It’s not that complicated. Let’s talk about Bitcoin in simple language.

     We all know that Bitcoin is a virtual currency, but what exactly is Bitcoin? Baidu Encyclopedia defines it as "Bitcoin is not issued by a specific monetary institution. It is generated through a large amount of calculation based on a specific algorithm. The Bitcoin economy uses a distributed database composed of many nodes in the entire P2P network to confirm and record all transactions, and uses cryptographic design to ensure the security of each link in the currency circulation." I believe that many people will feel confused when they first see this definition. Specific algorithm? Calculation? What is P2P...

     When I first saw Bitcoin, I had no idea what kind of currency it was, even though I read about it in the Wikipedia or related articles. But I can be sure that Bitcoin is indeed controversial. Next, I would like to try to introduce Bitcoin in simple language. This article may have many inaccurate points or wrong views. After all, I don’t know much about it, so I can only briefly talk about my own views.

What is Bitcoin?

     The concept of Bitcoin was first proposed by Satoshi Nakamoto, who developed the earliest Bitcoin issuance, transaction and account management system. With the mining of the first blockchain by Satoshi Nakamoto on January 3, 2009, the first 50 Bitcoins were released.

     Bitcoin is different from the central settlement system used by the banking system in our daily lives (a reputable third party is required to manage the entire system). Bitcoin avoids duplicate payments through a public distributed ledger. All historical transactions of Bitcoin are recorded in the ledger in the form of blocks. This ledger is not stored in a central server, but is open to the entire network and stored on every computer connected to the Bitcoin network.

After a complete transaction instruction is issued, the information spreads rapidly throughout the Bitcoin network. Network nodes begin to calculate whether the transaction is valid (i.e., whether the account balance is sufficient to pay), and try to generate a block containing the transaction information. When there are 6 blocks containing the transaction information, it is considered to have been verified and the transaction is officially confirmed to be successful.

     New bitcoins are created by running software, and people call the fight for these newly generated bitcoins mining. The essence of mining is to fight for the right to record accounts. In the world of Bitcoin, a data block is recorded on the public ledger of the entire network approximately every 10 minutes. This data block contains all transactions verified globally within these 10 minutes.

     The right to confirm this data block needs to be fought for, and each time a new block is grabbed, the winner is allowed to add a sum of money to his account as a reward. If a miner fails to grab the right to record within 10 minutes (in principle, only one miner can grab it), his efforts are in vain and he will have to enter the next round of competition for the right to record.

     The way to fight for the right to keep accounts is actually to play a cryptographic game called hashing, and the specific algorithm is SHA-256 (a typical secure hashing algorithm). Due to the randomness of the hashing result, there is no way to optimize the algorithm. You can only start from zero and count upwards. Whoever has stronger computing power has a greater chance of finding the number first. Therefore, the possibility of "discovering" new data is based on the comparison between personal computing power and the total computing power of the entire network.

     In the Bitcoin network, the speed of new coin production is pre-set. The generation of each transaction block is maintained at about 10 minutes, and the initial reward for not successfully grabbing a block is 50 bitcoins. Every time the size of the blockchain reaches an integer multiple of 210,000 (which is reached once every 4 years), the reward for successfully grabbing a block will be halved, from 50 bitcoins to 25, and then from 25 to 12.5. By analogy, the entire system will generate 21 million bitcoins around 2140, reaching the pre-set total limit. After that, the number of bitcoins will no longer increase, and the income of Bitcoin miners will be paid by transfer fees.

Rare must have value?

     Whether Bitcoin has value or not, I think it depends on whether people are willing to recognize its value. People may say that Bitcoin is a "rare currency", just like rare metals, because according to its algorithm, the number of Bitcoins mined will be halved every four years, which is convergent, and the total number of Bitcoins will not exceed 21 million in the end.

     Well, in fact, it is indeed "scarce", but does scarcity necessarily mean value? Gold is of course scarce, but is it really valuable? Gold is now more of an ornamental value, unlike rice or vegetables, which have edible value and can feed people.

     Perhaps we can imagine that in the future, when technology is more important, people will prefer technology-related decorations rather than gold. Moreover, if better materials are invented to replace gold in terms of fine craftsmanship, then what is the value of gold? Scarcity? Yes, things are valuable because they are rare, but to give an inappropriate example, just as every leaf is unique, every leaf is scarce, but we cannot use leaves to go shopping.

     Therefore, I prefer to understand the value of gold as a rule set by the "players". It is just that among the materials that everyone can find, gold happened to be found to be a rare, rust-resistant, easy to preserve, and even relatively soft and easy to cast material. Therefore, the original game makers set the currency standard to measure and circulate gold as the standard. Moreover, China did not use gold as currency at first. Before the Ming Dynasty, copper was used as currency, and later silver was used as currency. It was a silver standard, and gold existed as a luxury (this can be understood as Chanel is a luxury but not a currency).

