Deciphering the Bitcoin Money-Making Chain: Half Fire and Half Ice Water

In less than a year, Bitcoin has increased 95 times!

It is entering the public eye with unprecedented impact. For investors who are swept into this world by the magic of Bitcoin's skyrocketing, the greatest significance of Bitcoin is to make money. For those Bitcoin believers who worship Bitcoin "like a flame", this "perfect" Bitcoin will be the replacement of future currencies, and they hope that one day Bitcoin will "unify the world".

Half fire, half ice water.

Last Friday, European financial regulators issued a notice warning that Bitcoin has the risk of "violent price fluctuations". This is the second time in just half a month that regulators have poured cold water on Bitcoin, following the Chinese mainland, South Korea, and Hong Kong. On the 5th of this month, the People's Bank of China and five other ministries and commissions jointly issued a "Notice on Preventing Bitcoin Risks" for Bitcoin. This is seen as the first time that Chinese regulators have jointly "encircled and suppressed" Bitcoin.

Whether Bitcoin can really become an ideal currency or is the next "tulip bubble" that is getting worse and worse is a hot topic among all parties. Guo Tianyong, a professor at the School of Finance of the Central University of Finance and Economics, said that the popularity of Bitcoin reflects the public's low trust in existing sovereign currencies due to excessive issuance.

As Bitcoin believer Luo Jinhai said, in fact, technology itself is neutral and rational, and all the madness is given by humans. Behind the madness of Bitcoin is a technological revolution, an economic issue, and even a social issue.

A 95-fold increase in one year

At 10:50 p.m. on December 14, most factories in Shenzhen's Longgang Industrial Zone stopped working for the day. But 31-year-old fashion designer Wang Zheng was still busy receiving a customer who came all the way from Shanxi.

At this time, his identity was not a fashion designer, but a "mine owner" and a businessman selling mining machines.

Behind him, in this factory building of more than 1,000 square meters in Shenzhen Longgang Industrial Zone, hundreds of mining machines are working day and night with a rumbling sound, in an effort to mine the artifact of wealth that many people are crazy about - Bitcoin.

Public data shows that the price of Bitcoin was only 50 cents in 2011, and then rose to 13 dollars, a 2,600% increase. After entering 2013, Bitcoin has seen an even crazier rise, with an increase of more than 95 times this year. In particular, in mid-November, Bitcoin rose by $100 almost every day, and on November 29th, it hit a new high of $1,242, while the price of gold at that time was only $1,241.98 per ounce.

Bitcoin has attracted worldwide attention with its astonishing growth, and in China, various Bitcoin wealth creation myths have stirred the nerves of many investors. Bitcoin has completed the upgrade from "a small circle of IT geeks" to "known and hotly discussed by the general public."

So what is Bitcoin that attracts so many people?

Bitcoin is a type of virtual currency. In January 2008, a person named Satoshi Nakamoto published an article in a mailing group on the Internet discussing information encryption, outlining the basic framework of the Bitcoin system. The following year, he established an open source project for the system, officially announcing the birth of Bitcoin.

"The biggest feature is that it does not rely on a specific monetary institution to issue it, but is generated through a large number of calculations using a specific algorithm, using a distributed database composed of numerous nodes in the entire P2P network to confirm and record all transaction behaviors." Xu Dong, a Bitcoin research expert at Alibaba Small and Micro Finance Research Institute, told Nandu reporters that its uniqueness lies in the fact that it does not require a central clearing center or financial institution to clear transactions.

In addition to the characteristic of "decentralization", Bitcoin also has the following characteristics:

Circulating all over the world, no matter where you are, you can mine, buy, sell or collect; exclusive ownership, a private key is required to control Bitcoin, and it can be isolated and stored in any storage medium; relatively low transaction fees; cross-platform mining, users can explore the computing power of different hardware on many platforms...

In addition, the issuance of Bitcoin is subject to software algorithms and has a certain limit, rather than unlimited issuance. By around 2140, the number of Bitcoins produced will reach its upper limit of 21 million. This "limit" undoubtedly adds to the mystery of Bitcoin.

Bitcoin believers vs. speculators

Bitcoin's generation mechanism based on cryptography and Internet technology has fascinated IT geeks. Almost all of the first batch of Bitcoin supporters came from IT geeks, and Luo Jinhai is such a believer.

Luo Jinhai, a science and engineering man, works as a new media IT person and is also a science fiction writer. He calls himself a hardcore believer in the value of Bitcoin and likes to position himself as a Bitcoin evangelist.

