Bitcoin and brain-dead fans

1. Bitcoin’s Economic Cycle

Let’s take a look at a picture first (the picture comes from btc123.com)

This is the candlestick chart of the post office (bitstamp.net) from April 2013 to November 2013. As shown in the figure, this is a standard Bitcoin economic cycle. Generally speaking, the four stages of Bitcoin can be divided into the novice life cycle: the novice influx period, the novice panic period, the novice education period, and the novice brain-dead period.

The influx of newbies: This is a typical manifestation of the Bitcoin bull market. Specifically, newbies continue to pour into the Bitcoin market and related Q groups, which are overcrowded with newbies. In the Q groups that originally had few people speaking, there are suddenly many newbies, asking all kinds of newbie-level questions, such as: Which country is Satoshi Nakamoto from? What is the difference between a Bitcoin address and a public key? How to mine? Some even pay to become apprentices and complain that Bitcoin is unfair.

Novice panic period: After the Bitcoin bubble burst, the price of the currency fluctuated greatly and even halved instantly, and the trading volume was large. Novices experienced such a dangerous situation for the first time and lacked confidence in Bitcoin, which led to frequent mental asylums, nervousness, loss of appetite, sexual disorder, etc. Many novices sold their stocks at a loss during this period, which was also the best fate for novices.

Novice education period: Novices who choose to stay (usually because they are deeply trapped and unwilling to sell at a loss) need to go through a painful and long period of falling price. During this period, Novices do not have much hope for the price of Bitcoin, and then have time to learn about Bitcoin through various channels, intentionally or unintentionally, and gradually increase their confidence in Bitcoin.

The period of Xiaobai's brainlessness: After a long period of consolidation, Xiaobai has been through the ruthless baptism of the market, and gradually becomes slow to react to the price of the currency. He will not be overly sensitive to the slightest disturbance, and will not shout "No, Bitcoin is going to die!" at any time. He even adds to his position when he has loose money on hand. The market performance is a small fluctuation and recovery. Bitcoin begins to settle in Xiaobai's hands again. At this time, Xiaobai officially becomes a qualified brainless fan.

This is a standard Bitcoin economic cycle without a futures market (or futures have not yet developed to have much impact on spot). In the past year or so, due to the emergence of futures, margin trading, various financial products and other leveraged products, the Bitcoin market has become more complicated. Therefore, the performance of Bitcoin's economic cycle may not be standard, and the panic period and the education period of newbies may appear many times.

2. Definition of Bitcoin Fanatics

With the economic cycle of Bitcoin, we can give a definition of Bitcoin diehard fans: any Bitcoin enthusiast who has experienced at least one complete Bitcoin economic cycle and whose Bitcoin holdings have increased instead of decreased is a Bitcoin diehard fan. And diehard fans who have experienced two Bitcoin economic cycles are called second-generation diehard fans, and so on.

3. Why is Bitcoin valuable?

Since the equation "10,000 Bitcoin = two pizza coupons (23 USD)" was established, Bitcoin has begun to have a price, but ordinary people or some second-rate economists believe that Bitcoin only has price but no value. In fact, this conclusion cannot stand up to scrutiny. Common sense tells us that Bitcoin generates price when it is exchanged with legal currency, and generates value when it is exchanged with other commodities. The reason why Bitcoin is said to have only price but no value is relative to China's restrictions on using Bitcoin to price other commodities. It has to be said that the central bank's move is too ruthless. One move knocked Chinese Bitcoin to the ground. Not being able to use Bitcoin for pricing actually means that Bitcoin cannot be exchanged with other commodities, and no exchange can generate value. However, the tenacity of Bitcoin lies in its decentralization and globalization. In China, Bitcoin cannot be used for pricing, but it can be used as a speculative product and can be mined, while Bitcoin in other countries is striding towards real currency. In China, does Bitcoin really have no value?

As long as there are crazy fans, Bitcoin will have value.