     I just want to make two points. First, scarcity does not mean value. Second, value comes from who sets the value and whether it is accepted by everyone. The government uses the country as a guarantee to recognize the value of gold and allows everyone to use gold as currency for transactions in the country. Whether out of trust in the government or because there is no other choice, everyone accepts this setting. Gold is thus used as currency. The same is true for the legal tender issued by various countries. Back to Bitcoin, gold or legal tender is guaranteed by various countries and gives them value. So does Bitcoin have value? If so, who gives it value?

Assuming Bitcoin has value

     The topic of whether Bitcoin is valuable is really too big and the answer is very complicated. However, we can make an assumption that Bitcoin is valuable and analyze where its value comes from. If Bitcoin is valuable, I think its value comes from everyone's investment in it.

     Next, I want to compare Bitcoin to gold, not legal tender. Because legal tender, in addition to being regulated by national laws, also has the right to issue legal tender. The amount of currency issued is determined by the governments of each country. There is a risk that a large amount of money printing by the country will lead to inflation. Although there will be corresponding rules and restrictions, this problem does exist. If you can only choose one of gold and legal tender to compare Bitcoin with, it may be more reasonable to classify Bitcoin with gold compared to legal tender, which is a currency controlled by the government.

Let’s make an analogy with gold.

     Gold is created in nature, and Bitcoin is created in the algorithm in the computer (of course, this algorithm is created by humans, but whether the algorithm created by this or these people who created Bitcoin is good enough is not discussed for the time being). When people first thought that gold had value (the country recognized it as currency or as a luxury), it may not have been so certain at first, and not many people even knew about gold, so some people started a gold rush; when Bitcoin appeared, people were not sure whether this virtual currency had value at first, and not many people knew about this currency, but some people were attracted by the concept of this currency and some were attracted by the benefits behind it, so these people tried to start "mining" to obtain Bitcoin.

     After the status of gold was determined, those who successfully mined gold gained a lot of wealth; it seems that we can't go on any further because the status of Bitcoin has not been determined. However, we can discuss it individually. Because of the mechanism of halving Bitcoin mining every four years, the initial "miners" have less competition and get more Bitcoin rewards. Some of the initial Bitcoin miners, just like in the gold rush, got a lot of Bitcoin, and then there were Bitcoin stocks. Some people cashed out when Bitcoin soared and got a lot of wealth... Well, it's a rough analogy. Although there are gradually merchants willing to accept Bitcoin transactions or countries like Germany that accept Bitcoin, it is not universally recognized after all. So even if Bitcoin has value, it is unstable now. Let's continue with the analogy.

     After the value of gold was initially determined, people began to store large amounts of gold, and with the guarantee of the state, they could trade with gold. When the state issued legal tender, people would also use the legal tender to purchase gold for storage or investment. The more people invested in gold, the more stable gold became. It is better to say that the government needed to ensure the stability of gold. The more people held gold, the greater the impact of gold would be. In order to ensure the stability of the country, the government had to ensure the stability of gold.

     For Bitcoin, it is not traded with the guarantee of the state, but more among a part of people who are willing to accept Bitcoin. The key point is this "part". At first, this "part" was a very small group, but gradually, it was found that this "part" was increasing, and even some countries joined this part. People use legal currency to invest in Bitcoin, and in some cases, they can use Bitcoin for shopping. People hold more and more Bitcoins. At this time, the problem arises. The influence of Bitcoin is getting bigger and bigger, and the government has to consider the connection between Bitcoin and national stability. So gold is the value of gold guaranteed by the state, and everyone starts to hold gold, while Bitcoin is that some people recognize the value of Bitcoin and start to hold Bitcoin, and this part of people is increasing.

     As more and more people invest in Bitcoin and its influence grows, what we should consider at this time may not be whether it has value, but that it must have value. In fact, many Bitcoin holders' "advocacy" for Bitcoin does not lie in their belief that it has value, but in the fact that their money is already tied to Bitcoin, and it cannot be without value.

     The analogy is almost here. This is what I think the value of Bitcoin comes from everyone's investment in it, and this conclusion is based on the assumption that Bitcoin is valuable. So is it valuable? In fact, this analogy does feel a bit similar to gold. Bitcoin may be seen to be aimed at creating a kind of gold in the Internet. As for whether it can really be the gold in the Internet, the discussion is back to the question of whether it is valuable. Doesn't it feel like this is equivalent to not saying anything... I can only say that the market is too complicated and my ability is limited and I can't see it clearly now.

Will Bitcoin go through the same development process as gold?

