What to make of the Bitcoin price turmoil?

Chen Jianqi: Bitcoin price has been shaking at a high level since last year, does the price have reasonableness? Bitcoin development still faces many challenges that determine the greater uncertainty Bitcoin may face in its development.

Why Is Bitcoin Disrupting Expectations?

Looking at the evolution of the Bitcoin market, it was not the beginning of its creation that saw the phenomenon of social enthusiasm for Bitcoin. At the time of its creation in 2009, $1 could buy almost 1,300 bitcoins. At that time, bitcoin was just a game for curious people, and many official institutions and experts were not optimistic about bitcoin’s future. Along with the rapid rise of bitcoin’s price, many reports were constantly warning about the huge risks that bitcoin might face, and although bitcoin experienced high volatility, the overall upward momentum did not reverse. coin has undergone a dramatic transformation from Cinderella to Snow White in just a few years, and Bitcoin has subverted the industry’s mainstream expectations.

Why has bitcoin exceeded industry expectations? Some argue that it is a problem with existing theories and that the existing theoretical framework cannot explain the phenomenon of Bitcoin. But the analysis in this paper finds that it is not the theory that is faulty, but rather the evolving properties of Bitcoin. Bitcoin is essentially a game concocted by a computer program. In technical terms, Bitcoin is a digital code created using blockchain and other technologies that are titled as currency, and this currency is theoretically attributed to the category of digital currency. This is not uncommon in real life, as the International Monetary Fund has created a similar digital currency called Super Drawing Rights (SDR) back in 1969. Various digital currencies have emerged in recent years along with the development of computer internet technology, and there are no significant differences between Bitcoin and other digital currencies, other than technical differences.

Bitcoin has essentially more in common with other digital currencies. Before the emergence of Bitcoin digital currencies did not have any great impact, which empirically determined the pessimistic expectations of many experts about its future. In theory, not only is bitcoin not tied to a physical object, but there is no official guarantee such as a government. In this context, the unanchored nature of digital currencies such as Bitcoin exposes obvious technical flaws that make it difficult to function as a currency. The phenomenon of buying and selling digital currencies such as Bitcoin in large quantities with legal sovereign credit currencies such as the U.S. dollar has now emerged in society, and a new feature of the commoditization of digital currencies has emerged. The reason commodities can be bought and sold is that they have significant use value, but digital currencies such as Bitcoin theoretically fall into the category of electronic or virtual currency, and without a credible third party promising their purchasing power, digital currencies such as Bitcoin do not have much intrinsic value.

The lack of value attributes of digital currencies such as bitcoin determines that it is difficult for bitcoin to play the role of a currency, and the judgment that bitcoin’s prospects are not favored is consistent with theoretical logic. However, why has bitcoin seen a price spike since its creation? Why is society so enthusiastic about bitcoin? What exactly has changed with Bitcoin? In reality, bitcoin will lead the new development of digital currency, essentially because more and more enterprises in society are committed to accepting payment settlement in bitcoin, which solves the most important link for bitcoin to realize the function of money, that is, bitcoin gradually has the function of acting as a general equivalent, related merchants through bitcoin for commodity pricing, merchants accept bitcoin for commodity settlement, promoting bitcoin function from Bitcoin has gradually evolved into a quasi-currency.

acts as a general equivalent and other quasi-currency characteristics, injecting huge development space for bitcoin, and also prompting society to be full of huge imagination and expectations for bitcoin. If Bitcoin becomes a real currency, more and more countries will use Bitcoin, more and more businesses will accept Bitcoin, and the huge trade market around the world will create a wider space for Bitcoin than traditional sovereign credit currencies beyond national borders. On the one hand, the SDR, the official IMF-issued digital currency, is still only used for internal IMF bookkeeping and cannot be used in circulation in the marketplace. On the other hand, traditional sovereign credit currencies such as the U.S. dollar act as international currencies, facing the demands of serving domestic economic development and monetary policy independence, as well as the responsibility of maintaining the stability of international reserves, and the dilemma determines the larger defects of sovereign credit currencies. In this context, bitcoin becomes quasi-currency, decentralization and other features will prompt bitcoin to be more competitive, more and more international transactions may use bitcoin, the limited supply of bitcoin will face challenges, to meet the global market demand for bitcoin, bitcoin may appear the pressure of sustained price increases, the community’s expectations for bitcoin price increases is easy to understand.

Bitcoin Price Caps: Short, Medium, and Long-Term Price Estimates

From the above analysis, bitcoin is not a currency in the strict monetary definition sense, but it already has the characteristics of a currency that acts as a general equivalent. Bitcoin is not a specific physical commodity, it is similar to credit money, but does not have the full characteristics of credit money, i.e. bitcoin is not issued by monetary authorities, does not have monetary attributes such as fiat and compulsory, does not have the same legal status as mainstream money, and is not equivalent to money. However, many merchants already accept bitcoin for payment, and can also use bitcoin to buy and sell illegal goods such as guns, ammunition and drugsThese in fact give Bitcoin an endorsement of value, allowing Bitcoin to begin to act as a general equivalent, and Bitcoin has the attributes of a currency.

Bitcoin has become a quasi-currency, signaling that Bitcoin has transcended the realm of traditional commodities, and analysis of Bitcoin’s price should obviously be done from the perspective of monetary attributes. Since Bitcoin has been borderless since its inception, it has gradually become a currency, and thus Bitcoin has gradually evolved into a quasi-international currency. As Bitcoin’s share of international currencies changes, the demand for Bitcoin in countries around the world will adjust accordingly, and its price will vary. In an extreme scenario, if Bitcoin becomes the world’s dominant international currency, assuming that the current share of international reserves in U.S. dollars is replaced by Bitcoin, then the price of Bitcoin would be at least the ratio of current reserve assets denominated in U.S. dollars to the number of Bitcoins. According to the latest International Monetary Fund announcement of the share of the U.S. dollar in international reserve assets, as of the March 2017 quarter, the U.S. dollar accounted for 63.5% of the global reserve share, and global foreign exchange reserves totaled $11.3 trillion, and as of mid-January 2018, there were already about 16 million bitcoins, according to which the price of each bitcoin would have to be set at $427,000 to meet social demand.

