During the 2008 financial crisis, the central banks of various countries printed money to create liquidity, but this had a side effect of widening the global wealth gap. As a result, many people have become skeptical about our monetary systems that are dominated by these central banks. Enter the creator of Bitcoin, Satoshi Nakamoto, the pseudonym for a person or group of people who wanted to change this situation. He (or they) published a Bitcoin white paper in October 2008 and mined the first Bitcoin block, dubbed the “Genesis Block.”
Since then, Bitcoin, which is based on decentralization, uses a peer-to-peer networking and consensus system, and utilizes the blockchain as its fundamental technology, has etched out its place in history. Subsequently, Bitcoin has become a speculative target of similar commodity attributes due to sharp price changes. It was also severely cracked down upon and restricted by regulators of various countries because of its use for illegal purposes such as money laundering and black market trending.
Bitcoin price has been fluctuating wildly in the past few months. From the international financial market to the street, Bitcoin has become one of the hottest topics.
As a leading one-stop integrated brokerage and financial technology company in the field of digital assets, RedBlock’s CEO Jeremy Zhou was once again invited to join a series of interviews produced by the well-known financial program Amber World together with Yang Dahao, the Co-founder of Tuoluo Tech. They discussed whether Bitcoin can represent all digital currencies, the reasons why Bitcoin has fluctuated so wildly, and whether the decentralized encrypted digital currency represented by Bitcoin can become dominant and possibly win out over traditional currencies.
Below are excerpts from the interview, entitled “Bitcoin: Speculative Bubble or the Future of Currency?”:
Amber: Although some people might already know about Bitcoin, there are still lots of people who don’t know much about it. I want to ask both of you to define Bitcoin. What is Bitcoin?
Zhou: When it comes to Bitcoin, the general public often thinks it is a coin or currency, but I think it is an asset. Bitcoin has liquidity, circulation value, and the value of the underlying material, and these are the main standers of asset valuation. Therefore, simply defining Bitcoin as a commodity currency is not comprehensive enough.
Amber: Many people, including me, heard about Bitcoin more than ten years ago. As people come to understand more, many new terms such as “mining” will appear. So, please talk a little bit about the origin of Bitcoin.
Yang: We can use the concept of playing a game as a reference to explain and understand Bitcoin. We can imagine a situation. There is an unknown game with a points mechanism, and players can get rewards by playing the game and beating the level. This mechanism is actually like Bitcoin mining. Mining is the process of solving math problems. It’s an algorithm, which can be understood as a game math problem. As the number of participants continues to increase, it gradually becomes a currency or asset.
Amber: For general investors who want to catch up with the trend of Bitcoin, how should they invest?
Zhou: Without the ability to verify the value behind this asset and without fully understanding its logic, it would be better for general investors to choose some legit agencies to invest in. Individual investors should choose carefully. I still encourage people to spend time researching the market and the logic of investing. After doing these two things, it will be easier to take the next step. Whether investing in Bitcoin or other cryptocurrencies, general investors should understand and pay attention to review the authenticity and reliability of the company behind the crypto.
Yang: Looking at it from another angle, Bitcoin belongs to the customer side. However, the operation of the blockchain requires certain technologies. People who don’t know about investment or risk prevention, cannot deal with risks. They will not make rational choices. They will blindly follow the trend and believe that the price of Bitcoin will continue to rise. This is the biggest risk of investment. There are too many uncertainties in the investment of cryptocurrency.
Amber: As early as more than a decade ago, when Bitcoin first appeared, individual users could mine by themselves. Does it still work on an individual level?
Yang: The “game” rule of mining is that users who complete the problem first can be rewarded. At present, every computer or even a phone with a configured program can mine, but it may take a long time to obtain a small gain. For example, it may take a hundred years of mining to obtain just 0.1 Bitcoin. To enhance competitiveness, institutional-level miners have emerged.
Amber: As a digital asset, will Bitcoin face the risk of hacking?
