What exactly is Bitcoin

On December 5th, five ministries and commissions including the Central Bank announced that financial institutions were prohibited from conducting bitcoin business, but stated that bitcoin trading is a commodity buying and selling behavior on the Internet, and ordinary people have the ability to participate at their own risk free. At one point, bitcoin fell as much as 35% in Asian trading hours.

However, Bitcoin has won affirmation on the other side of the ocean. One of Wall Street's largest institutions, Bank of America Merrill Lynch, announced that its research scope officially covers Bitcoin and valued Bitcoin at $1,300. Its analyst David Woo He believes that "Bitcoin can become a major payment method for e-commerce and become a strong competitor to traditional currency transactions".

Bitcoin originated in 2008, a domain name bitcoin.org was blocked After the successful anonymous registration, on October 31 of the same year, a paper titled "Bitcoin: P2P Electronic Currency System" was published on a certain website; 10 days later, an open source community called bitcoin appeared on sourceforge.net s project. No one knows who the creator of this project is. The developer is left with only one name, Satoshi Nakamoto, who completely disappeared from the Internet after building the Bitcoin system.

Based on the concepts of openness, peer-to-peer, consensus, and direct participation, Satoshi Nakamoto has developed a bitmap on the platform of P2P peer-to-peer network and distributed database based on the open source software and the working mode of block cipher in cryptography. An operating system for currency issuance, trading, and account management. Its system allows nodes throughout the peer-to-peer network to reach network agreements according to their seed files, thereby ensuring fairness, security, and reliability in currency issuance, management, and circulation, and promises that Bitcoin will become an email-like system. "Electronic cash" can avoid inflation and cannot be counterfeited under the premise that no approval is required and everyone has the right to issue. After the payment is completed, the user loses ownership of the bitcoin.

Users can obtain Bitcoin through complex algorithms and a large amount of computing resources according to Satoshi Nakamoto's system. As long as they download the open source client and let their computers participate in solving mathematical problems, as long as they win, they can get this virtual cash , and this method is widely known as "mining" (Mine). Of course, users can also buy bitcoin through exchange services such as BitInstagnt and Coinbase.

Unlike traditional currencies, Bitcoin's operating mechanism does not rely on central bank, government, corporate support or credit guarantees, but on network agreements reached by seed files in a peer-to-peer network, theoretically ensuring that any person, institution, or It is impossible for the government to manipulate the monetary aggregate of Bitcoin, or to create inflation. Its total monetary volume gradually increases at a predetermined rate by design, and the increase gradually slows down, and finally reaches a limit of 21 million in 2140.

According to the analysis of Wall Street News, Bitcoin has at least some of the following advantages:

1. As an exchange intermediary, the transaction cost of Bitcoin is very low. It adopts a decentralized peer-to-peer network, and network users independently confirm transactions without a third-party clearing agency.

2. Compared with traditional currencies, Bitcoin transactions are more secure, transparent and anti-counterfeiting. Bitcoin adopts an encryption algorithm that cannot be cracked by hackers. Moreover, Bitcoin is easy to trace, and all Bitcoin transactions are publicly archived on the network, which can effectively prevent illegal activities. Finally, Bitcoin's automatic authentication mechanism also makes it impossible to counterfeit.

3. The supply of bitcoin is limited and there is no risk of inflation. The design of the Bitcoin system is somewhat modeled after the gold supply, with a cap of 21 million, which can effectively prevent inflation caused by central bank spam.

4. The relative anonymity of Bitcoin is attractive to people in crisis or capital-controlled countries. According to reports, many believe that Bitcoin can be used to evade high taxes, capital controls, and property forfeiture. For example, the number of bitcoin users began to soar during the Cyprus crisis on March 16 this year. China also has a large number of people buying bitcoin now.

5. As Bitcoin becomes more and more accepted, it may succeed in a "winner takes all" market. While many competitors are now emerging, Merrill believes that the e-money market is a winner-take-all market, and consumers will not be interested in using different currencies with similar characteristics. The more popular Bitcoin becomes, the higher the barriers to entry for competitors and the harder it is for them to gain market share.

6. From the perspective of asset allocation, Bitcoin is less sensitive to risk, much like gold. For example, after the October FOMC minutes suggested the Fed was less easing than expected, gold fell 1%, while Bitcoin fell 3%.

But at the same time, the following shortcomings of Bitcoin will hinder it from becoming an international currency:

1. Violent price fluctuations seriously affect the function of Bitcoin as a store of value. While Bitcoin is also subject to some positive news, the wild swings in Bitcoin’s price are more of a speculative act. This volatility not only affects Bitcoin's store of value function, but also makes it unlikely that some large merchants will accept Bitcoin as a means of payment. Merchants currently accepting bitcoin digest its volatility internally and don’t pass it on to consumers, but Merrill doesn’t think this behavior will continue.

2. Although Bitcoin is efficient and transparent, it is still possible for regulators to incorporate it into regulation, thereby increasing transaction fees. The government will not allow a new currency to be used for "black market" or tax evasion. As long as Bitcoin is regulated, transaction fees are bound to increase and the advantage of low fees diminishes.

3. The qualification of the Bitcoin trading platform is questionable. Since the vast majority of Bitcoin users cannot mine by themselves, they can only purchase Bitcoin with their local currency through the Bitcoin platform for transactions. Currency risk aside, many bitcoin trading platforms have been hacked and users have suffered losses. For example, in one report, the system of the Bitcoin trading platform Bitcoinica was hacked and 18,547 bitcoins were lost. Recently, the European trading platform BIPS also lost 1,295 bitcoins due to security incidents.

4. At present, the right to mint Bitcoin is in the hands of "miners". With the popularity of Bitcoin, the government has no minting power, and its minting revenue will decrease. This means that governments may prevent Bitcoin from getting bigger.

5. The payment confirmation delay is as long as 50 minutes, which will hinder the widespread application of Bitcoin. Bitcoin requires a 50-minute confirmation delay after payment, during which time Bitcoin may be re-used by buyers for payment. This is not a problem between two traders who trust each other, because the seller trusts that the buyer will not use it again. But between two anonymous traders, this creates a high, unhedgeable risk.

6. Bitcoin is not legal tender, which may be detrimental to its becoming an international currency. Unlike fiat currencies, no one is obligated to accept bitcoin payments. The value of Bitcoin depends on the confidence of its users, and once people expect its usefulness to decline, Bitcoin will disappear in an instant. Continuous price swings and hacking attacks will continue to negatively impact consumer and investor psychology.

In short, as an electronic currency that breaks the traditional credit currency system issued by the central bank and endorsed by the government, Bitcoin has a lot of room for imagination. However, the limited supply caused by the design principle makes it difficult for Bitcoin to be used on a large scale, and at the same time, excessive speculation makes the price fluctuate greatly, and the investment risk increases sharply. There is no precedent for how Bitcoin will develop in the future, but the Internet is already changing the payment and financing models of the financial industry, and the fundamental change of the financial industry in the future - currency, is not a lie.