After 2011, Luo Jinhai devoted most of his spare time and energy to Bitcoin. He also built a Bitcoin news portal that focuses on searching for Bitcoin news and sharing it with more people.

"Bitcoin is a combination of mathematics, cryptography, and programming. Its P2P and decentralized spirit is in line with my own value system." Luo Jinhai added: "I will not sell my Bitcoin even if it drops to one dollar."

When the Nandu reporter asked, "Bitcoin believers' admiration for Satoshi Nakamoto is like Apple fans' admiration for Steve Jobs?" He smiled and said, "Steve Jobs is a real entity. But Bitcoin believers' love for Satoshi Nakamoto is a belief in themselves, a belief in the free nature of their own bones."

However, what surprised the Nandu reporter was that he only had about 10 bitcoins. He said: "I don't own many bitcoins, 10 is enough. I actually hate the talk of holding tens of thousands of bitcoins. The key to being a Bitcoin believer is to identify with the Bitcoin spirit."

In his eyes, Bitcoin believers have at least the following characteristics: "1. Believe in the power of logic. 2. Prefer Google and do not approve of Facebook. 3. Have a desire for new knowledge. 4. Be more rational than emotional. 5. Tend to be perfectionists. 6. Be paranoid and have a clear personal worldview. 7. Like to argue and do not like to argue."

In the Bitcoin world, there is another group of investors who are different from Luo Jinhai. In terms of the number of people and the amount of investment, these investors are the main force in the current domestic Bitcoin world.

The reason they pay attention to Bitcoin is very simple—Bitcoin can make money, and most of them don’t even fully understand the principles of Bitcoin.

Financial writer Duan Hongbin first learned about Bitcoin from some geeks in 2010, but the tens of cents of Bitcoin at the time did not attract his attention. In the summer of 2011, Bitcoin had risen to tens of dollars, and Duan Hongbin even felt a little regretful, thinking that he had missed the best opportunity for Bitcoin. However, the subsequent increase in Bitcoin's value surprised Duan Hongbin.

In 2012, Duan Hongbin initiated the establishment of a private Bitcoin hedge fund among his friends. He told a reporter from Nandu, "This is the first fund in the country to invest in Bitcoin."

However, when he told his friends about his plan, they all thought it was incredible. "Some people directly said that I was stupid for believing in this." In the end, Duan Hongbin's fund only raised 100,000 yuan from four or five friends, many of whom were "friendship subscriptions."

At the beginning of the position building, Bitcoin suddenly dropped from 30 US dollars to 20 US dollars. The fund started badly and was trapped all of a sudden, with a floating loss of 10%. Then it continued to fall. Duan Hongbin bought the bottom, but he did not expect that Bitcoin would fall to 2 US dollars mercilessly, a drop of 93%. Duan Hongbin, who had no confidence, could only take a look and no look attitude. But just as he did not expect the big drop, he also did not expect the subsequent big rise. This year, Bitcoin ushered in two rounds of big rises, and the 100,000 yuan of Bitcoin he bought in the beginning was eventually exchanged for more than 11 million yuan of assets. This is something that people who invested in him because of personal relationships could not imagine.

Duan Hongbin is not an isolated case. The roller coaster-like trading price also attracted Yang Yang to join. Unlike Luo Jinhai, although she also spreads information about Bitcoin, Yang Yang defines herself as a "Bitcoin investor." In her eyes, Bitcoin is just one of the investment methods.

Yangyang doesn't watch the market, doesn't speculate on coins, and never does short-term transactions. Currently, Yangyang has about a few hundred bitcoins. She is relatively relaxed about the future trend. She said: "It is a risky investment. If you can afford to play, you can afford to lose."

In the Bitcoin world, Bitcoin believers and investors have different understandings of Bitcoin, and there is a barrier between them, like "day does not understand the darkness of night". Hardcore "Bitcoin believers" represented by Luo Jinhai never seem to want to be called "Bitcoin investors". In their eyes, many investors are just part of the industrial chain, but unfortunately, these investors do not have the spirit of Bitcoin at all.

Chinese aunties and Wenzhou guests are coming?

Wherever there is money to be made, Chinese aunties and Wenzhou people will appear. Since November, when Bitcoin has risen sharply again, news about "Chinese aunties" and "Wenzhou people speculating in Bitcoin" has appeared in the newspapers. In the media reports, they have also joined this Bitcoin arena.

Have Chinese aunties and Wenzhou people really appeared in the Bitcoin world?

