Who is carrying whom?

Chapter 0 Introduction

Now the price of Bitcoin has reached more than 2,000 yuan per coin. Many people who have just learned about it will say, it is so expensive, only fools would buy it, I will not carry the sedan chair for you.

Their logic is this: those of you who bought the coins early on, the price was cheap. If I buy, you are taking advantage of me, and the money you earn is mine.

Is it right to think this way? The answer is wrong. This is a conclusion drawn intuitively. This article attempts to analyze from an economic perspective what kind of economic relationship exists between people who buy coins in the early stage and those who buy coins in the later stage.

Chapter 1 How are the prices of goods sold in the market determined?

I am a mechanical designer and I often have to write bids for projects. One of the items is pricing. I usually divide the price into several items in the bid, such as raw material costs, equipment costs, labor costs, taxes, and then add my profit at the end. In fact, what I want to tell you is that these sub-items are all deceptive and are just written randomly. The real pricing principle for our products has nothing to do with these. As long as the product is produced, the pricing principle is one: sell it as expensive as it can. If it cannot be sold and it has to lose money, then lose as little as possible, even if it is to dismantle and sell scrap metal, you have to make some money. I never say, wow, my cost is 100 yuan, I only make 10 yuan, so I will sell it to you for 110 yuan. Even if the cost is only 1 yuan, as long as the customer is willing to pay 1 million, I will sell it for 1 million.

As long as the product is produced, you can make as much money as possible, regardless of the cost invested in the past. If you have to make a loss, you should make as little loss as possible. This is the golden rule of the market. The price of a product is the result of the game between supply and demand. The supplier wants to sell it at a higher price, and the demander bargains hard. The final balance is the selling price, which has nothing to do with the cost of the product. At most, it is a bargaining statement. People who have done business understand this.

That is, many people regard the value of an asset as the cost of past investment in the asset, which is completely wrong. Of course, accountants do this. But economics does not see it this way. The value of an asset is always the discounted present value of its future income stream, and the cost invested in the past is a sunk cost, no matter how big or small, it does not affect the present value of the asset. (Discounting is to convert future income into an equivalent present value. It is an accounting concept)

In other words, the present value of a commodity (durable goods, not including those with a short shelf life) depends on people's expectations of its future utility. (Excerpt from "General Economics" by Xue Zhaofeng)

For example, if a fruit tree can bear fruit every year in the future, then the present value of the fruit tree will be determined by how much people think the fruit is worth. Please note that the present value of a fruit tree is not determined by how many fruits it can bear, but by how valuable people think the fruit will be in the future. Moreover, the present value of a fruit tree is not determined by the actual output of the fruit tree, but by the present value of the output that people expect. In short, the present value of durable goods is completely based on people's subjective estimates of the future. If the subjective estimate changes, the present value of durable goods will change.

It is people's expectations of something that determine its price.

As for what Marx said about the price of a commodity should fluctuate around the undifferentiated human labor time condensed in the commodity, this is not a real market law but a product of imagination.

Chapter 2 How does the price of Bitcoin come about?

The price of Bitcoin is also the result of the balance of supply and demand. All those who hold Bitcoin and want to sell it want to sell it at the highest price possible. No kind-hearted person would say that my Bitcoin holding cost is 1 yuan, and now the Bitcoin price is 2600, so why not add 30% profit based on the cost and sell it for only 1.3 yuan? Who is stupid?

So how did the current price come about? It is the current discount of everyone’s expectations of the future price of Bitcoin in the market.

Some people have high expectations, thinking that the price will reach $100,000, so they don’t sell. Some people have low expectations, thinking that the market will collapse tomorrow and the future price will definitely return to zero, so they sell quickly. The expectations of all market participants are aggregated and discounted to form the price at this moment.

The first people to buy Bitcoin or purchase mining machines are the first people to anticipate the future price of Bitcoin.

