The disruptor: Bitcoin

The selling of Bitcoin in China reached its peak on December 5.

In just one hour, Bitcoin plummeted from 6,935 yuan to 5,120 yuan.

This is only the number recorded by BTCChina, the largest Bitcoin trading center in China. On some other small trading websites, the sellers even offered a low price of 4,000 yuan. At that time, almost all investors wanted to cash out the Bitcoin in their "wallets".

A wallet is a way to store Bitcoin, an investment product made up of code. It is a bit complicated for investors who are new to Bitcoin . The card consists of an "address" and a "key", and the "key" is the password to open the "wallet".

The sharp drop in Bitcoin was actually related to the notice jointly issued by the People’s Bank of China and five other ministries on the same day.

The notice, titled "Notice on Preventing Bitcoin Risks," confirms that Bitcoin is not a real currency and requires all financial institutions and payment institutions in China not to price products or services in Bitcoin, not to buy or sell Bitcoin or act as a central counterparty to buy or sell Bitcoin, and not to underwrite insurance related to Bitcoin. The insurance business may not include Bitcoin in the scope of insurance liability, nor may it directly or indirectly provide other Bitcoin-related services to customers.

In fact, this is not the real reason for the sharp drop in Bitcoin, although Bitcoin transactions in China account for more than 30% of its global trading volume.

Two days ago, former Federal Reserve Chairman Alan Greenspan said, "This is a bubble. Bitcoin must have intrinsic value. You must use your imagination to imagine the intrinsic value of Bitcoin. I have never been able to do this, but maybe someone can."

One day ago, a spokesperson for the Hong Kong Monetary Authority also said that since the value of Bitcoin has no physical support or issuer support and its price fluctuates greatly, it does not have sufficient conditions to become a payment medium or electronic currency. The spokesperson believes that Bitcoin is just a highly speculative commodity.

Hong Kong is China's offshore financial center and international financial center, where most of the RMB-USD transactions are conducted. The USD is one of the three most widely used exchange currencies for Bitcoin.

Demystifying Bitcoin

However, the detailed joint notice issued by five Chinese ministries did not block the door to Bitcoin transactions.

The notice confirmed that as a commodity trading behavior on the Internet, ordinary people have the freedom to participate in Bitcoin transactions on the premise of assuming their own risks.

So, is Bitcoin, shrouded in numerous veils, a special commodity in cyberspace, or a special currency now and in the future?

This may be traced back to the moment Bitcoin was born.

In 1976, Nobel Prize winner in Economics Friedrich Hayek completed his most important economics work in his later years, "Denationalization of Money".

In his book, Hayek overturned the orthodox concept of the monetary system: since free competition is the most efficient in the general commodity and service market, why can't free competition be introduced in the monetary field? He put forward a revolutionary suggestion: abolish the central bank system, allow private issuance of currency and free competition, and this competition process will discover the best currency.

In the 1990s, the Internet emerged in the United States, and geeks began to practice the views of the predecessors. A code-breaking group called "Cypherpunks" tried to create electronic currency, and another person named David Chaum created an anonymous system "electronic cash". After that, various electronic currencies continued to emerge - bit gold, b-money, etc., but all failed without exception.

The core design of the first generation of electronic currency is to use a central bill exchange to aggregate all transactions into a real-time general ledger, so that the flow of each currency can be monitored to prevent duplicate use. This requires a reputable third-party organization to manage it, which goes against the original intention of decentralization.

On November 1, 2008, a man who called himself Satoshi Nakamoto published a research report , the main content of which was that he had established a virtual currency system that did not require a third party and was completely peer-to-peer.

Bitcoin was born.

Gold in the virtual world, the wonderful journey of a professional foreign exchange futures trader

"It was a wonderful trip," said Zou Chun, commenting on his recent trip to Singapore.

Zou Chun, 45, is a recent entrant into the Bitcoin circle. According to popular saying, as a professional foreign exchange futures trader for 20 years, he can be considered a "tycoon" in this circle, and his Bitcoin experience also started in a standard tycoon way.