“What does Bitcoin look like? Send me a picture.”

"After I buy it, how do I get it mailed? Should I use STO or YTO?"

…

These are the questions that the customer service of Bitcoin trading platform BTCTrade often encounters. Zhang Shousong, CEO of Bitcoin trading website BTCTrade, told Nandu reporters that more and more people are paying attention to Bitcoin. However, many people who come to consult do not know what Bitcoin is.

However, Zhang Shousong emphasized that "Chinese aunties are far from being as enthusiastic about speculating in gold. The main group of people playing Bitcoin in China are definitely not Chinese aunties."

Ling Kang, vice president of Bitcoin China, also confirmed to the Southern Metropolis Daily reporter that most of them are a small group of people characterized by being "young, highly educated, with an Internet background, and male." He said: "What Chinese aunties say is basically hype. Bitcoin's principles are so complicated that even IT guys can't figure it out. Can Chinese aunties do it?"

Duan Hongbin told a reporter from Nandu that Yang Linke, the founder of Bitcoin China, once told him that among the traders in Bitcoin China, men accounted for 92% and women accounted for only 8%. And they were mainly young people.

When interviewing several players, Nandu reporters found that amid the lies about the entry of middle-aged ladies and the arrival of people from Wenzhou, some players who had made their first pot of gold earlier had already evacuated.

At the beginning of this month, when the price of Bitcoin was more than 5,000 yuan, Liu Boyu (pseudonym), an IT man working in a well-known Internet company, decided to sell all the Bitcoins he had. He used to be a firm holder, but now he plans to no longer be involved in this world because he cannot judge the true value of Bitcoin.

Liu Boyu, who had been paying attention to Bitcoin, officially bought Bitcoin in October this year. At that time, he bought tens of thousands of yuan of Bitcoin at a starting price of 1,080 yuan. At that time, when he was interviewed by a reporter from Nandu, he firmly stated: "I don't plan to buy it, but hold it for the long term." In his opinion, "Bitcoin, from a technical perspective, is impeccable and can be regarded as a perfect representative of future currency."

However, after mid-November, Bitcoin rose rapidly, "which was really unexpected." Liu Boyu felt something was wrong and started to sell some of his Bitcoins. However, after he sold some of his Bitcoins, the price of Bitcoin surged again, and then fell back to more than 4,000. Liu Boyu experienced several waves in this process. In less than two months, he earned more than 300% from Bitcoin.

However, the surge also made Liu Boyu start to re-examine Bitcoin. "Maybe one day Bitcoin will really become a currency, but at least it won't be the time when it's skyrocketing and plummeting now."

In terms of investment strategy, Liu Boyu found that although the media's attention to Bitcoin is increasing, the actual attention to Bitcoin has actually entered a bottleneck period. He has long observed the public's attention to Bitcoin through the Baidu Index of Bitcoin. From June to October this year, the Baidu Index of Bitcoin once rose rapidly, but after October, the Baidu Index of Bitcoin began to peak, and he noticed that after October, the Baidu Index of Bitcoin in the IT circle even began to decline.

"For Bitcoin, only attention means capital inflow. And the bottleneck period of attention growth means that no more off-market funds will flow in. This is a dangerous signal." This signal made Liu Boyu decide to clear his position.

Duan Hongbin also believes that Bitcoin has entered a crazy phase. In his opinion, the more money that enters the market, the higher the price will continue to rise, and the rising price will in turn become the best footnote for the advocates. Therefore, as long as the funds that follow the trend and enter the market to take over are more than the funds that quietly withdraw because of the risk, the crazy rise of Bitcoin will continue. But it is also possible that at any day in the future, as long as people no longer have confidence in the rise of Bitcoin, the bubble of Bitcoin will be punctured. Today, Duan Hongbin, who established the first Bitcoin investment fund, has liquidated his Bitcoin and invested the funds in some new virtual currencies.

In the eyes of more off-site skeptics, Bitcoin is a typical Ponzi scheme and a typical greater fool game of passing the parcel.

Bitcoin’s “wealth-making” mechanism

Although the market is full of doubts about the "money prospects" of Bitcoin, it is indeed a "gold mine" full of business opportunities - a complete industrial chain for Bitcoin has been formed in the Chinese market.

The Bitcoin supply chain includes "mining-trading platform-online wallet storage-payment system-merchant application" and other links. From the perspective of the supply chain, the most popular entrepreneurial links are currently concentrated in mining and trading platforms. In Luo Jinhai's view, except for the "merchant application" link, the current industrial chain has been almost established. He said: "Some foreign merchants have supported Bitcoin, but domestic merchants are still in a hype state."