The above discussion is based on the conclusions of traditional economic theory. However, for a new thing like Bitcoin, we cannot only use traditional theory, but must use a set of theories with Bitcoin characteristics to explain it.

Traditional economic theories mostly assume that everyone is rational. If it were based on this assumption, Bitcoin would not have achieved what it has today. But in reality, people are often irrational. Therefore, financial behavioral studies and psychology are very useful in today's society. Let me ask, why would the man who used two pizza coupons to buy 10,000 bitcoins buy them when he didn't know whether these 10,000 bitcoins could be exchanged with other people? Therefore, this transaction must be an irrational transaction. From the perspective of that man, the reasons for his taking over may be:

1. This 23 USD may be a tolerable loss for him, and he does not care even if no one continues to take over. What he cares about is the sudden change from 0 to 1.

2. These 10,000 bitcoins meant something else to him. That is, these 10,000 bitcoins gave him other expectations. He might expect that one day the value of bitcoin would exceed 1 USD, which was a fantasy at the time; he might expect that one day bitcoin would take over the financial system; he might expect that one day bitcoin would allow people to live a free and easy life.

In summary, it can be seen that people's irrational transactions often include their expectations for the future. It can be said that when people buy Bitcoin with legal tender, they actually make two exchanges. The first exchange is between legal tender and Bitcoin, and the second exchange is between Bitcoin and people's expectations. According to traditional theory, exchange creates value. The exchange of Bitcoin and legal tender actually includes the exchange of Bitcoin and other expectations of the buyer, thus generating the buyer's expected value. As long as the expected value of Bitcoin is higher than the market price, the buyer will keep holding it.

The above buyers are so-called brainless fans. They buy Bitcoin within the range of losses they can afford, which is essentially their expectations for Bitcoin. These expectations form the basis of Bitcoin's value.

4. The way of thinking of brain-dead fans

People who participate in Bitcoin transactions can be divided into two categories: one is those who expect to earn legal currency, and the other is those who expect to realize their own psychological expectations. The first category is called speculators, or investors, because investment is just a special case of speculation, and the second category is called brainless fans.

The speculators’ way of thinking is a rational thinking mode. All actions are for earning legal currency. In a very short period of time, they hope to earn legal currency by selling high and buying low, and sometimes they even follow the trend and spread rumors to achieve the purpose of earning legal currency. Even if some people aim to earn more Bitcoin, they will eventually cash out to get legal currency. In this case, the Bitcoin market is actually no different from the stock market. No one expects the stock market to transform into currency, and it is impossible for it to withstand the government's torture.

The way of thinking of the brainless fans is an irrational way of thinking, which is only relative to traditional theories. Everything is done for the purpose of achieving their own psychological expectations, and they are not shaken by the temporary gains and losses of legal currency. Therefore, generally speaking, the bottom of the Bitcoin bear market is the sum of the psychological expectations of all Bitcoin brainless fans. For example, the current Bitcoin price on May 25, 2015 is about 240 USD, the total volume is 14.2 million, and the total market value is about 3.4 billion USD. In other words, the psychological expectation value of Bitcoin by all Bitcoin brainless fans must not be less than 3.4 billion US dollars.

The greater the expectation, the greater the value

During a Bitcoin economic cycle, in the "novice influx period", it is obvious that speculators' expectations in the short term are greater than those of the crazy fans, so Bitcoin flows from crazy fans to speculators. In the "novice panic period", due to the short-sighted behavior of speculators and the long-term expectations of crazy fans, Bitcoin flows from speculators to crazy fans. Such flows are driven by expectations. Speculators and crazy fans will also transform into each other due to changes in expectations. After a complete Bitcoin economic cycle, there will always be some crazy fans who transform into speculators, and some speculators who settle into crazy fans.

As the number of brain-dead fans continues to expand, the amount of Bitcoin in their hands will also continue to increase, so the amount of Bitcoin in circulation will decrease. In other words, Bitcoin is relatively deflated, so Bitcoin appreciates. The greater the expectations of brain-dead fans for Bitcoin, the less Bitcoin will be in circulation, and the more Bitcoin will appreciate.

