Chinese people have become Bitcoin buyers again, with RMB accounting for 80% of transactions

According to the Wall Street Journal, after experiencing a panic-inducing plunge in January 2015, the virtual "currency" Bitcoin seems to have recovered from its decline and has maintained a recovery momentum in the past two months, even approaching the $ 300 mark again. This may make some Bitcoin believers regain their confidence, and perhaps some people will feel the temptation to re-enter the market.

In this new uptrend, brave buyers from China have become the main force: according to a report released by Goldman Sachs on March 11, RMB transactions now account for 80% of global Bitcoin trading volume.

In my opinion, this only shows one thing: Chinese buyers are becoming victims and baggers of yet another global Ponzi scheme.

The best MLM design ever?

On November 20, 2013, when Bitcoin was the hottest and fastest rising in history, I publicly published two assertions on Sina Weibo, the largest social media platform in China, pointing out that Bitcoin was a "big bubble" and that it was worthless, just like the bubble of moon land speculation. Just five days later, Bitcoin reached its historical high in the frenzy and entered a continuous downward channel.

I should say that I was not firm enough in November 2013, and I just called Bitcoin a "bubble" instead of a "MLM scheme". There is a subtle difference between the two. A bubble refers to a situation where the price of a valuable capital product deviates from its intrinsic value due to a short-term surge in demand, while a MLM is simply the artificial creation of demand for something worthless or extremely low value.

The "value" of MLM products is completely based on the "beliefs" of the audience, which has also led to a phenomenon: it is relatively easy to get out of the bubble frenzy, but it is very difficult to get rid of the brainwashing of MLM. Especially for a MLM design like Bitcoin that includes both complex information technology and financial and monetary principles, it is not easy to judge that its investment value is zero (or very low). Financial experts may not dare to comment easily because they do not understand its IT side, and IT people may not be able to make a judgment because they do not understand finance.

Some people have always accused Bitcoin of being a Ponzi scheme. After its collapse in early 2014, some authorities, such as "Dr. Doom" Nouriel Roubini, who successfully predicted the US financial crisis, also joined this camp. Despite this, some people continue to believe in Bitcoin, including some smart people, such as Overstock.com CEO Patrick Byrne.

Self-contradictory "monetary investment products"

Of course, it is not ruled out that many smart people are just participating in this game on purpose. For example, someone once claimed to be a venture capitalist and invested $100,000 to $200,000 in 100 companies related to Bitcoin. It was found that this person held more than 30,000 Bitcoins. Therefore, if the public opinion effect created by his $1 million to $2 million can increase the value of each Bitcoin by $100, he will realize a net profit of $1 million to $2 million.

The existence of such conflicts of interest can help us understand why Bitcoin cannot be invested in financial terms. This is because it calls itself a currency, but is also hyped by many people as an investment product. However, as a currency and as an investment product, these two are fundamentally contradictory.

Currency itself should be value-neutral, that is, it has no investment value. When we talk about foreign exchange investment, we usually mean that it is not an investment based on value, but speculation based on trends. Any currency can rise or fall in the foreign exchange market at the same time, and the chances are almost equal. Any currency, if simply held (without other investments), will not bring any benefits except for the above-mentioned rise and fall. In other words, currency itself cannot be an investment product.

But Bitcoin, a "currency", claims that because it is a currency, it has investment value. This statement is as absurd as someone claiming that he is immortal because he is a mortal. Of course, it is even more absurd: if someone claims that he is immortal and immortal, you definitely don't believe it, but he says that he is a mortal and has special abilities, and then you believe it...

If Bitcoin is really a currency, its price relative to other currencies should be basically stable. Even if it can really avoid excessive money printing and inflation as it claims, its price growth relative to other currencies, such as the US dollar, can only be equal to the inflation rate of other currencies. In recent years, the inflation rate of the US dollar has remained below 2% for many years. In other words, the price growth of Bitcoin relative to the US dollar should not exceed 2% per year.

This is not what the Bitcoin promoters tell us! What they always say is: buy, buy, buy, this thing will be worth a lot of money soon!

