose the private key; 2) After the private key is used to sign and authorize the transfer payment instruction of the corresponding account, the corresponding address can be used to verify whether the payment signature authorization is true without disclosing the private key. In this way, by mastering the private key, real people have actual control over the bitcoins in the general ledger.

The fourth key technology is the proof-of-work accounting mechanism.

It is used to ensure that new transactions are recorded as unique new account pages and added to the general ledger, thereby maintaining the consistency of the distributed ledger. Under the rule that everyone can keep accounts, the Bitcoin system allows everyone to participate in the accounting competition by guessing and calculating a hash value that meets special requirements. However, only one person can successfully record a new account page every ten minutes or so, and the others copy the account page and add it to the general ledger they save. In this way, the distributed ledgers can be consistent with each other. At the same time, successful account keepers can receive a reward of 12.5 bitcoins, which not only encourages accounting, but is also the only way to issue new coins. The new coin accounting reward will be reduced by half every four years or so, thus eliminating the inflation problem of sovereign currencies.

Through the above four technologies or mechanisms, Bitcoin can safely and reliably maintain a bookkeeping currency system, and ensure that each private key owner has actual control over the currency on the corresponding address, and complete secure transfers through signatures and verification, thereby realizing the basic payment function of currency. In addition to replacing sovereign credit with the credibility of blockchain (essentially trust in the selfish nature of people), there is no essential difference between the payment function of Bitcoin as a bookkeeping currency system and that of legal currency. Therefore, technically speaking, the Bitcoin system is indeed a monetary system, and the circulating Bitcoin is a currency.

4. Is Bitcoin used as a currency?

The Bitcoin system technically has the function of currency, so is there anyone using it as currency? The answer is: Yes, and the scale is growing.

The first transaction known to the public using Bitcoin was the purchase of two pizzas by Laszlo with 10,000 Bitcoins on May 22, 2010. There may have been earlier transactions, but this is the one that people talk about the most. Buying pizza was an accidental application. Bitcoin was first widely used as a currency in the field of illegal transactions. The most famous one was the Silk Road website that emerged in early 2011. It mainly used Bitcoin transactions, with more than 1 million users, and 70% of its transactions were related to drugs. This is mainly because Bitcoin has a strong anonymity, and online payments are not as easy to trace as digital legal currency. In addition, financial regulatory authorities in various countries do not understand Bitcoin yet, and lack corresponding regulatory laws and technical means. In October 2013, Silk Road was seized by the FBI, and the illegal use of Bitcoin was curbed, but legal applications have since risen rapidly.

Bitcoin's innovation and openness have attracted more and more supporters, some of whom accept Bitcoin payments in their own shops or persuade other shops to do so. In 2013, the coinmap.org website began to register physical shops that accept Bitcoin on the map for free and provide search and retrieval services. Currently, nearly 8,000 shops around the world have been registered. Some multinational companies have also accepted Bitcoin payments, including Paypal, Microsoft, Dell, Expedia, Overstock, etc. Recently, Steam, the world's largest online game sales platform, cancelled the Alipay payment channel and opened Bitcoin payments instead.

Since the main economic transactions of enterprises willing to accept Bitcoin payments are still completed in legal currency, and the exchange rate of Bitcoin to major legal currencies fluctuates greatly, accepting Bitcoin payments increases business risks. For this reason, third-party payment institutions that specialize in providing Bitcoin payment exchange services have emerged, such as Bitpay invested by Li Ka-shing and Coinbase invested by IDG. They provide technical support to companies willing to accept Bitcoin payments, and promptly exchange the Bitcoins received by these companies into legal currency. More than 4,000 companies have accepted Bitpay services, including PayPal, Microsoft, Virgin, Wordpress, Newegg, etc.

Bitcoin transactions are more common within the Bitcoin industry, such as buying and selling mining machines, wallet equipment, souvenirs and other commodities, as well as investment crowdfunding. In addition, the more widely used areas also include donations (commonly known as rewards) and VPN services. Many public welfare or open source projects such as Wikipedia, Khan Academy, and Mozilla Foundation accept Bitcoin donations, and domestic Bitcoin enthusiasts "reward" their favorite articles with Bitcoin, which has become a knowledge market transaction model of paying for quality.

