Bitcoin is not about investment

Nearly a month ago, an entrepreneur gathering in Silicon Valley invited a Stanford University professor to give a speech. The topics were "random", ranging from economic trends, technological trends to Bitcoin and the National Security Agency.

The female professor said that she went to the Turkish city of Istanbul a few months ago, where she met a Pakistani banker. The two talked about Bitcoin, a virtual currency, and seemed to be still unsatisfied, so she wrote an email after returning to the United States.

As she was about to send the email, she realized that the combination of Istanbul, Pakistani bankers, and Bitcoin would definitely lead to the email being intercepted by the National Security Agency and the sender becoming a target of surveillance. So she gave up and did not send the email.

The professor studies economics and holds a small amount of Bitcoin. However, she does not take Bitcoin seriously, but is sure that law enforcement agencies will take it seriously, because Bitcoin is originally a "hacker currency" and once it is mixed with areas with high incidence of terrorism, it will definitely be more "suspicious."

Hotter than gold

The economist had never expected that within a month since her speech, the "exchange rate" of Bitcoin against the US dollar would rise sharply.

In early November, one bitcoin could be "exchanged" for $212.

On November 29, the so-called "Black Friday", the busiest shopping day for Americans the day after Thanksgiving, the value of Bitcoin once rose to US$1,242; at the same time, the price of gold was US$1,241.98 per ounce.

Later that day, the value of Bitcoin fell back to $1,160.

At the beginning of this year, one Bitcoin could be "exchanged" for $13.5, while the price of gold was $1,700 per ounce.

Compared with gold, Bitcoin has been "rising against the trend" for a period of time. In November alone, it "valued" by 400%. There are now about 12 million Bitcoins in total, with a total "market value" of about US$12.9 billion.

A Bitcoin payment platform called "Bitpay" processed 6,296 Bitcoin transactions in one day on "Black Friday", which is the highest number of Bitcoin transactions "in history" and equivalent to 6% of the total global Bitcoin-related transactions on that day.

"Bitpay" is relatively large in scale among payment platforms, and its business is to help buyers purchase goods and services from sellers, thus intervening in real economic activities. It is different from most Bitcoin-related trading platforms, that is, Bitcoin buying and selling platforms.

Tony Gallippi, CEO of BitPay, inferred that on Black Friday, of all Bitcoin-related transactions, except for BitPay which accounted for about 6%, most of the remaining 94% of transactions were likely to be money "speculation", that is, buying or selling Bitcoin.

The motivation for Bitcoin's "currency value" to surpass gold is not that traders need to use this currency for "shopping", thereby widening the gap between Bitcoin supply and demand, but rather the bullish outlook for this virtual currency.

The reason why Bitcoin is so popular is that it uses money to support money, makes money with money, uses virtual space as a venue, and uses virtual currency to cash in traditional currency. It has no connection with entities and real industries.

Speculation, obviously.

Speculation is fundamentally different from investment.

At least at this stage, no investment product can skyrocket like Bitcoin.

More “virtual” than game coins

Bitcoin, as a concept, was created in 2008 by a person using the pseudonym "Satoshi Nakamoto", at the same time as the US subprime mortgage crisis and even the global financial crisis.

In April of the following year, Bitcoin was formed. It was "generated" by computer mathematical calculations, and could be "mined" manually using computer hardware and "circulated" with the help of peer-to-peer networks (P2P). It has a limited "issuance" and a total design of 21 million. The difficulty of "mining" gradually increases, and it is expected to reach the upper limit before 2140.

It has an icon, but it is not a physical object and cannot be put into a wallet. It can only be stored in an "electronic wallet".

The reason why it is called "hacker currency" is that Bitcoin holders are "invisible", transactions leave no traces, are not controlled by financial institutions, and are not regulated by the government. "Hackers" are more willing to use it than ordinary people, and illegal transactions such as money laundering and drug trafficking are more convenient to use than legal transactions.

Moreover, in the United States, within the scope of legal transactions, settlement with Bitcoin has almost no additional fees and is not subject to any taxes, which is quite tempting for some people.

Bitcoin transfers are realized through the Internet, which is fast and efficient. However, compared with virtual currencies such as game coins, Bitcoin is more "virtual" because it has no issuing agency, which means it is not guaranteed by any physical institution. The "trust" of holders and users, or even the collective "illusion" as the British magazine "The Economist" calls it, is the only pillar for the existence of Bitcoin.

To a certain extent, Bitcoin is "virtual" and not as "real" as gold, so it can support a greater "illusion".

Bitcoin was worth 25 cents in April 2009, 30 cents in early 2011, and its market value was below $10 most of the time before this year. It could be exchanged for less than $20 in January this year, $32 in February, $92 in March, $230 in April, and $70 in July.

