The Value and Risk of Bitcoin

The price of bitcoin has risen above $18,000 in the last two days and has been rising for some time. Clearly, the market has been filled with optimism about bitcoin lately. After all, institutional and individual investors in the U.S. are beginning to put more money into bitcoin, which is naturally driving up the price of bitcoin. However, under the current market sentiment, it is necessary to make an objective judgment about the nature of Bitcoin and its risks, so as to avoid making wrong investment and trading decisions under the influence of emotions. Especially since it is very easy to leverage bitcoin transactions, and the percentage of leverage can be very large, it can lead to even greater risks. In such a market environment, it is all the more important to maintain clear and correct judgment in order to avoid taking very large losses.

This article provides some analysis of the nature of Bitcoin and the risks it faces so that stakeholders can refer to it when making decisions.

The Nature of Bitcoin Value

Stocks represent the equity, dividend and voting rights of a company. Commodity futures products are backed by an underlying commodity. Ownership of real estate is backed by underlying real estate. However, unlike these types of products currently traded in the market, Bitcoin is not backed by any underlying asset. Its value is entirely the consensus that the market reached through trading. This consensus is entirely the subjective judgment of market traders. In this respect, Bitcoin is fundamentally different from other products traded in the market, which is also the reason why some mainstream financial professionals do not accept bitcoin at all. They believe that bitcoin has no value at all and is the result of speculation. The most representative viewpoint in this regard is that of Warren Buffett. He believes that Bitcoin is probably rat poison squared, and he does not hold any cryptocurrency himself, nor will he in the future.

A related judgment in the market is that bitcoin is a Ponzi scheme, and that bitcoin transactions will eventually break down because of the broken capital chain, just like any other Ponzi scheme. A fundamental difference between Bitcoin and a Ponzi scheme, however, is that a Ponzi scheme cannot continue because it ultimately fails to pay interest to its participants. But the bitcoin system works automatically, and it does not need to provide a reward to the trader; bitcoin itself is the reward. The market value of bitcoin is only as large as its size, but as long as there are participants willing to hold it and provide bookkeeping services, bitcoin will continue to stay.

The Difference Between Bitcoin and Gold

Bitcoin believers like to compare Bitcoin to gold. They point out the similarities between them, such as the fact that the total amounts for both assets are limited, and they are easy to divide and carry, they also never wears out, besides, that neither is subject to manipulation by any individual or organization. However, in other ways, the two are very distinctly different. In terms of liquidity and divisibility, bitcoin is superior to gold. However, bitcoin is far less accepted in the marketplace as a form of monetary payment than gold. After all, gold has become a globally recognized value in human economic activity, and has been used as a medium of exchange for most of history. Therefore, the trading price of gold products is supported by gold’s function as a medium of exchange and an asset. In terms of length of use, bitcoin is of course new, but its acceptance in the market has been very rapid. The recent rise of Bitcoin has further advanced the acceptance of Bitcoin in the market.

Factors and Risks of Bitcoin’s Rise

The recent development of crypto-digital finance in the US market clearly supports this market for Bitcoin. Besides, the explosion of DeFi in recent months has drawn the market’s attention to crypto-digital currencies. In addition, the significant increase in the number of stable coins(based on USD) has provided the basis for Bitcoin’s price increase. What’s more encouragement from US financial regulators for the development of crypto-digital finance has also led more mainstream financial institutions to enter this space. Investors in the U.S. market have also begun to take a more positive view of Bitcoin and large purchases of bitcoin by institutions and celebrities have also contributed to the rise in bitcoin’s price. These factors, as well as improvements in the infrastructure for providing related transaction services, have provided a more solid market foundation for Bitcoin’s price rise.

In terms of risk, the biggest near-term risk for Bitcoin remains compliance. Bitcoin itself has been defined as a virtual asset, so there is no problem in the U.S. market. What affects the price of bitcoin is a number of related services. These services include trading mediums and trading venues, as well as some of their trading activities. In October of this year, for example, the CFTC and the Department of Justice began prosecuting BitMex, and it is expected that U.S. financial regulators will continue to do so in the coming years. Such regulatory measures will certainly affect the price of Bitcoin.

In the longer term, Bitcoin will face competition from other digital assets. Among the current crypto digital assets, there is no digital asset that is based on an underlying commodity or equity. Therefore, it can be argued that Bitcoin has no competing digital trading product. Nowadays, more and more mainstream financial institutions have started to enter the crypto-digital asset space. In Switzerland, for example, the Swiss Digital Asset Exchange has emerged. In the U.S. market, there are also efforts underway to encrypt and digitize real estate-based interests in order to facilitate the flow of real assets. When these interests in the real economy are encrypted and digitized for trading and circulation, then there will certainly be more trading capital in the market for these traded products. Thus, this will naturally disperse the funds coming into Bitcoin, which in turn will cause the price of Bitcoin to fall. Of course, this will be a long-term process.

Article from Gu Yanxi, Founder of Liyan Consulting

Translated by Yang(Mengyan Finance)



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To translate some latest policy and issues on blockchain and fintech happened in China