A recent major development is the launch of Openbazaar. This is an e-commerce platform similar to Taobao and eBay. The difference is that Openbazaar does not have a centralized company to manage all traders. Merchants use the client to establish their own store servers and form a borderless store network through a distributed mechanism similar to Bittorrent and Bitcoin. Bitcoin is mainly used in the network. With the help of the Onename website, a trusted connection between Bitcoin addresses and natural persons is established. Bitcoin's multi-signature technology is used to implement an open and competitive third-party arbitration mechanism. Combined with the historical evaluation system of transactions, the basic framework of a borderless e-commerce platform is constructed. Openbazaar began public testing in August 2014 and was officially launched in April 2016. At present, 17 versions of the official client have been released and are in rapid iteration.

With the promotion of Bitcoin payment, some governments have also gradually recognized the currency function of Bitcoin. In August 2013, the German government took the lead in recognizing the legal currency status of Bitcoin, allowing it to be used for tax payment and other legal purposes. The US government also turned to support the development of Bitcoin after the congressional hearing on Bitcoin in November 2013. In 2015, itBit obtained the first digital currency license in New York State. In October 2015, the European Court of Justice ruled that Bitcoin is a means of payment, and its purchase and sale are regarded as foreign exchange, and no value-added tax is required. In 2016, Circle obtained the first electronic currency license in the UK, and the governments of China, Russia and other countries have gradually turned to publicly affirming the innovative significance of Bitcoin technology to the monetary system.

5. Is Bitcoin a better currency?

As a new currency, Bitcoin was not promoted by the government in the early days and was even suppressed. There were very few things that could be bought with it. Why are more and more people willing to buy, hold and use it? The fundamental reason is that these people believe that Bitcoin is a better currency.

Compared with the sovereign credit currency system, Bitcoin has four main advantages:

1) Reduce excessive government intervention in currency.

In theory, the monetary authorities of legal tender can issue any amount of currency at any time without collateral. Although the government generally uses the right to issue currency based on national interests, it still prefers to issue more currency in order to expand power, pursue political achievements or avoid conflicts, which leads to continuous inflation. The frequent use of monetary policy by the government will also distort market price information and damage market efficiency. The issuance speed of Bitcoin is pre-set based on the consensus of all parties, which is stable and predictable, eliminating inflation and reducing excessive intervention in monetary policy.

2) Eliminate exchange costs and fluctuations caused by sovereign borders.

Unsecured fiat currencies will inevitably lead to different countries’ sovereigns trying their best to maintain their own sovereign currencies, thus forming a multi-currency international monetary system with one country and one currency. Under the general trend of economic globalization, the exchange costs, exchange rate fluctuations, and the design, adjustment, and friction of exchange rate systems of different countries between fiat currencies of different countries have become major obstacles to global economic development, and are also an important source of international financial risks and economic turmoil. Bitcoin does not rely on any sovereignty, has no physical form restrictions, and can circulate in different countries. Once a mature global currency application network is formed, it will be able to completely eliminate exchange costs and risks.

3) Reduce the cost of credit verification in the fiat currency banking system.

Sovereign credit currency is essentially based on trust between people. To ensure the reliability of recording currency ownership and transactions, it is necessary to establish a sound system within the banking system led by the central bank, and conduct multi-level regulation, review, supervision, rewards and punishments. This requires a lot of social resources, such as luxurious buildings, high-paid employees, etc., and the operating cost is high. The Bitcoin system does not require interpersonal trust to ensure the reliability of the ledger. Many Bitcoin payment companies serving the world are small companies with 50 or even less than 5 people, which saves a lot of social resources.

4) It is easier to innovate and develop than the fiat currency system.

