Forbes: Have you never heard of blockchain? You may know very little about Internet finance

Last week, Japanese police arrested Mt. Gox CEO Mark Karpeles again on charges of theft. The stigma and charges surrounding Mt. Gox, once the world’s largest Bitcoins exchange until it closed and filed for bankruptcy early last year, further deepened Bitcoin’s negative public image.

For Chinese people, the term Bitcoin should be familiar to them. According to Goldman Sachs, by the end of 2014, the RMB accounted for about 77% of global Bitcoin trading volume, followed by the US dollar at 19%, and the rest were the Euro and the Japanese Yen. At the same time, the three major Chinese Bitcoin exchanges - OKCoin, Huobi and BTC China - accounted for about 80% of the global total trading volume.

Chinese people like to speculate and mine Bitcoin. When Bitcoin was the hottest in China (in 2013), many people became "miners" to mine Bitcoin and make quick money. If the price of Bitcoin had not dropped from a high of 7,000 to 8,000 yuan per coin to less than 1,500 yuan per coin now, more people might have switched to become speculators and miners.

Since the central bank and five other departments of China stopped financial institutions and payment institutions from conducting bitcoin business, coupled with the emergence of negative news and the increased risk of price fluctuations, bitcoin has gradually faded from the vision of the Chinese people. The craze came quickly and went away even faster, but venture capitalists' enthusiasm for bitcoin continues to rise. According to Coindesk statistics, since 2012, the total amount of venture capital invested in bitcoin-related start-ups has accumulated globally to about US$800 million. The investment amount in the first half of 2015 has exceeded the total amount of 2014, approaching US$400 million. Another report believes that according to the current trend and growth rate, the total amount of global venture capital in 2015 will reach US$1 billion.

The venture capitalists have many backgrounds, such as Silicon Valley venture capital funds, the New York Stock Exchange, the Chicago Mercantile Exchange, Goldman Sachs, and China's representative IDG Capital. The investment areas are diversified, from trading platforms to wallets, from payments to hardware devices.

Why do venture capitalists and the general public have very different views on Bitcoin? On the surface, the two are highly correlated, with Bitcoin as the main subject. However, in reality, the former is betting on innovative technology to solve real pain points, while the latter is betting on price fluctuations that lack rigid demand support.

The significance of venture capital is to cast a vote of confidence in the future before a new technology, a new product or a new business model is widely accepted. The real target of venture capitalists investing in Bitcoin is the blockchain technology behind it. In other words, Bitcoin is an application product derived from blockchain technology.

Specifically, blockchain technology is a huge, decentralized digital ledger. The encrypted data recorded on the block is currency, equity, bonds and other digital data (such as digital signatures, contracts), built on the consensus of new block generation confirmation and reward distribution. Countless independent computers in the global network maintain, update and verify to ensure the fairness, justice and openness and transparency of the accounting results. Therefore, there is no need for any centralized organization to review.

According to the above logic, the centralized and intermediary functions performed by participants in the financial system, such as the central bank, commercial banks, investment banks, credit card operators (Visa and MasterCard), and the SWIFT payment system, may one day be reorganized or even replaced. The benefit is to reduce potential risks and costs, such as counterparty credit risk, transaction time costs, complicated document details, and intermediary fees.

"Unlimited potential to be developed" is the view of Randall S. Kroszner, a tenured professor of economics at the University of Chicago Booth School of Business , former member of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee, on the prospects of Bitcoin in a commentary article titled "The Future of Banking". He believes that in addition to the intensity and direction of supervision, innovative technology will be the key driving force for the future banking model.

In general, venture capitalists focus on the ecosystem covered by blockchain technology. The system includes four major elements:

1. Miners (and mining equipment and tools) that produce, maintain, update and verify Bitcoin;

2. Daily Bitcoin users and customers;

3. Merchants who accept Bitcoin as a normal medium of exchange; and

4. Entrepreneurs and large companies that develop and sell new products and services centered on Bitcoin.

Therefore, investors should consciously and extensively invest in every corner related to Bitcoin, thereby creating a network scale effect, so that they can hope to reflect and enjoy the value and effects generated by the technology.

Relatively speaking, Chinese people buy and sell Bitcoin based on an opportunistic mentality. In their minds, Bitcoin is positioned as a financial investment product that can be freely bought and sold like stocks. Stocks are supported by real indicators and factors such as corporate revenue, cash flow, market demand, and industry trends. However, Bitcoin has no actual daily demand and use in China for the time being.

What does it mean? E-commerce is booming, but regulators prohibit the use of Bitcoin as a payment medium, resulting in a situation where heroes are useless. At the same time, existing payment channels such as Alipay and WeChat Wallet are already popular among the public , so the general public has no urgent need to add a newly created payment currency and tool. In the absence of sustained rigid demand, when the market reverses, coupled with the leverage effect, speculators quickly leave the market, resulting in strong price volatility.

Regarding rigid demand, let’s take a real example - the cross-border remittance system for overseas Filipino domestic workers:

Personal cross-border remittances from the Philippines account for about 10% of the Philippines' GDP, directly affecting the country's economy. According to statistics from the Philippine Central Bank, in 2014, personal cross-border cash remittances (from overseas Filipino domestic workers) totaled US$27 billion. The accumulated total in the first four months of 2015 was approximately US$7.8 billion.

For domestic workers, the real pain point is the complicated procedures for cross-border remittances and the high intermediary fees (5-10% of the remittance). Therefore, a Manila-based startup - Satoshi Citadel Industries (SCI) - has established a remittance, payment and wallet system based on Bitcoin and blockchain technology. The goal is to reduce the handling fee to 2% and greatly shorten the remittance processing time.

SCI CEO John Bailon explained in a phone interview that first, a pilot service was set up in Hong Kong (there are about 170,000 Filipino domestic workers living in Hong Kong), where domestic workers hand over Hong Kong dollars to tellers, and recipients in the Philippines (such as relatives) receive remittances in Philippine pesos through various digital (mobile wallets) and non-digital (physical service points) channels. In the background, a seamless electronic Bitcoin exchange process (from Hong Kong dollars to Bitcoin, and then from Bitcoin to Pesos) reduces fees and remittance processing time.

Of course, the application of Bitcoin cross-border remittances is not limited to the Philippines. Bitwage (https://www.bitwage.com), headquartered in California, USA, provides international, Bitcoin payroll services and products for employees and employers, such as the world's first international Bitcoin payroll debit card (for sending, receiving and spending wages). China also has many overseas domestic workers around the world, right?

In China, the development of Bitcoin and blockchain technology is not entirely pessimistic. In fact, favorable conditions have long existed - for example, abundant computer talents, perfect mining equipment, electricity cost efficiency, booming e-commerce, widespread use of the Internet and smartphones, and a large population. When the regulatory intensity becomes clear and close to reality, coupled with the continuous improvement of blockchain technology and the gradual opening of cross-border capital restrictions, it is believed that it is feasible to establish a more comprehensive and active ecosystem in China.

Obviously, Bitcoin and blockchain technology are currently in a stage of being questioned and denied. As for how big the final application level is and how high the return on investment is, just like the data that Bitcoin mining machines calculate and decrypt every minute and second, the breadth and depth of potential are complex and difficult to imagine.