How can an item whose value keeps growing be used as currency? Assuming that its value doubles every year, using it as currency to do business means that the goods you bought with two bitcoins last year can only be sold for one bitcoin this year, and you lose one bitcoin out of thin air. However, if you hold two bitcoins and do nothing for a year, you will not lose money. Therefore, such an item with a constantly increasing value must be held by everyone and never used for circulation and exchange, so it will never become currency.

Wait a minute: Isn’t the reason why Bitcoin is so valuable because it can be used as a currency? If it cannot be used as a currency, where does its so-called “value” come from?

Deviating from the "Internet spirit"

Other Bitcoin supporters emphasize that it is not a currency in the traditional sense, but a brand new means of payment. It is completely different from traditional, government-issued currencies. It is decentralized and non-governmental, representing the "Internet spirit." Traditional financial theories are not applicable to Bitcoin.

Decentralization is indeed a feature of Bitcoin. Using encryption algorithms to achieve uniqueness and non-replicability is not a new idea. All bank electronic transaction systems use encryption algorithms to ensure the uniqueness of transactions. The technical uniqueness of Bitcoin is that it does not require a central verification and bookkeeping, but relies on the joint verification and bookkeeping of distributed nodes on the Internet. The more nodes involved, the stronger the uniqueness verification of Bitcoin. If the traditional central bank is like a dictatorial judge who follows personal authority and professionalism to determine the authenticity of currency; then, the verification method of Bitcoin is like a jury with no upper limit on the number of seats, and anyone can apply to join to testify for the "innocence" of Bitcoin. This sounds very open and democratic.

The problem is that Bitcoin's structural design cannot be completely open, because a completely open distributed verification system will not be able to avoid malicious participants. The latter can set up a large number of junk nodes to manipulate Bitcoin's verification. To avoid junk nodes, Bitcoin requires participants to provide "proof-of-work". At the same time, those who diligently set up verification nodes will be rewarded with a sum of Bitcoin or transaction fees - this process is commonly known as "mining".

This is just the first step towards closure. The real reason for the system to become closed is that the issuance rate of Bitcoin must remain stable, so "hard work" can only be set as relative. In other words, it is not possible that more and more Bitcoins will be issued just because more people participate in mining. On the contrary, the more people mine, the more computing power will be required to establish new nodes.

If we compare Bitcoin "miners" to banks in the virtual currency world, this picture is easy to understand: Bitcoin seems to be a world without a central government, where everyone can set up a bank, but the amount of currency issued each year is limited, so those who set up banks must have sufficiently powerful computing power to seize the right to issue currency - if we replace "powerful computing power" with "money" or "power", we will suddenly realize: Bitcoin's design has not changed the world order, and only rich and powerful people can set up banks.

In fact, the distribution of Bitcoin wealth in the world today is extremely unequal. According to Cryptocoins, less than 1% of the population owns nearly 80% of Bitcoin. This proves that Bitcoin has actually deviated from the open and shared spirit of the Internet and has become a money game that can be easily manipulated by a very small number of people.

If we really want to carry out the spirit of the Internet to the end, there is only one way, which is "continuous revolution": constantly launching new virtual currencies to replace the old currencies that have established a power verification system. Based on the idea of ​​Bitcoin, various "copycat coins" have indeed been launched one after another. Bitcoin supporters are therefore facing an embarrassing situation: if they emphasize that Bitcoin is the only orthodoxy, then they deviate from the principle of openness and sharing; if they want to stick to the spirit of the Internet to the end, then they can only declare that all virtual currencies that use the same distributed verification principle are equal - and the end result, of course, can only be excessive issuance of currency and zero value.

Frankly speaking, I do believe that this is the future development direction of IT virtual currency: one day, distributed verification will be so powerful that people can create a new verification algorithm for peer-to-peer transactions anytime and anywhere, making virtual currency services almost completely free. But this prospect, from the perspective of IT technology, is in line with the financial viewpoint in the second paragraph of this article: a currency itself should not have any investment value.

(The author Wu Xianghong is currently the founding partner of a cross-border investment consulting company. He has served as CEO of Yihe Asset Management Group and vice president of Cisco Greater China . The views expressed in this article only represent his personal opinions and do not constitute investment advice in any sense; the author and his employer have not participated in any investment activities related to Bitcoin.