The centralized nature of the sovereign credit currency system leads to a high threshold for entering the monetary banking system, which limits the size of the group engaged in innovation. Once a company enters the fiat currency banking system, it will have a certain monopoly advantage, have great vested interests, and lack the motivation to innovate. In addition, the complex system established by the fiat currency banking system to solve interpersonal trust also makes innovation very difficult. In recent years, traditional commercial banks have been under tremendous competitive pressure from Alipay, WeChat Pay, etc., partly due to insufficient innovation. The rules, protocols, source code, and general ledger of the Bitcoin system are completely open and open source. Any individual or enterprise can innovate and transform them. Recognized improvements and innovations will be adopted by all through the consensus mechanism, making it easier to innovate and develop.

The direct reason for the emergence of sovereign credit currency is that when an economic crisis comes and currency and credit face deflation, the monetary authorities need to provide sufficient liquidity to curb the deflation and avoid the occurrence of a major crisis. This seems to be the biggest advantage of sovereign credit currency, and it is also the most important reason why the government and academia oppose Bitcoin. However, the advantage of Bitcoin is that it continues to play a role in the market, while the emergency of legal currency to curb major crises is accidental and short-term. The continuous inflation caused by the legal currency system is the result of making short-term means a daily routine, just like taking tonic medicine for serious illness as a daily staple food.

In fact, "deflation exacerbates economic crises, and more liquidity is needed when crises come" has become a consensus among the government and academia. Even if Bitcoin becomes the main currency, society still agrees that the government should provide sufficient liquidity through various means in times of crisis. For example, establishing a monetary policy reserve fund, lowering the reserve ratio, issuing government bonds, lowering interest rates, etc. In the most urgent times, it is still possible to suspend Bitcoin withdrawals from banks through decrees to curb tightening. The key is that the functions and powers of the government will not disappear with the application of Bitcoin. In the long run, people can make wise trade-offs between long-term mechanisms and short-term policies.

6. Does Bitcoin have intrinsic value?

From the perspective of currency functions, Bitcoin has obvious advantages over current sovereign currencies, which is also the fundamental reason why governments choose to accept and actively study Bitcoin after resisting and waiting. However, it seems that there is still no answer to whether Bitcoin has intrinsic value? Physical currencies such as wheat, cattle, sheep, and gold have practical uses and thus have value. This value is the premise for them to become currencies. Although paper money that is separated from the gold standard has little value in itself, it seems to have value because the government provides guarantees for it. So, Bitcoin has no other uses and no one guarantees it, so where does its intrinsic value come from? This question reflects people's long-term misunderstanding of the intrinsic value of currency.

Whether an item has economic value depends on whether it has a certain purpose and is scarce. For example, bread is edible and scarce, so it has value; air is necessary for life but not scarce, so it has no value. This understanding of value has become common sense. However, when people understand the value of money, they ignore this common sense. They must find out whether the currency can be eaten, used as jewelry, and other similar uses, and then recognize its intrinsic value, but forget that the purpose of the currency itself should be to serve as a medium of exchange. Whether the currency has intrinsic value should depend on whether it can become a medium of exchange to facilitate transactions and maintain a certain degree of scarcity.

The emergence of early physical currencies, such as wheat, was because people found in life that among many items in use, wheat was generally accepted and held by everyone, and it was more convenient to use as a medium of exchange. For this reason, wheat had a second use besides being able to fill the stomach - a medium of exchange. At this time, people had two demands for wheat, one for eating and the other for exchange. With a fixed supply, the intrinsic value of wheat increased. In addition to its original intrinsic value as food, it also had an intrinsic value as a currency.

When people use gold as currency, the intrinsic value of gold can also be divided into the intrinsic value of gold as currency and the intrinsic value of gold for other purposes (such as decoration). However, since the demand for gold as currency far exceeds that for other purposes, the intrinsic value of gold as currency far exceeds the intrinsic value of gold for other purposes. In other words, the intrinsic value of gold mainly comes from its use as a medium of exchange. It can be said that gold is so valuable because it has become currency.