Yang: The cost of hacking is very high, which means that the cost will be far less than the return.
Zhou: In terms of Bitcoin, there are many mature custodians now. For instance, Switzerland had already issued 8 digital asset custody licenses as early as December 2018. Licensed institutions can not only custody real cash, gold, etc. but also provide custody services for digital assets such as Bitcoin. One of our business partners, SEBA Bank, has purchased 500 million USD worth of insurance for digital asset custody services.
Their servers have also been arranged deep in the mountains of Switzerland. In addition, SEBA Bank hired hackers who had attacked the security system of the Pentagon in New York to serve as the architecture engineer of the service to maintain the security layout. Its entire structure has begun to show a trend of specialization and advancement.
Amber: Countries including China that have not yet fully recognized and guaranteed Bitcoin compliance at the legal level are gradually improving and exploring better ways to apply Bitcoin. They hope to make Bitcoin into a legit financial product. This process will take time. Institutions need to continue to build their trust and improve the protection of laws and regulations. In fact, in a large environment, China’s central bank is still in the process of constantly understanding, exploring, improving and transitioning to recognition. At present, there is a lot of unknown capital flowing in. Will this cause harm or violate the law?
Zhou: : A long time ago, there was actually such a situation. For example, Bitcoin was used as a medium for Darknet transactions or money laundering. Now the administration within various countries has become stricter. The current legitimization of the entire market is also a reason for the value increase of Bitcoin. When more and more large institutions jump in and the infrastructure of the blockchain continually improves, the intervention of custodians and regulatory agencies has put stronger confidence and trust in the development of Bitcoin. Trust is value. As more people trust it, the value of Bitcoin will continue to rise.
If people do not trust it, then Bitcoin will be worthless.
Amber: Talking about the existence of Bitcoin, do you think Bitcoin is safe?
Zhou: I believe that as the infrastructure continues to improve, Bitcoin will become more and more secure. Compared with real money or other circulating products, Bitcoin will also be more reliable.
Yang: I agree with Jeremy. I think Bitcoin is much safer than all existing assets.
Amber: In the second half of last year, the price of Bitcoin fluctuated wildly. What caused the large price change? What is the logic of investing in Bitcoin, or its price change?
Zhou: I think that the volatility in 2020 might have been caused by “whales” (individuals or institutions holding large amounts of Bitcoin are called whales). For some reason, they liquidated, and it caused the entire market to fall. However, this situation is rare; it may also be due to the intervention of some institutions, such as Tesla. After all, Elon Musk himself is a Key Opinion Leader with a strong market appeal.
Yang: Bitcoin is still in its “infancy”. Just like a child, its “emotion” will fluctuate significantly. It has something in common with the mood swings of shareholders. They have no judgment on the value of things. Before this year, most of the Bitcoin investors were retail investors, and even institutions that are also entering the market are taking approach. As more institutions enter the market, the price of Bitcoin will gradually stabilize. Compared with the West, the Chinese investment market will be relatively speculative. On the contrary, in the West, they are more inclined to value investing, which means Long-term holding, so its volatility is relatively limited.
Amber: Nowadays, when it comes to any topic related to Bitcoin, there is one person who is inevitably mentioned: Elon Musk, the founder of Tesla. He used to say, “Compared with cash, Bitcoin is ‘not that stupid’ cash.” How do you take this?
Yang: The so-called “stupid cash” is like a frog that isn’t moving in warm water, with a lack of market sensitivity and a slow market response. Most of the time, this money lies quietly on a bank card. Generally speaking, the public isn’t that sensitive to inflation. For example, when there is only one dollar on an account, one will not have any sense of inflation. However, Tesla, which holds billions of dollars on hand, will be affected. Therefore, it is necessary to choose a good asset to invest in, which can also describe as a risk hedging method to deal with future inflation.