In order to verify the authenticity and liquidity of Bitcoin, Zou Chun first spent more than 10,000 yuan to buy two coins in Hangzhou, then flew to Singapore and posted an advertisement on a website that provides information to local traders, saying that he had Bitcoin for sale. Because the price he quoted was lower than the price on the trading platform, three buyers soon contacted him.

He arranged to meet the South African buyer with the highest bid in a cafe, transferred the Bitcoin in his mobile wallet to the other party, and accepted the Singapore dollar cash paid by the other party.

"I was really excited that a Chinese and a South African completed a Bitcoin transaction in a cafe in Singapore," said Zou Chun. The next day, he sold the second coin and received a check from a Singaporean.

After returning to China, Zou Chun became a die-hard supporter of Bitcoin. He told the reporter of Financial Weekly, "I plan to have this experience every time I travel to cities around the world in the future."

Zou Chun is just one of the many Chinese who have recently joined the Bitcoin community. Data from trading websites show that on November 18 this year, the price of RMB against Bitcoin soared, rising from 3,000 yuan to 6,000 yuan in one day, resulting in a 15% premium for Bitcoin denominated in RMB over that denominated in US dollars on that day. Chinese trading websites also became the world's highest-volume Bitcoin trading platform.

Driven by the crazy effect of RMB speculators, US dollar speculators subsequently drove the price of Bitcoin to soar around the world. On November 27, the price of Bitcoin against the US dollar exceeded 1,000, and on November 29 it once exceeded 1,250 US dollars, exceeding the price of gold per ounce for the first time.

Four years ago, the first transaction using Bitcoin was 10,000 Bitcoins exchanged for a $25 pizza coupon. Two years ago, the price of Bitcoin was only $1. Such an appreciation is probably something that even the most optimistic Bitcoin people would never have imagined.

"It is virtual gold. You can compare it to gold. It is very similar in every aspect, and it has many advantages that gold does not have." Wei Yueyang firmly told the reporter of Financial Weekly. Wei Yueyang used to be a "coder" in an IT company in Guangzhou. In his spare time, he was a Texas Hold'em player in Macau casinos. He came into contact with Bitcoin two years ago and invested most of his savings in it. "Now, in his words, I have completely "quit playing cards and coins" because "writing code and playing poker can't make me financially free, but Bitcoin can."

Bitcoin is generated from a "regional chain" (known as a "mining pool" in China) composed of Internet terminals. Terminals running the same program are called "miners", and a large number of "miners" form a network to jointly maintain the "regional chain".

The "miners" are in competition with each other. They compete to crack irreversible cryptographic puzzles. The first "miner" to get the answer will receive a 50 bitcoin reward. As the number of "miners" increases, the difficulty of the questions also increases, which keeps the output of bitcoins in each "mining pool" at one every 10 minutes. In addition, every time 210,000 "mining pools" are reached, the reward is halved, from 50 bitcoins to 25, and then from 25 to 12.5, and it continues to decrease. In this way, by 2140, Bitcoin will reach the predetermined upper limit of 21 million.

All Bitcoin transactions also run on this network, and any transaction can be seen by everyone on the network. This feature prevents counterfeit coins or duplicate transactions from occurring.

"Its reserves and mining volume are limited. It is an alternative to paper currency, easy to divide and measure, and can be traded all over the world." Wei Yueyang said: "And it can be used anytime and anywhere. There is a saying that 'in prosperous times, antiques are valuable, in troubled times, gold'. Regardless of prosperous times or troubled times, you can store and use Bitcoin. Isn't it appropriate to say that it is the gold of the Internet world?"

“How can I use it in an environment without electricity and internet?”

The reporter from Finance Weekly asked Wei Yueyang a question that stumped him. After a moment of silence, he said that Bitcoin could not solve this problem. But he immediately added, "Any currency has shortcomings, including gold. There is no perfect thing in this world. I think Bitcoin should be the currency with the least shortcomings. After all, the situation you mentioned does not happen often. It is relatively perfect in an impossible situation. This is why more and more people recognize Bitcoin."