The emergence of coinage has made the intrinsic value of money more clearly manifest. In the era of coinage, a gold coin with a one-pound mark has the same purchasing power as a pound of gold, that is, the same intrinsic value. However, a pound of gold coin actually contains less gold than a pound of gold. The difference minus a small amount of coinage costs is the benefit obtained by the coiner, that is, the coinage tax. Despite the reduction in weight, people are still willing to use gold coins instead of gold. Why? Because gold coins are more convenient to trade! In other words, because gold coins are more convenient to trade than gold, the same physical content achieves a higher intrinsic value. The coinage tax is the value shared by those who increase this intrinsic value.

The emergence of gold standard paper money made transactions more convenient, but the scarcity of paper money was guaranteed by the issuer's gold reserves. Therefore, gold standard paper money was only a representation of gold and had no intrinsic value. Its purchasing power came entirely from the value of gold. However, when the deflation crisis caused paper money to break away from the gold standard and become a sovereign credit currency, its nature changed fundamentally: the state achieved the scarcity of paper money through its power rather than its gold reserves, and paper money was easier to exchange, so paper money as a sovereign credit currency had intrinsic value.

Some people may question why the state makes paper money have such a high intrinsic value? In fact, this is no different from the painter making paper have a higher intrinsic value. They both created something that is both scarce and useful, one thing can be appreciated, and the other can be exchanged. Some people will emphasize that legal tender has purchasing power because it is forced to be redeemed by the issuing government, and it has no intrinsic value. However, after the fall of the Somali government, people still use the paper money issued by the government for a long time. Why? Because it is still scarce and useful, and it still has intrinsic value.

If you understand that sovereign-backed paper money has intrinsic value, then it is not difficult to understand that Bitcoin has intrinsic value. Bitcoin guarantees scarcity through a distributed consensus protocol, and has more advantages over legal tender, making it more conducive to exchange. Therefore, it also has intrinsic value - the value of currency.

The value of money has been hidden in other uses of physical objects since the beginning of physical currency, and has been ignored by people. With the advent of sovereign credit currency, a completely artificial currency, its intrinsic value should have been fully recognized, but people were confused by its predecessor, the gold standard paper currency, and the legal tender of state endorsement, and could not get rid of traditional understanding. Only with the emergence of Bitcoin, which is purely digital, has no other uses, and does not rely on national credit, can we see the value of money more clearly and understand the intrinsic value of various currencies in the past.

7. Why does the price of Bitcoin rise and fall so sharply?

Since Bitcoin has the property of being a better currency, it has intrinsic value. So why does its price rise and fall so sharply? Since August 2010, there have been 32 days when the daily increase of Bitcoin price exceeded 20%, with the largest daily increase reaching 173%, and 10 days when the daily decrease exceeded 20%, with the largest daily decrease reaching 64%. What impressed the domestic market was that Bitcoin soared from 800 yuan in September 2013 to 8,000 yuan in December, and then fell all the way to 900 yuan in January 2015, and then rose sharply to around 5,000 yuan in June 2016. Shouldn't the intrinsic value be stable?

Indeed, intrinsic value is not as stable as the natural properties of an object, such as weight and density. Intrinsic value depends on the relationship between the scarcity of an object and people's demand. The actual market price is also affected by people's understanding of this relationship. Although the scarcity of Bitcoin is certain, people's demand for it is very unstable, especially affected by people's expectations of its intrinsic value and development prospects. This is the main reason for the huge fluctuations in Bitcoin prices.

The main reason why Bitcoin has gone from zero to being bought and sold and its price rising continuously is that more and more people are beginning to understand it and realize that it has the potential to become a better currency, so they buy and hold it in anticipation of its appreciation. As more and more people buy and hold it, its price will rise. When the mainstream media or major events lead to a sudden increase in the number of people paying attention to and understanding it, demand will increase rapidly and the price will skyrocket. For example, in the spring of 2011, Forbes published a report on Bitcoin, which pushed the price up 10 times, from 86 cents to $8.89; in September 2013, CCTV and other mainstream media widely reported on Bitcoin, which was also an important reason for the subsequent price surge to 8,000 yuan.

