Bitcoin Price Volatility Surges

The year 2020 was a magical year. Despite continuous troubles from the beginning to the end of the year, asset prices performed very well. Apart from Tesla, the most eye-catching performer last year was Bitcoin. After a 300% increase last year, Bitcoin started this year with an increase of nearly 40%. Recently, Bitcoin has been a hot topic, and today I am also joining the discussion. Hello everyone, welcome to Chunyang's Notes.

In May 2010, a programmer in Florida exchanged 10,000 Bitcoins for two pizzas worth $25. This was the first physical transaction with Bitcoin. A simple calculation shows that 10,000 Bitcoins were worth $25 at that time. This year, the highest price of Bitcoin exceeded $40,000. If the programmer had kept the Bitcoins he used to buy pizza until now, he would be worth nearly $400 million. In 10 years and 7 months, the value of Bitcoin has increased by 16 million times.

What exactly is the wildly rising Bitcoin? A Bitcoin is a string of characters that exists on a computer or USB drive. Its biggest feature is that the total amount is limited, not exceeding 21 million coins. Because the number of Bitcoins is capped, and it is similar to the scarcity of gold, many people call Bitcoin digital gold.

Here, we must understand one thing: there is a big difference between Bitcoin and gold. Gold is a form of wealth recognized by people from all over the world, both ancient and modern, while Bitcoin is not. Not only are there many countries that prohibit Bitcoin transactions, but there are also many people in the private sector who do not recognize the value of Bitcoin. It can be said that the acceptance of Bitcoin is far worse than that of gold.Additionally, compared to gold, Bitcoin has no utility value. Globally, 2,500 tons of gold are used industrially each year or made into jewelry, but Bitcoin lacks such value.

Advertisement

Bitcoin is by no means digital gold; it is more like a limited-edition handbag pursued by a small group of people.

Brand-name bags can fetch a good price in the circles of socialites, but to the majority who do not understand bags, even if they are limited edition, they are still just bags, and selling them at a high price is very difficult.

Buffett said: "Bitcoin doesn't do anything, it just sits there, like a shell or something else, and to me, this is not an investment."

Buffett compared his buttons with cryptocurrencies, emphasizing that no matter how high the price of buttons can be sold, their use is also very limited.

The story of Bitcoin's surge last year

Since Bitcoin is more like buttons or brand-name bags, why did it increase several times?

Just like the surge of many stocks requires a story, the surge of Bitcoin last year also had a story:

The first story is the global currency over-issuance.

In the turbulent year of 2020, the root of the unusual rise in various assets was the flooding by central banks.Here is the translation of the provided text into English:

There is a piece of data: The Federal Reserve has existed for 107 years, but 40% of its balance sheet expansion was completed in the last 11 months. Currently, global investors are forced to hold a staggering $18 trillion worth of negative-yielding bonds. In an era of significant wealth shrinkage, where there is a limit to the total amount and virtual currencies that cannot be over-issued easily, can easily become an attractive story.

The second story is digital gold.

JPMorgan Chase, in a recent report, stated that Bitcoin will compete with gold for the status of "alternative currency."

JPMorgan's logic is roughly as follows: since the wealthy pursue diversification in their asset allocation, and gold is almost a standard in the wealth management of the rich, if Bitcoin is considered digital gold, then the wealthy will also include Bitcoin in their assets. If millionaires on Earth hold 0.2% of their assets in Bitcoin, the price of Bitcoin would be $15,000. If this proportion increases to 1%, the price of each Bitcoin would be $75,000.

Although this story is also very appealing, it must meet the premise that Bitcoin equals digital gold.

As we mentioned earlier, Bitcoin has no common points with gold other than scarcity. If scarcity alone can be compared to gold, there are many scarce resources in the world. Why should the wealthy believe that Bitcoin will be the same as gold? Of course, this does not include the wealthy who need money laundering.

The third story is that American financial institutions have begun to invest in Bitcoin.

Among the institutions investing in Bitcoin, the most famous is Grayscale Investments. This American company raises funds by issuing private fund shares and then hoards a large amount of Bitcoin.