Bitcoin believers:

If you believe it, don't sell it.

The financial social networking site "" was originally a first-level forum for US stocks. Now it has become a gathering place for Bitcoin traders. Two weeks ago, the well-known ID "GT Zhou" responded to a question about retirement, saying: "The easiest way to retire is to buy 10 Bitcoins now."

"To prepare for retirement when you are 30 or 40, your investment target must be able to continue to appreciate in value over the next 20 years or more. Previously, most people's choices were gold or houses. If you are optimistic about the Chinese economy , you can also invest in index funds. Now there is a better choice, Bitcoin."

However, when Bitcoin truly became more valuable than gold, everyone seemed to have a question in mind: Will Bitcoin continue to appreciate? How much is it worth?

In fact, while the price of Bitcoin has been soaring, the price of gold has been falling. At the beginning of this year, the price of gold was $1,700 per ounce, and now it has fallen below $1,250 per ounce.

Why is Bitcoin doing so well when gold prices are performing so poorly?

Gold’s loyalists have only one simple answer: the price of gold is suppressed, and governments and central banks keep the price of gold artificially low because gold threatens their monopoly on paper money and their power.

They said that because Bitcoin has similar properties to gold in all aspects, but its price is set freely and cannot be manipulated, it will not be suppressed. Bitcoin will only show the same trend as gold should have - soaring.

This view that Bitcoin prices will rise in the long term seems to be gaining traction. So what exactly is supporting Bitcoin prices?

"Bitcoin also has production costs, and they are very high," said Chen Haojian, an investment consultant at Orient Securities. "The price of Bitcoin against the RMB has a basic basis, which is its production cost. Because the overall computing power has increased so quickly, the speed at which Bitcoin production costs have risen is almost the same as the speed at which its price has risen."

The so-called "full computing power" refers to the total computing power of computers in the world that are "mining" at the same time. Because the output rate of Bitcoin is fixed, the higher the total computing power, the lower the rate at which an individual can mine Bitcoin. At present, the total computing power is about 6470443G per second, which is an indescribable huge number, exceeding the total computing power of the world's 500 fastest supercomputers.

"In January this year, I bought a 3,000 yuan graphics card, which allowed me to mine one coin in a month. In October, I needed 10 of the same graphics cards. Do you think the price of this coin will not rise?" Chen Haojian said, "This is one of the two major effects that determine the value of Bitcoin. The other is the currency substitution effect, which means that since this year, more and more people are willing to exchange paper money for Bitcoin. The surge in Bitcoin this year is due to both effects, with the latter being the main reason."

The gold that can be compared with Bitcoin’s “production cost determines price theory” is still gold. According to data from Thomson’s 2013 World Gold Yearbook, the total cost of gold mining in the world in 2012 was $1,260 per ounce. It was this cost price that supported the gold price to remain above $1,200 after a rapid decline.

"People's confidence in Bitcoin is the premise," Wei Yueyang said. "As long as the ecosystem continues to operate, the price of Bitcoin will continue to rise like the price of gold in recent decades."

Professional speculator Zou Chun interpreted the appreciation of Bitcoin from a more professional perspective: "The appreciation of Bitcoin is firstly due to the improvement of the efficiency of currency circulation, because it is anonymous and P2P, thus bypassing supervision and the inefficient banking system; secondly, the legal currency itself is not doing well, and the government abuses the right to issue banknotes and collects seigniorage, which has angered the public and finally led to the geeks taking the lead in launching a counterattack."

Based on the growth rate of the overall computing power and the currency substitution effect, Chen Haojian calculated the increase in the price of Bitcoin: 70% per year and 4.1% per month. Starting from this year's exchange rate of 300 yuan per Bitcoin, 20 years later in 2033, the price of each Bitcoin will be 18.6 million yuan.

"Bitcoin believers have a saying: If you believe in it, don't sell it," said Zou Chun.