However, there is still a long way to go from a better currency in theory to a better currency in reality. As a major man-made economic mechanism, Bitcoin is still experimental and there are many uncertainties, including the possibility of complete failure. These risks mainly come from:

1) Technical risks.

For example, asymmetric encryption algorithms may be cracked, protocol codes may have vulnerabilities, certain types of network attacks may paralyze the entire system, and technical problems may occur during system upgrades. These are the main risks faced by Bitcoin in its early stages of development. After all, Satoshi Nakamoto was alone and his programming skills were not very good. With the addition of more talents, the code was constantly updated, many potential technical risks were eliminated, and Satoshi Nakamoto also announced his withdrawal from the core development team. After 7 years of operation and a market value of over 10 billion US dollars, Bitcoin has survived countless attacks. Now, the possibility of not being attacked despite major technical risks is very small.

2) Competition risk.

Since Bitcoin is open source, a programmer can copy a new coin in a few days. Such coins are called "altcoins", and there are thousands of them so far. There are also some that inherit the main features of Bitcoin, but make improvements in some aspects, which put a certain competitive pressure on Bitcoin. They can be called "competitive coins", which theoretically pose a threat to the market and value of Bitcoin. However, the biggest threat may be the sovereign digital currency formed by the central bank trying to transform legal currency with blockchain technology, and other countries are also trying. However, compared with Bitcoin, altcoins and competitive coins are more fragile and need to face more tests. Sovereign digital currencies mainly absorb the advantages of blockchain technology in saving credit costs, while the disadvantages of sovereign currencies such as excessive government intervention, exchange rate costs and risks, and insufficient innovation motivation still exist.

3) Policy risks.

Bitcoin becoming a currency will have a significant impact on the operation of existing currencies, financial supervision, monetary policy, etc. It will encounter resistance from the traditional monetary and financial system, and will also generate new social and economic problems and new policy control issues. The continuous decline in prices from 2014 to 2015 was largely affected by relevant domestic policies. Although since 2013, monetary authorities in countries including the United States, China, and Russia have gradually shifted from resistance to gradual recognition, as Bitcoin gradually enters the mainstream economy, the friction will be greater, and there is still great uncertainty at the policy level.

4) Transformation risks.

After seven years of development, Bitcoin has accumulated considerable experience and lessons. It is relatively mature in technology, has formed competitive advantages, and has a looser policy environment. It is moving towards the mainstream economy, and the overall risk has dropped significantly compared to two years ago. At present, the biggest risk facing Bitcoin is the risk of transition from a niche ecosystem to the mainstream economy. In the previous niche ecosystem stage, the main focus was on technical risks, the system ecology was simple, and the problems and goals were clear. Entering the mainstream economy requires first responding to the test of system capacity and robustness caused by the rapid expansion of the market, and also solving the problem of interest compatibility in a more complex industrial ecology, and making trade-offs between system robustness, decentralization, and expanding market size, and these issues are all considered on a global scale.

As a great experiment that attempts to change the lifeline of the world economy, Bitcoin's possible brilliant prospects and many potential risks make its intrinsic value itself very uncertain. The Bitcoin system and its ecology involve knowledge in many fields such as computer hardware, programming, cryptography, economics, finance, monetary policy, etc., and there is a very high learning threshold to fully understand its principles, prospects, and risks. Even if you fully understand it, you will have different judgments on different development directions and risks, and they will change with the development of the situation. Therefore, the understanding and expectations of Bitcoin's intrinsic value and its development prospects will vary greatly among groups, and will fluctuate greatly over time. An interesting phenomenon of "fans turning to haters" in the Bitcoin ecology can well illustrate this point. Some "Bitcoin fans" who strongly supported Bitcoin in the early days may suddenly lose confidence in the Bitcoin system or its ecology, and turn into "Bitcoin haters" who fiercely attack Bitcoin.