Christopher Koch, a 29-year-old Norwegian, told the BBC in October that he "bought" some bitcoins when he was doing technical research four years ago, spending the equivalent of $22, and then he forgot about this "wealth"; he recently unlocked his account and found that the market value of his bitcoins was $850,000. This kind of wealth "myth" has attracted many people to join the ranks of bitcoin supporters.

Riskier than the stock market

Following the surge in April, Bitcoin set off its second "boom" this year in November.

Every time the value of Bitcoin soars, it is followed by a sharp drop, attracting the attention of regulatory authorities. The reason is that there is a lack of supervision on Bitcoin transactions in the United States and even around the world. Only when cash is involved, that is, when large sums of money are used to buy and sell Bitcoin, reporting is required.

In some seminars, if U.S. federal government financial regulators and California state government regulators are present, Bitcoin platform operators must keep a low profile and not say much.

Unlike the stock market, which faces regulation and some countries set a limit on the rise or fall of stock prices, there is no limit to the surge or plunge of Bitcoin. No country has officially recognized Bitcoin, which means it may disappear at any time.

To date, many people still believe that Bitcoin itself is worthless and that its appreciation is purely artificial. Amid doubts, some neutral official statements were interpreted by Bitcoin supporters as "recognition", such as the US federal government regulators saying that virtual currency can have "legitimate uses" and German regulators considering Bitcoin as a "unit of account".

In fact, any kind of currency, virtual or traditional, is in demand and valuable only when people use it. The most basic use of any currency is payment and settlement. In this sense, the recognition of Bitcoin in practical occasions has indeed increased greatly. Take "Bitpay" as an example. The number of merchants cooperating with this payment platform was 1,000 in September 2012, and 12,000 by the end of November this year.

Striving to get more merchants to accept Bitcoin is the way for Bitcoin to survive. However, compared with traditional currencies, the number and amount of Bitcoin transactions are not large.

BitPay processes only about one-half millionth of the transactions processed by Visa's credit card network, which processed 87.5 billion transactions a year as of June 30 this year.

What is worthy of vigilance is that some people use the cross-border transfer function of virtual currency to transfer assets and even launder money. In addition, in the United States, the federal government closed a website called "Silk Road" in October because it accepted Bitcoin and sold drugs and other contraband, involving hundreds of millions of dollars.

It will take time to promote the legal uses of Bitcoin, but attempts at illegal uses have become a reality.

More difficult than investing

There are two types of “investments” related to Bitcoin, in the classic sense of the word.

The first is that in the early days of Bitcoin, some people bought computer hardware and connected to the Internet to "mine" this electronic currency. However, the difficulty of "mining" increased, the hardware requirements increased accordingly, and the time spent increased. One theory is that the Bitcoins "mined" were not enough to offset the electricity costs. As a result, some investors gave up "mining" and joined the Bitcoin trading business instead.

The second is that the surge in the value of Bitcoin has given some people a "business opportunity" and they have built or expanded trading platforms in an attempt to attract more people to join and earn transaction fees. Unlike payment platforms, trading platforms have limited construction costs; in addition, there is a lack of supervision, so there are not many restrictions on the operation of the platform.

In this industry, there are some rumors that the value of Bitcoin will only rise in the long run and will not fall, and it is expected to reach tens of thousands of dollars in the end...

Indeed, the total amount of Bitcoin is limited, and the pace of "issuance" is slowing down, which means that this virtual currency will not naturally depreciate as the issuance increases, like traditional currencies. On the contrary, according to the design, if more and more merchants accept Bitcoin, the total market demand will gradually increase, which means that it will naturally appreciate.

However, natural appreciation and artificial appreciation are two different things and have two different effects. Buying and selling Bitcoin for arbitrage may only be considered speculation under the current legal and market environment.

In addition, the smallest unit of Bitcoin is 0.00000001, which is equivalent to a 100,000-fold increase in the issuance volume compared to the total limited volume.

In 2011, Paul Krugman, the 2008 Nobel Prize winner in economics, published an article on whether Bitcoin can serve as a currency, stating that "the financial system we want is not one that makes people rich by holding money, but one that creates conditions for transactions and makes the economy rich as a whole... Everything that is happening around Bitcoin is completely wrong."

Patrick Merkle is the general counsel of the Bitcoin Foundation and is naturally a supporter of Bitcoin. On November 18 this year, he testified before the U.S. Senate Homeland Security and Governmental Affairs Committee and admitted that "this (Bitcoin) is still largely an experimental currency and should now be viewed as an area that poses high risks to consumers and investors."

That hearing, convened by the Senate Homeland Security Committee, which usually discusses the terrorism situation, was intended to assess the "potential risks, threats and prospects" of virtual currencies.

Perhaps, as the Stanford professor thought, Bitcoin is within the scope of the US government's counterterrorism monitoring. Thomas Carper, chairman of the Homeland Security Committee, said he was a little confused: "Bitcoin may be the first of many virtual currencies that has captured the imagination of some people, triggered fear in others, and confused everyone else, including myself."

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