On May 21, 2010, a man named Laszlo used 10,000 BTC to buy a pizza worth $25. This was the first time that Bitcoin had a price, that is, 10,000 coins were worth $25. This pizza seller was the first person to buy Bitcoin on the market. He was also the first person to give Bitcoin a future price expectation, and this expectation was converted into the present value of $25 for 10,000 coins at that time.

All the people who participated in the Bitcoin price game expected the Bitcoin price to happen after the $25. That is to say, all the prices after that were based on the $25. Without the $25, how could there be 2,400 RMB per coin?

Chapter 3: Who is carrying the bridge for whom?

Let us first clarify what the metaphor of the bridge means.

What is a sedan chair? The Bitcoin market is a sedan chair.

What is a sedan chair? If you spend 2,400 RMB to buy Bitcoin, then the money you spend is lifting the sedan chair. That is, your cost is lifting the sedan chair.

So who is sitting in the sedan? Who is sitting in this sedan? The sedan is filled with all participants’ discounts on the future price of Bitcoin.

For those who sell Bitcoin, whether they make a profit or a loss, the discount of the expected future price of Bitcoin is equal to the price they sold it at. They are not sitting in the sedan, they just stop carrying the sedan, they leave the market and the sedan.

In other words, someone first spent $25 to buy 10,000 bitcoins, which lifted the bridge of the Bitcoin market. Then people later joined in to lift the bridge together. The people who came later were not lifting the bridge for the people who bought in front, because the people in front were not sitting in the bridge.

Those who bought at 8000 and held until now are also carrying this sedan chair. Those who bought at 2400 now are also carrying this sedan chair. Everyone has high expectations for the future price of Bitcoin, so they will carry this sedan chair.

Chapter 4 Who took advantage?

According to Chapter 3, it seems that those who buy first have to work harder, while those who buy later are taking advantage of those who bought earlier.

That's it.

Hayek said:

“Before a new commodity becomes a public want and constitutes a necessity of life, it is usually the plaything of a few. Part of the money paid by the rich for such goods is used to defray the expense of experimenting with the new product, although this is not their object, and as a result of this process these goods can later be enjoyed by the poor.”

If we compare this passage with what Hayek said and replace the "new commodity" with "Bitcoin", then this passage can be written like this.

“Before Bitcoin becomes something that more people need, it is usually just a toy for a few people. Part of the money these few people pay to buy Bitcoin is used to develop and optimize Bitcoin, although most of these few people’s goal is just to make money. But the result is that the Bitcoin purchased later is more useful than when these few people bought it, although the price is higher.”

You see, it was the previous buyers who spent money to support the development of Bitcoin, and they took the risk of failing to predict the future price of Bitcoin. Those who buy now and those who buy later are all enjoying the market foundation established by the previous buyers. The Bitcoins bought by newcomers are also more useful, and their expectations for future prices are more accurate than those of the previous buyers at the time.

Why do those who buy in later have to pay a higher cost? The cost for those who buy in first should also be lower, because at that time the discount of the entire market participants' expectations for the future of Bitcoin should be lower. Because at that time Bitcoin was more difficult to use, the technical difficulty was higher, and the price fluctuations were greater. Moreover, those who came first took on more responsibilities such as spreading knowledge about Bitcoin and educating those who came later. Although many people did not have these ideas, the fact is that they did these things, and their anecdotes have been circulating on the Internet. Those who came later can see them for free, but the fees they paid became the cost of buying Bitcoin.

Chapter 5 Conclusion

Now you know who is carrying whom and who is taking advantage of whom?

This is purely my personal opinion. If you have different ideas, please leave a message. Thank you.

Thanks to @老刘, @脉星, @云币, and a few anonymous friends for their donations last week. Thank you very much, you give me the motivation to keep writing.

Finally, if you find the article useful, please give me some Bitcoin to encourage me to continue writing.

Author: tan90d (Weibo @LightningHSL WeChat tan90d)
My BTC address: 14mhzjkJ71oMAMkKu3dy98dnUpkyQBHL1r
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