In general, Bitcoin is still a currency that circulates in a very small range. It is only because of its significant theoretical advantages and people's high expectations for its intrinsic value in the future that there is a high demand, pushing up the market price. Compared with actual demand, the demand brought by expectations is more volatile and will fluctuate greatly with the technical improvement, application expansion and specific manifestation of various risks of Bitcoin. Only when the development prospects of Bitcoin gradually form a consensus among the public and the demand generated by the prospect expectations is gradually replaced by the actual transaction demand, will this volatility be significantly reduced.

8. Bitcoin is a great social experiment

Bitcoin is the first viable monetary system that humans have consciously created. This is a great economic experiment, which returns the lifeblood of the market from the government to the market, and provides the Internet with an endogenous currency, promoting the globalization and networking of the economy, becoming a new driving force for world economic growth.

The market is the most important decentralized economic organization formed by the evolution of human society. It can organize scattered economic entities and allocate their various economic resources to achieve maximum output and optimal distribution on the premise of protecting ownership. Market prices are the core information system for the market to realize its functions, while currency is the yardstick of price and the medium of circulation, which can be called the heart of the market. With the rapid development and globalization of modern market economy, the economic crisis has become a major market stubborn disease. In order to solve the crisis, especially the credit tightening at the beginning of the crisis, the government took over money and created sovereign credit currency. The heart of the market was taken out of the body and beat under the intervention of doctors. Although this can cure diseases in a timely manner, it damages daily functions and brings other diseases. Bitcoin returns money to the market in a way that follows the principle of decentralized market organization and puts the heart back into the body, which is of great significance to the long-term and healthy growth of the global market economy.

The Internet is the most important technological innovation since the end of the last century and is a fundamental change that drives the Fourth Industrial Revolution. It not only narrows the world and enhances cultural exchanges, but also provides unprecedented broad space for the globalization of the market economy. However, although people can understand economic resources and price information around the world through the Internet, due to the division of sovereign currencies, a large number of transactions cannot be implemented due to exchange costs, exchange risks and exchange rate systems. The emergence of Bitcoin has enabled currency to surpass sovereign division, greatly reduce the transaction costs of international trade, and can fully utilize the advantages of the Internet and explore the global economic growth potential in the Internet era. For this reason, Bitcoin and blockchain technology are also considered to be a deep change in the Fourth Industrial Revolution.

Bitcoin is not only a great economic experiment, but also a great social experiment. The important feature of the progress of human society's civilization is that each individual develops more freely. The more free development of individuals in intelligence, labor, consumption, and thoughts means that society will become more and more complex. Organizing complex societies in an orderly manner and realizing individual freedom as much as possible is the eternal theme of civilization progress. The market organizes free individuals through decentralized voluntary transactions, promoting the progress of civilization. Bitcoin also establishes a monetary system that originally needed to be maintained through decentralized technologies and mechanisms, allowing individuals spread all over the world to organize more freely, and also promoting the progress of civilization.

Not only that, Bitcoin's monetary experiment also provides ideas and technologies for solving the organizational problems of complex society in other fields. Bitcoin's core technologies and mechanisms are simply called "blockchain technology". They can not only be used to build a monetary system, but also to various social and economic fields that rely on interpersonal trust, such as property rights, securities, insurance, notarization, elections, charity, etc. At present, the exploration of blockchain technology application in various fields is in full swing, and the popularity of the term "blockchain" has even surpassed "bitcoin". With the development and maturity of these explorations, the importance of Bitcoin to the progress of human social civilization will be further revealed.

After more than seven years, Bitcoin has achieved initial success by virtue of its advantages as a medium of transactions. But it is still an experiment, facing a major challenge to enter the mainstream economy and be tested by the global market. Therefore, there are still many uncertainties, and the price surge and plummeting will continue. Regardless of whether this currency experiment is ultimately successful, its innovative significance has become increasingly clear. It should be treated with a more positive attitude, making it an important driving force for the fourth industrial revolution and the global economic recovery.