Behind Bitcoin’s Counterattack

Belief and doubt are actually two sides of the same coin. It is easy for people to believe that the surge in asset prices is a sign of the development and prosperity of the financial market. However, many times, the hype based on illusions is often the accumulation of extreme emotions in the market when there is nowhere to vent. These extreme emotions are not faith, but deep-rooted doubts and fears of being helpless. The recent manic counterattack of Bitcoin is a good example. In the first half of 2013, the exchange rate of Bitcoin against the US dollar rose from $15 to $266 within a few weeks. Then, the bubble burst rapidly and the exchange rate of Bitcoin plummeted to $58. However, Bitcoin silently staged a good comeback in the second half of the year and quickly rebounded to $233. The historical high seems to be just around the corner. If the first surge of Bitcoin can be found in many reasons from Bitcoin itself, then the counterattack after this plunge does not seem to have much to do with the evolution of Bitcoin itself. Therefore, for the counterattack, what is really important is not the strong voice of the times issued by Bitcoin itself, but the trend notes behind the counterattack of Bitcoin.

First, the reason behind Bitcoin's counterattack is the loss of gold's luster. After the inexplicable plunge in April 2013, gold has become a true "barbaric relic", its safe-haven function has declined significantly, and the possibility of returning to the international monetary system has completely disappeared. Against this background, the trend of gold since April has completely shown the characteristics of a randomly fluctuating commodity. Even though the US dollar exchange rate depreciated during the same period, the local crisis in emerging markets and the US debt crisis in the second half of the year caused panic, gold has never shown a credible strength again. The loss of gold's luster has brought about the end of the traditional safe-haven model and has encouraged more and more investors to regard Bitcoin as an optional target for investment and speculation.

Secondly, the reason behind Bitcoin's counterattack is to sell out the United States. In addition to gold, the traditional asset that is most valued by risk aversion is U.S. Treasury bonds. The U.S. Treasury market has enough volume to accommodate the investment needs of giant "institutional investors" such as foreign exchange reserve managers of various countries. At the same time, U.S. Treasury bonds have good liquidity, security and certain profitability, so they are favored by overseas investors. However, the government shutdown and debt ceiling issues since October have made the market realize that even if the short-term default risk of U.S. Treasury bonds is not large, the normalization of U.S. fiscal and debt problems has made investing in U.S. Treasury bonds dangerous and difficult to control in the long run. Therefore, reducing dependence on U.S. Treasury bonds is a need for overseas investors to seek benefits and avoid harm. In fact, selling out the United States has already been quietly carried out. From April to August 2013, external holders absolutely reduced their holdings of U.S. Treasury bonds for five consecutive months, and the net holdings fell from 5.72 trillion U.S. dollars to 5.59 trillion U.S. dollars. This continuous reduction trend has never appeared since 2002. The decline in the attractiveness of U.S. Treasury bonds has also caused international capital to shift some of its attention to Bitcoin.

In addition, the reason behind Bitcoin's counterattack is that it has no credit to rely on. Although Bitcoin's non-sovereign characteristics and inherent self-restraint have been fascinating since its birth, strictly speaking, Bitcoin does not have the conditions to replace credit currency at present. Moreover, judging from the trend of Bitcoin's sharp rise and fall, the instability brought about by its series of inherent drawbacks has even become a very important new risk in the international financial system. The market's pursuit of Bitcoin is, on the surface, a forward-looking admiration for the new generation of currency, but in fact it is a realistic fear of a phased cliff in the development of the credit system and the international monetary system. Since 2008, the evolution of the crisis has gradually destroyed the credit model. The subprime mortgage crisis, as a liquidity crisis, destroyed the micro-credit of financial institutions, and the government rescue used macro-sovereign credit to fill the micro-credit gap. Subsequently, the sovereign debt crisis destroyed the macro-credit of government sovereignty. The global monetary policy used monetary credit to support it. As a result, monetary credit is unsustainable, QE is long-term, currency issuance is out of control, and the atmosphere of currency war is strong. Monetary credit is facing a collapse dilemma. After continuous collapse and gap filling, the credit chain has been broken to the last link of currency credit, and there is no follow-up support. Therefore, the loss, collapse and rebirth of currency credit will be a long process. In this process, although the era has not yet evolved to the era of virtual currency, Bitcoin is regarded as a new hope in the context of no credit support. However, this high expectation that transcends the times is nothing but an illusory thirst quenching and a useless forcing of growth.

Finally, behind the counterattack of Bitcoin is the bleak reality of the real economy. The popularity of Bitcoin reflects the bleakness of the real economy. It is precisely because of the lack of support for global economic growth that the illusory Bitcoin is sought after by irrational funds. In fact, global economic growth expectations have been continuously lowered, the rigidity of the US job market has not improved, the recovery of Europe and Japan is fragile, and emerging markets have lost the halo of independent growth. The bleak global economic outlook and the lack of real investment opportunities are precisely another reason for the counterattack of Bitcoin.

In short, behind the counterattack of Bitcoin is not the endless expectations for Bitcoin, but the deep fear of the lack of credit and the powerlessness of entities.