At the beginning of 2020, Grayscale Investments had about 260,000 Bitcoins. By the end of the year, the number had increased to over 600,000, accounting for 3.26% of the total Bitcoin supply.

Grayscale's fund design is very unique; its fund shares can only be subscribed to and not redeemed. Investors who want to exit can only sell their fund shares on the secondary market. This design makes Grayscale's Bitcoin a one-way street, greatly supporting the price of Bitcoin.Additionally, the international version of Alipay, PayPal, has also announced its entry into the Bitcoin market, allowing ordinary customers to directly purchase and hold Bitcoin online.

The stories of currency over-issuance, digital gold, and institutional entry have propelled Bitcoin's wild price surge.

Is Bitcoin really a good investment?

A 300% annual return rate makes many people itchy to try their luck and dive in for a profit. Should we invest in Bitcoin?

Personally, I do not recommend investing in Bitcoin.

There is an essential difference between virtual currency trading and financial asset investment. Stocks and bonds are backed by predictable cash flows, and commodities such as iron ore, oil, and grain have clear production uses. Behind Bitcoin, there is no clear value; its only way to cash out is to sell it to another person who believes in these stories.

This is actually very similar to the Dutch tulip bubble. When the public realized that the enormous wealth they were chasing was nothing more than a small tulip bulb, the tulip story became unsustainable.

There is another reason why I do not recommend investing in Bitcoin: the Bitcoin market is increasingly resembling a casino manipulated by big players.

Almost all investors in the Bitcoin market are short-term speculators. Data shows that 80.77% of Bitcoin investors aim for short-term profits, with only 13.81% of users choosing to hold long-term.

Most people invest in Bitcoin for a quick gamble. A few days ago, when Bitcoin plummeted, within 24 hours, more than 200,000 people in the market suffered margin calls, with the amount reaching 14.1 billion.Many people invest in Bitcoin with leverage, typically at 10 times leverage. This means they pay a margin of 100 yuan to buy Bitcoin worth 1,000 yuan. If the price moves more than 10% in the opposite direction, they will be liquidated.

The volatile price of Bitcoin, with fluctuations exceeding 10%, is all too easy.

If I could manipulate the price of Bitcoin, all I would need to do is create a 10% drop during the price rise and a 10% increase during the price fall. Without considering margin calls, both bulls and bears would theoretically be liquidated, and I would be able to profit from the entire market.

In recent years, the concentration of Bitcoin holdings has been increasing, making it entirely possible for market manipulators to emerge.

As of the end of 2020, there were 2,260 Bitcoin addresses with a balance exceeding 1,000 Bitcoin, holding approximately 7.89 million Bitcoin, which accounts for 44% of the total circulation.

Since major Bitcoin holders prefer to spread their assets across different addresses and few disclose their holdings publicly, the actual concentration of Bitcoin is likely higher than the statistical results suggest.

Furthermore, about 18 million Bitcoins have been mined, but only 3 to 4 million are traded in the market, with only 20% of the total Bitcoins in circulation.

With concentrated holdings and limited trading volume, such a market is highly susceptible to manipulation.

Here's an interesting fact: in the first 7 months after Bitcoin was introduced, its creator, Satoshi Nakamoto, mined 1.1 million Bitcoins, which is 6% of the current total. These Bitcoins have remained untouched and are now worth nearly $40 billion.

If a market has the four characteristics of high leverage, violent price fluctuations, limited trading volume, and high concentration, then it is a perfect market for profiting at the expense of others.Before any asset bubble bursts, many people will have made a fortune, where is the upper limit of the bubble? How high will the prices rise? How crazy can the market sentiment be? No one can predict these things.

A rational investor should not be provoked by soaring prices to lose their reason, but should, outside of the fervent market sentiment, carefully consider two questions: Do I truly understand the investment logic behind this? Is this really worth so much money?

If, like me, you are confused by the skyrocketing of Bitcoin, it is best not to join in the excitement of something you do not understand.