Mining is considered to be a "relatively low-end" link in the industry chain. Mining is actually an arms race, competing for who has a machine with higher computing power. The cost of a mining machine can easily be tens of thousands of yuan, or even hundreds of thousands of yuan.

Wang Zheng started to pay attention to Bitcoin in April this year when Bitcoin's first round of surge occurred. In April, he spent 35,000 yuan to buy a Butterfly mining machine from the United States. After receiving the mining machine in July, he started "mining". In order to avoid the huge noise caused by mining, he rented a factory in Longgang, Shenzhen, and became a "miner". He told the Southern Metropolis Daily reporter that mining was relatively easy in July. A Butterfly mining machine, operating 24 hours a day, could mine about one Bitcoin. But now, after rounds of technical equipment updates, even with the latest Avalon mining machine, it can only mine 0.13 Bitcoins a day at most, and consumes at least 24 degrees of electricity a day.

"It is more profitable to work upstream than downstream." After seeing more and more people joining the Bitcoin circle, Wang Zheng also started selling mining machines. And this seems to make money faster. "At the most, I sold 270 units a day." Wang Zheng told reporters that the price of the mining machines he sold was adjusted according to the daily Bitcoin price and mining efficiency, and was roughly between 18,000 yuan and 35,000 yuan. The latest price yesterday was more than 20,000 yuan per unit.

However, many experts believe that according to the principle of Bitcoin generation, it is becoming increasingly difficult to generate Bitcoin, while the equipment required for mining is becoming more and more advanced and expensive, and the profit from mining is already very small. Yang Yang told the Southern Metropolis Daily reporter: "Now I don't know if I can make a profit from mining."

The most popular link in the industry chain is the trading platform. On these platforms, RMB can be exchanged for Bitcoin, or Bitcoin can be exchanged for RMB. According to incomplete statistics, there are more than 20 domestic startups in the trading platform link.

In mid-2011, Bitcoin was gaining popularity on the other side of the ocean. Trading platforms such as Mt.gox attracted two Chinese Bitcoin enthusiasts, Yang Linke and Huang Xiaoyu. They found that there was no similar Bitcoin trading platform in China, so they used their spare time to run a simple Bitcoin trading website for "fun". In March this year, another Bitcoin fan, Li Qiyuan, joined and served as CEO.

After the three partners officially started running Bitcoin China, Bitcoin became popular again after the end of October, with the highest transaction volume of Bitcoin China exceeding 100,000 Bitcoins. It is reported that Bitcoin China has announced the completion of a $5 million Series A financing.

BTCTrade CEO Zhang Shousong started to build a Bitcoin trading platform when Bitcoin frequently rose in April. In fact, for a technical guy like him, the threshold for building a platform is not high. But what is giving him a headache is the fierce competition among trading platforms. Zhang Shousong said: "In fact, some trading websites are often attacked. Hackers often attack the server through a large amount of traffic and bandwidth, and the server is full, resulting in the website being unable to open."

An unnamed venture capitalist in the industry analyzed that virtual wallets, foreign exchange and payment will be the three major areas where startups can enter the Bitcoin market.

Virtual wallet services help users hold Bitcoin and provide some of the functions of bank current deposit accounts. The exchange service converts RMB into Bitcoin, or Bitcoin into RMB, which is the current popular trading platform. The third entrepreneurial field is payment. He believes that payment services help merchants accept Bitcoin payments in transactions, but the premise is that the market needs to mature and the number of people accepting Bitcoin is increasing.

However, the venture capitalist also reminded Bitcoin startups that they need to obtain more financing through venture capital to hedge risks and provide security measures and predictive monitoring measures.

Speculative bubble or financial future?

Regarding the Bitcoin craze, Guo Tianyong from the School of Finance at the Central University of Finance and Economics also said in an interview with Nandu reporters that society's enthusiasm for Bitcoin reflects the public's low trust in existing sovereign currencies due to their excessive issuance, and this is the basis for the rise of Bitcoin.

So is it possible for Bitcoin to become a real currency?