     Bitcoin wants to be the gold of the Internet, so can we consider that it may develop in a similar way to gold? Because there are indeed some similarities. For example, gold is of high value. A gold nugget may be worth tens of thousands of dollars. People initially need to keep the gold nuggets themselves. Later, for the sake of safety and storage, institutions similar to banks emerged to store gold and later legal currency for everyone.

     The current value of Bitcoin is not low. One Bitcoin is now worth about 300 US dollars. Moreover, the characteristic of Bitcoin is that even if the owner holds the private key, the private key represents all the Bitcoin assets you own and is kept by yourself. There is no such thing as a lost bank account. If the private key is forgotten or lost, all the Bitcoins can never be recovered. If such a "large value" of Bitcoin is really valuable, I believe everyone will be very uneasy about keeping it or carrying it with them, so institutions similar to banks will appear to help everyone store Bitcoin.

     Gold trading is becoming increasingly inconvenient, not only because it is not easy to carry, but also because the variety of commodity prices has a great restriction on this metal currency, so paper money appeared. However, Bitcoin, as a product of the Internet, has a natural advantage in this regard. It is easy to carry, and Bitcoin can be traded by decimal points. However, I do not think that the ability to trade by decimal points is a good trading method, because everyone is already accustomed to existing transactions, with legal tender in various countries as a standard for reference. For example, according to the RMB standard, if the price of a commodity is 0.00063152 Bitcoins, should everyone take out a computer to calculate the corresponding RMB price at the current rate of 1 Bitcoin: 2,500 RMB? However, this can also be solved. Perhaps a payment software can be designed to display the corresponding legal tender price in real time according to the corresponding rate when paying.

     Speaking of this, it still needs the legal tender of each country as a standard. People are used to such a consumption method, with legal tender as a reference. Even if we consider that people will generally use electronic money in the future, then Alipay or online banking can completely solve this problem. So what is the use of such a new virtual currency, an additional choice? Is it really beneficial to have this additional choice?

Issuing “official Bitcoin”?

     Bitcoin has a decentralized theory. Some people may think that this decentralization can solve the inflation problem of the government's currency issuance rights, and that Bitcoin will replace legal tender in the future. This is just overthinking. This decentralization is a good way to solve this problem, and it is also what economists from all over the world have been working hard to solve.

     However, Bitcoin, which has the characteristic of decentralization, cannot play this role. If there is a virtual currency that can replace the government's "free" right to issue currency and achieve decentralization, then this virtual currency must be a virtual currency similar to Bitcoin discovered by the official authorities of various countries.

     Bitcoin is created by an individual (or a group of creators) and then circulated around the world. If Bitcoin rises, it is more suitable as a currency that is used across regions, convenient, and has low transaction fees. If the currency is not issued by the country, it will lack certain control. If the country needs to conduct large-scale transactions, will it need to initiate a large number of transactions to collect Bitcoin? In addition, Bitcoin, a currency mechanism that is difficult to monitor, still has great disadvantages for national development. The country needs certain monitoring capabilities.

     Perhaps the decentralization of state-issued currency does not lie in canceling the state's right to issue currency, but in adding reasonable rules, such as the Bitcoin algorithm. The state uses an algorithm similar to Bitcoin to issue "official virtual currency". Because the total amount of currency is limited, the state can adjust the exchange rate between the official currency and the legal currency through macro-control.

     What algorithm should be used by the official virtual currency still needs to be studied. The algorithm of Bitcoin is not necessarily reasonable and there may be many areas for improvement, but the transparent and open characteristics of Bitcoin can be used. Bitcoin can check the flow of each fund, and everyone can check which wallet each fund went from and to which wallet. Although everyone does not know who the wallet belongs to, if the address is made public, all transactions of this address can be checked. For example, if the department discloses the address of its own virtual currency, everyone can check the whereabouts of the funds at this address. Isn't this a way to solve the problem of transparency and fairness of government agencies?

in conclusion

     The above are just some of my personal views on Bitcoin. There is still no answer as to whether Bitcoin is really valuable. It depends on how large the "part" that accepts Bitcoin is. After all, this is a bottom-up "currency", and the currencies we usually recognize are top-down.

     If more people support it, it may not necessarily become a legitimate currency. It just adds new rules of the game. Isn't our world today also playing under a set of rules, including the rules between countries and the rules of currency? Perhaps we will find that these currencies have no actual value, but everyone is willing to accept these rules to play the game, and the country can guarantee the uniformity of the rules.

But before that, we may need to consider whether the game rules designed by Bitcoin are reasonable, such as its 6-time verification mechanism, the rule that the reward of Bitcoin is halved every 4 years, etc. Although we need to respect the originality, we also need to carefully consider whether the original mechanism is reasonable from various aspects such as economics and sociology. After all, there is no guarantee that the first person to eat crabs will definitely eat crabs correctly.