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Bitcoin is Not the Investment Opportunity You Missed

In the past week, bitcoin trading price soared again, exceeding USD 19,000 for the first time. A few years ago, this newly created cryptocurrency was only priced at a few cents or dollars, and even in some cases geeks exchanged thousands of bitcoins for only a piece of pizza. As it skyrocketed so much that people now complain of missing the biggest investment opportunity in the decade. While in my opinion, bitcoin is not a kind of currency, nor a proper investment.

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For bitcoin, people may have missed out on its unexpected great profit in recent years, but it is by no means the so-called investment opportunity. Its trading price’s repeated exceeding people’s expectation fails our prediction about its short-term price. In any case, common sense shows that bitcoin is more likened to “tulip” in economic history. History tells that tulips in Holland of the 17th century rose sharply as an investment product but soon downed to its reasonable price as a flower.

There are two typical analogies for bitcoin. First, it is a kind of “currency”, as its name implies, “coin” refers to a kind of currency. At the birth of bitcoin created by Satoshi, it is endowed with the idea of coinage, and hackers were trying to create this new currency for digital space use that would go beyond those now used by countries in the real world. The blueprint behind bitcoin is to create a brand new and real currency that uses blockchain technology to solve the problem of trust even between strangers, eliminating the need for traditional central banks in every country as credit intermediaries.

To a certain degree, for the first inventors and supporters it can be likened to the imagination that a group of “pirates” takes up a small island in the Pacific where they establish a nation and issue currency which would be recognized by the global financial system. In the case of bitcoin, this “Pacific Island” exists in the digital world rather than in reality.

However, the assumption that bitcoin’s being a currency has disillusioned and its ambitious attempt to challenge the existing global financial system has failed. It can only act as a token used for exchange of goods in a very small market (among geeks, or illegal underground markets) for bitcoin’s lacking of monetary attributes. Each government has its own definition about bitcoin, for instance, as early as the end of 2013, the notice issued by the People’s Bank of China clearly pointed out that bitcoin should be a specific virtual commodity. This defined that it was not a currency, but similar with the props and skin in computer games. It is not that tradition unwelcomes new stuff but that the mystery of bitcoin can hardly win the trust from people.

The second frequently mentioned analogy for bitcoin is “gold”, it indicates that it’s a valuable investment subject like gold. According to its algorithm design principle, bitcoin’s total amount is limited. It needs to be dug up in the mining way, like gold mining, taking a lot of efforts. However, this analogy is also inexact. As time goes by, the discovery of gold’s value has undergone a long history, which can be deemed that its high value is pushed by many historical events, but not for bitcoin. Nowadays’ bitcoin is by no means gold, gold is a value-stable investment, while bitcoin is highly risky, and this is why we would rather compare it to the over-hyped tulips in Netherlands of the 17th century.

Another rarely mentioned analogy is that bitcoin is like the miles we accrued at an airline or a point card purchased from an Internet company which can be exchanged for services or games. This analogy may be lacking in imagination, so it is rarely mentioned by bitcoin advocates. Take a point card for example, it runs by cash. In China we can purchase a point card by cash, but it is usually used in one-way direction, that is, it cannot be exchanged back for cash, not like a casino token which can be a two-way exchange; And for another, supported by the company who provides services, point cards are only limited to services provided by that Internet company only. These are completely different from bitcoin.

In a word, today’s bitcoin has not yet live up to its original expectation and now become a highly risky, inflated investment subject, more precisely, it is a speculative target as it does not have any explicit value.

The blockchain technology behind bitcoin may be a valuable technology and protocol if it can be independent of bitcoin. Or more generally, blockchain is a “large open ledger ” in which all transaction information is recorded using a computing program. One of the assumptions about the future of blockchain is that it is kind of a new protocol about trust. Various subjects in digital space can establish trust relationships in this open and large ledger and realize assets exchange based on this trust. Blockchain may have the status of what TCP/IP to Internet. The current Internet is mainly used for information exchange. Blockchain as well as smart contracts, if they can become basic protocols, can be used to assist in the exchange of assets.

Some people therefore compare the current blockchain to Internet in the early 1990s, they are really trying to imagine and attempt it in a variety of scenarios. One possibility is that it can be used as a basic protocol for creating tokens, which is known as circulated encrypted digital proof of stake. However, risk still exists there. The past six months has seen the basic protocol blockchain technology was not used to practical application but instead became a speculative high-tech stunt as a prop for other cryptocurrencies/tokens besides bitcoin.

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