"In the era of credit currency, currency itself has no value, and the public's recognition of currency is a concept." Guo Tianyong pointed out that in the era of commodity currency, currency is a general equivalent with value, supported by physical value, but in the era of credit currency, currency is actually the achievement of a concept, and currency itself has no value. In the current sovereign currency system, currency is issued by countries on behalf of the country and required to be used by citizens, and the government's credit is behind it. Bitcoin is initiated by the private sector, and people in a certain small range are willing to use it as a measure of transactions, especially on the Internet, including other virtual currencies, including Bitcoin, which are more convenient to use, making people willing to accept Bitcoin.

"If someone recognizes it, Bitcoin may become a currency, but if recognition no longer exists, Bitcoin will become the next 'tulip' and the bubble will burst." Guo Tianyong further pointed out that Bitcoin itself has two fatal characteristics that make it difficult to subvert the existing sovereign currency system.

First, to become a currency that measures the value of other commodities, its own value must remain stable, but the price of Bitcoin has been fluctuating, which cannot generate stable price expectations, and users cannot use it to measure purchasing power. Secondly, although Bitcoin is regarded as a decentralized currency, without the credit of a sovereign government as an endorsement, people are not sure whether there are really people manipulating Bitcoin. From this perspective, Bitcoin lacks credibility and can only circulate within a recognized niche.

In the Bitcoin world, there are also rumors that Bitcoin is being manipulated.

It is reported that on December 12, 2010, when Bitcoin was becoming popular, Satoshi Nakamoto quietly left and disappeared from the Internet. "Who is Satoshi Nakamoto" has become a mystery. However, the market rumored that Satoshi Nakamoto held a maximum of 980,000 Bitcoins and never used them. Some players are worried that Satoshi Nakamoto will cash out all the Bitcoins he holds when the price is high, causing the market to plummet.

In addition, two American mathematicians downloaded all the transaction records of Bitcoin from the Internet and analyzed them. The results showed that more than 75% of Bitcoins are not in circulation. What is more frightening is that they put forward an idea: this part of Bitcoin may belong to one or two people. In an interview with Nandu reporters, Xu Dong also said that Bitcoin is like a small-cap stock. There are already some dealers in the market who hold a large number of Bitcoins and influence the market price by selling and sucking. The price of Bitcoin may have been manipulated.

In fact, apart from the hype of speculators, if Bitcoin wants to become a real currency, security is also an unavoidable problem.

In 2011, the Bitcoin trading platform MtG ox was attacked by hackers. Hackers obtained a large amount of user information, then logged into user accounts, stole Bitcoins, and sold them in the market. Critics pointed out that in the real currency market, no exchange can roll back transactions due to market conditions or someone's mistakes. The Bitcoin market lacks exchanges with long-term credit guarantees, and the systemic risks are obvious, making it difficult to provide the stability required as a currency.

"Perhaps it is another variant of a Ponzi scheme similar to Pu'er tea and tulips, but it is also possible that it will evolve into a subversion of the global monetary system in the future. After all, the Internet has already subverted so many industries in the real world." Ma Jun, a researcher at Huachuang Securities, believes that no matter how this will develop in the end, at least an attempt has been made on the next-generation monetary system of the Internet system, which is worthy of attention.

In the view of Luo Jinhai's friend Chang Qia, the openness of Bitcoin determines that it is a small society without uniformity. "It can be regarded as an exploration ship, with passengers and sailors from all over the world, and it is difficult to label them uniformly. For example, for liberals, Bitcoin is a Noah's Ark that can carry them to the paradise of freedom; for organizations like the Bitcoin Foundation, the Bitcoin community needs to take the initiative to contact regulators to avoid potential policy reefs."

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Regulatory concerns: Bitcoin becomes a hotbed for illegal activities

An unnamed scholar said in an interview with Nandu reporters that the reason why Bitcoin has attracted the attention of the People's Bank of China and other departments is that in the practice of various countries, Bitcoin has become a hotbed for illegal activities such as money laundering, and regulators are worried about the impact on the security of the financial system. Xu Dong also said that as a virtual currency, Bitcoin has no purchasing power and use value, and its market demand lies in being used by some criminals in various countries for money laundering.

This is exactly what the regulators are most worried about. In a previous notice, the regulators also stated: "Since Bitcoin transactions are anonymous and not restricted by geographical location, the flow of funds is difficult to monitor, which facilitates money laundering and terrorist financing activities."

Xu Dong also told the Southern Metropolis Daily reporter that the current main demand for Bitcoin is that some countries use Bitcoin as a money laundering tool to transfer assets into US dollars abroad. Luo Jinhai told the Southern Metropolis Daily reporter that currently in China, some criminals use Bitcoin as a tool for pyramid schemes, money laundering and gambling.