Of course, the change in the international status of the U.S. dollar, not only its economic and financial laws, but more importantly, and the United States of America’s strong support, bitcoin is difficult to challenge the international currency status of the dollar, and basically not feasible in the short term. In addition, the development of bitcoin heralds the transfer of minting tax from the official to the private sector, which profoundly touches the sovereignty of government currency issuance and may prompt a major adjustment in the pattern of world financial interests, all of which increase the uncertainty of bitcoin. Some countries have already started to take measures to restrict bitcoin trading, and if more countries restrict bitcoin trading in the future, then bitcoin’s development will be affected. In particular, if bitcoin trading is banned through international coordination, then bitcoin’s quasi-currency properties will be lost, and bitcoin’s future will face great uncertainty. Thus, the question is which countries will focus on promoting bitcoin? If all countries in the world will ban bitcoin trading, then it will be difficult for bitcoin to survive and there will be no point in discussing bitcoin prices.

observing the development of bitcoin in various countries, Japan has become the world’s largest bitcoin trading market, the Japanese government’s attitude towards bitcoin is relatively ambiguous, and even rumors that the Japanese government will clarify the status of bitcoin as a currency, all signs indicate that Japan has included bitcoin in its financial development strategy. Why is Japan going above and beyond the norm when it comes to bitcoin development? The reason is that Japan may want to use bitcoin to enhance its position in the international monetary and financial system. Japan has pushed hard to internationalize the yen since the 1970s and 1980s, but as of now, the yen’s share of international reserves has remained at single-digit levels. The yen’s lukewarmness has dashed Japan’s dreams of elevating its international financial voice through the internationalization of the yen, and the fact that bitcoin was supposedly created by a Japanese named Satoshi Nakamoto and that Japan has become the largest trading market may prompt Japan to have The opportunity to enhance its voice in the international monetary and financial system through bitcoin in the future, and the possibility that bitcoin de-neutralization could lead a revolution in the global payment system and force a restructuring of the global financial ecology, from this perspective, it is not difficult to understand the importance the Japanese government attaches to bitcoin development.

If Japan takes bitcoin as an important breakthrough in its efforts to enhance its financial discourse, then the yen may gradually withdraw in the future, allowing bitcoin to gradually replace the yen’s status as an international currency. As a result, bitcoin’s share of international reserve assets could level out to be the yen’s share of international reserves. According to the latest data released by the International Monetary Fund on the share of the Japanese yen in international reserve assets, as of March 2017 quarter, the yen accounted for 4.5% of the global reserve share, according to this combined with global foreign exchange reserves of $11.3 trillion and 16 million bitcoins measured, each bitcoin price must be set at about $30,000 to meet demand, even considering that the total number of bitcoins will increase in the future to 21 million, then the price per bitcoin should also be set at around $23,000.

One might argue that it took decades for the Japanese yen to reach the level of reserve share it has today, so one might speculate that even if bitcoin grows faster, it may be difficult to reach the yen’s current level of international reserve share in the short term. Thus, a more objective way to analyze the potential global reserve share of bitcoin in the short term is to compare bitcoin with currencies that have just started to internationalize, which is more comparable. 2016 saw the entry of the RMB into the IMF’s SDR currency basket, and from this perspective, the RMB is one of the major currencies that have started to internationalize in recent years. an instrumental variable for measuring the share of international reserves. According to the latest data released by the IMF on the share of the RMB in international reserve assets, as of March 2017 quarter, the RMB accounted for 1.1% of the global reserve share, if the short-term bitcoin reserve share reaches the level of the RMB, according to this combined with the global foreign exchange reserves of $11.3 trillion and 16 million bitcoins measured, the price of each bitcoin must be set at about $7,520 in order to meet demand, and if we consider that the total number of bitcoins will increase to 21 million in the future, then the price per bitcoin should be set at around $6,020.

As you can see, the scarcity of bitcoin dictates that its price will dynamically adjust as the scope of use changes. In the short term, bitcoin has undergone a gradual evolution from a computer code to a quasi-international currency. Bitcoin’s share of international reserves may rise to about 1%, and a reasonable price for bitcoin is around $6,000 to $7,500. In the medium term, bitcoin’s share of international reserves may rise to the level of the yen, and then the reasonable price of bitcoin is around $23,000 to $30,000. In the future, if the level of Bitcoin’s internationalization continues to rise, then the price of Bitcoin will continue to rise, and in the long term, if Bitcoin has the opportunity to develop into the most important international reserve currency, then the price of Bitcoin could rise to over $400,000.

Bitcoin’s price has oscillated at a high level since last year, mostly staying between $10,000 and $20,000 in recent months, compared to the aboveThe short-term bitcoin price levels measured are suspiciously high, although they may be reasonable if we consider society’s expectations for bitcoin in the medium term. However, these are only theoretical calculations and are based on the premise that Bitcoin will be socially acceptable and healthy, which is a risky assumption. As mentioned above, Bitcoin development also faces many challenges, Bitcoin will affect the minting tax and the monetary sovereignty of countries, Bitcoin decentralization will force the reshaping of financial business, force a huge adjustment of financial payment mechanism, prompt financial institutions to face greater pressure to reshape their profit model, financial regulators will also face the challenge of regulatory innovation, the above issues determine Bitcoin may face greater uncertainty of development .