Countdown to Bitcoin Production Reduction: "Gold-like" Market Needs to Be Strengthened

Bitcoin is about to experience its second halving in history.

According to the countdown to Bitcoin production reduction on the IDGUI website, as of the time of writing, the time for Bitcoin's second halving will be 4 p.m. on July 9, which is Saturday this week .

With the expected reduction in production, the price of Bitcoin has been fluctuating upward for several days after experiencing a sharp rise and fall recently. According to the market data on Huobi.com, as of 12:00 noon on July 6, the price of Bitcoin was hovering around 4,560, a cumulative increase of more than 30% from the lowest price on June 23.

Many people related to Bitcoin believe that the arrival of production cuts will lead to a tightening of Bitcoin supply, which will in turn drive up expectations of its secondary market price; however, at the same time, recent international events such as Brexit and the rise in gold prices have also driven Bitcoin's upward trend.

But it is worth mentioning that in the face of strong investment and speculative attributes, the sharp fluctuations in Bitcoin prices are making it a virtual security or commodity at the de facto level , while its originally defined currency payment function is being continuously marginalized.

  Violent fluctuations before production cuts are expected

Faced with the upcoming production cut, the price of Bitcoin has fluctuated significantly in the past six months.

Data from Huobi.com shows that Bitcoin has risen from 2,760 yuan at the beginning of the year to around 4,560 yuan, with a cumulative increase of 65.22% in half a year; during this period, the highest price once hit 5,100 yuan, and then fell sharply to around 3,600 yuan only in four consecutive trading days, and then continued to rise to the current price.

In fact, the first production cut in Bitcoin’s history triggered a short-term surge in Bitcoin, but in the eyes of investors, the expected rise brought about by the second production cut has been “overdrawn” to a certain extent by the market conditions in the past year.

"The price of Bitcoin exploded once after the first production cut, which was at the end of 2012, at about $13. Then in January of the following year, the price directly rose to more than $260." Bitcoin investor Yang Jingyuan said, "But we can't simply draw a parallel with more than three years ago, because judging from the trend before the production cut, Bitcoin had already seen a relatively large positive overdraft. In 2012, the production cut was still an unprecedented event, so the expectations were not clear."

In September last year after the A-share market crash, Bitcoin started a bull market that lasted for a year and a half. The price has risen from 1,430 yuan to the present, with a cumulative increase of 218.88%.

"The sharp drop in Bitcoin last month was probably related to profit-taking due to the rapid rise in price. Bitcoin also has a relatively sound short-selling mechanism, so some people were able to make profits in the opposite direction," said Yang Jingyuan.

In fact, in addition to the expectation of production cuts, the recent rise in risk aversion in the international market caused by events such as Brexit will also drive up the price of Bitcoin.

On June 23, after the announcement of the Brexit majority in the UK referendum, the price of Bitcoin against the RMB and the US dollar as shown on Huobi.com rose by 18.94% and 20.92% respectively.

"13% of Huobi's trading users buy Bitcoin as a safe-haven asset. The success of the Brexit referendum will promote risk aversion." Huobi co-founder Du Jun believes, "But the impact of this sentiment will not be as exaggerated as in 2013. First, the trading volume of Bitcoin is relatively small and it is easy to be affected. Second, the price of Bitcoin was relatively low at the time, so the increase was easy to increase."

  A golden market?

Compared with its previous lows, Bitcoin is still slowly climbing, and in the view of industry insiders, Bitcoin's multiple characteristics give it strong gold-like properties.

According to Mingxing Xu, founder and CEO of Bitcoin platform OKcoin, Bitcoin's two attributes of "constant total amount and divisibility" and "stable blockchain technology" give and guarantee Bitcoin's gold-like qualities.

"On the one hand, the total amount of Bitcoin is constant, and it is more divisible than gold. It has an obvious hedging function in the case of uncertainty in the international financial situation, which has also attracted many investors to trade and pay attention." Xu Mingxing said, "Another reason is that the underlying technology of Bitcoin, 'blockchain technology', has gradually been verified in practice and recognized by the market."

In his view, the stability of blockchain technology is also the key to ensure that Bitcoin can continue to exist in a gold-like form. The so-called blockchain is the distributed accounting technology that is currently sought after by sellers in the capital market. It allows the issuance, circulation, and transaction records of Bitcoin to be stored in various nodes of the network, thereby achieving the "decentralization" of the registration and settlement of a certain type of virtual assets, making it difficult to forge and tamper with its transaction data.

"If we compare the recent upward trend of precious metals such as gold and silver , Bitcoin's similar characteristics will eventually maintain a certain positive correlation with their price changes," said an investor who has held Bitcoin for a long time.

It is worth mentioning that the recent rise in risk aversion in the international market has also led to an increase in the prices of precious metals such as gold and silver. This phenomenon has also caused many color stocks such as China National Gold Group and Jingui Silver to hit their daily limit.

However, in the view of industry insiders, the constant total amount of Bitcoin and the tightening phenomenon brought about by the expectation of production reduction will cause it to evolve into an electronic security with stronger investment attributes, and its monetary attributes will eventually be diluted.

"If it is to be used as a currency, it must first ensure its relative price stability, that is, the price of the previous day and the price of the next day will not differ too much, and the volatility must be within a certain range." A macro analyst at a large securities firm in Shenzhen believes that "for example, the legal tender of the late Nationalist government or the mark during the Weimar Republic, in the end, due to inflation, their monetary properties were invalidated. Compared with gold, which has a constant total amount, the problem that Bitcoin may face is supply contraction, and ultimately it is negatively correlated with the money supply ."

"If gold-like substances were in the era of non-credit currencies, they could potentially be used as currency. But now, whether it is the gold standard or Bitcoin, from a monetary perspective, they can no longer meet the current economic development speed of society," said Yao Jianfeng, chief analyst of Zero Finance.

In fact, regulators in some Western countries, including the United States, have defined Bitcoin as a security or commodity .

"This issue is controversial. For example, the US SEC defines Bitcoin as a 'security' and any business related to it needs to be regulated," said Xu Mingxing. "The US CFTC (Commodity Futures Trading Commission) regulates it like commodities like gold and oil , and trading behavior needs to comply with the market rules of commodities."

It should be noted that these definitions, whether currency, securities or commodities, have not yet been accepted by domestic regulatory authorities. Previously, the central bank's definition of Bitcoin was still only a virtual commodity.