Many speculators always compare the price of Bitcoin with that of two years ago, and believe that Bitcoin will fall back to the level of tens of US dollars, which is impossible. Because after the sharp rise in 2013-2014, both the number of crazy fans and their expectations for Bitcoin are no longer the same.

5. The role of brainless fans in the Bitcoin economy

Brainless fans are currently a decentralized group, with each individual connecting and coordinating with each other through a simple rule, which is the expectations and prices at different levels.

Nowadays, when people mention brain-dead fans, they always have a sense of sarcasm and ridicule, equating brain-dead fans with scapegoats. The difference between brain-dead fans and scapegoats is that one is a passive scapegoat, while the other is an active scapegoat.

The reason why the brain-dead fans took the initiative to take over is:

1. The expected value of Bitcoin by die-hard fans is always higher than the market price.

2. Brainless fans pay more attention to long-term interests.

3. The expectations of crazy fans for Bitcoin are irrational behavior.

The active buying behavior of the crazy fans inadvertently makes the central bank act as the last buyer (lender of last resort). In other words, the crazy fans provide liquidity (Bitcoin) to the market and promise to redeem it at market price at any time.

This characteristic of the crazy fans is very important. It is the foundation of all Bitcoin economy. It is equivalent to the 10-year US Treasury bond and is the benchmark for other securities. It is this promise of crazy fans that makes Bitcoin have credit, a decentralized credit. The value of Bitcoin can suddenly change from 0 to 1. The most important innovations of Bitcoin all come from this.

Of course, at this point, traditional economists will jump out and say, "All market economic behaviors should be formed by market entities out of self-interest. Such selfless behavior of taking over for others will not occur in the market."

Being selfless is a false proposition. There is no normal selfless person in the world. As long as a person is normal and can make independent judgments, his behavior must be selfish. The only difference is whether this person focuses on short-term interests or long-term interests, his own interests or the interests of others. If a person focuses on long-term interests or the interests of others, as long as it is his true thoughts, this behavior is actually a selfish behavior.

Therefore, whenever a fan decides to take over a product for whatever reason, it is a selfish act. They always act out of an expectation that it will benefit themselves.

6. The difference between Bitcoin and blockchain

Recently, people are following the trend and touting blockchain as a great innovation. But people who know a little about software algorithms are not interested in it at all. The so-called blockchain is just made up by people who want to get venture capital to deceive investors. To put it bluntly, blockchain is a data structure plus a set of algorithms, and they are not unfamiliar in the software industry, let alone a great innovation. The reason why Bitcoin can succeed is that it forms a closed loop with this data structure and this set of algorithms (blockchain) and decentralized credit. The innovation of Bitcoin lies in the formation of this decentralized credit.
Currently, major banks in the world are working together to study an application based on blockchain to speed up inter-bank settlement. This is just an attempt to replace one centralized credit with another centralized credit (SWIFT organization). This is a cycle formed by a data structure and a set of algorithms (blockchain) and centralized credit. There is no essential difference from the original SWIFT organization.

Therefore, the greatest innovation of Bitcoin is that it has created a decentralized credit, and this credit cannot be monopolized. Once it is monopolized, it is no longer Bitcoin (i.e. it loses its original value) . Currently, the major banks in the world are competing to research private chains and blockchains. The blockchain project of Wanxiang Group in China is bound to be centralized. They are not challenging Bitcoin, but the vested interests such as SWIFT and UnionPay. In essence, they are on the same front as Bitcoin.

This article has been intermittently written since May and has been delayed until now. Now it is finally completed. My level is limited and there are many inconsistencies with traditional theories. I sincerely point them out.

Author: Trueiron
Address: 1ronNBrnGoAmfTQ9L5mXcSJUL3moNzoz2
Date: 2015-11-29