Zhou: I think he is comparing Bitcoin with the traditional monetary system. The United States continues to print money, and in fact, the debts of central banks in various countries are also very high. With the high debt situation, how can we believe that the money will not collapse or depreciate one day? I think Musk’s metaphor is a very, very euphemistic way to describe this matter from a higher perspective. Compared with centralized power or the state, decentralized Bitcoin is not controlled by any third party and is solely determined by itself or the market, and it should be more credible.
Amber: Is Bitcoin’s previous surge caused by a flood of liquidity?
Zhou: In fact, any financial product has a speculative nature. I think investment and speculation are not two completely independent concepts. On the contrary, I think the investment is strategic speculation. Investors can turn speculation into investment by carefully studying the changing pattern and influencing factors of the investment target.
Amber: What conditions does Bitcoin need to have before it can develop from a speculative product to a real currency?
Zhou: Bitcoin needs to be more dispersed and needs more people to hold it, not just a few people to control most of the currency. In other words, Bitcoin needs more liquidity and common use. More usage scenarios, more robust regulatory mechanisms, more platforms, and companies are needed to design different tools with various functions such as trading, development, and management. If more and more people trust and hold Bitcoin, the entirety of Bitcoin holdings will become more dispersed. Because of the larger diversified base, it will develop into a so-called monetary value system. As far as the current development trend is concerned, participating institutions and service providers are constantly improving and growing, and Bitcoin is on the path of systemization.
Yang: I think that Bitcoin has reached this stage. At present, the whole world is participating in such operations and “games.” A peer-to-peer payment system has been constructed, and this is how Bitcoin works. I think the critical factor is not technology. It’s time.
Amber: The supporters and opponents of Bitcoin often change. Take celebrities as an example. Bill Gates had a strong opposition to Bitcoin before, but now he’s more on the fence; Elon Musk, who used to be a crazy fan of Bitcoin, suddenly began to emphasize investment risk again.
Amber: What are the current views on Bitcoin held by major central banks around the world?
Zhou: Overall, the legislation in the United States and Europe is relatively open. Bitcoin has been recognized as a valuable asset in both regions. For example, in the US, the very well-known Grayscale Fund has become a bridge for traditional capital to buy Bitcoin shares. Investment funds such as Bitcoin ETFs are not very different from traditional funds. The fund will also rise and fall, and it is through the fund company that one can buy shares. The difference is that Bitcoin funds will use Bitcoin as valuable assets in the later stage, while other funds will use company stocks or options as valuable assets. For products that already have the attributes of financial assets, the relevant laws should be applied. In other words, the value of Bitcoin has been protected, supervised by law, and incorporated into the tax system. Now the transactions on platforms such as Coinbase in the United States require payment of handling fees, and revenues are also subject to tax. Therefore, Bitcoin transactions have been included in the regulatory system.
China has not yet issued the relevant laws, but according to some court cases from local governments, it is regarded as a kind of digital asset.
Amber: For those countries that have not yet officially or fully recognized Bitcoin, are their investors at risk when making Bitcoin investments?
Yang: Yes. When the regulatory rules are not clear enough, disputes arising from investment transactions will not be protected by law. In addition, irregularities can also lead to chaos in the industry. Some countries have successively begun to study the value of Bitcoin and its financial attributes. The speed of research is directly related to its supporting regulations and governance levels.
Amber: Do you think there is a competitive relationship between the central bank’s digital currency and Bitcoin?
Zhou: I think there is no competitive relationship between the two because their attributes and functions are different. There is a related reciprocal relationship between the two. As mentioned in the previous discussion, when a central bank digital currency and Bitcoin trading pair or options clearing product is availed, the two will correlate but not a competitive relationship.
Yang: I don’t think the two are in a competitive relationship, but rather, a relationship of mutual assistance. For example, through decentralization, Bitcoin may become the world’s largest settlement currency for the U.S. dollar in a certain combination in the future. This is an impact of initial decentralized thinking, and the impact will bring about new changes.
Amber: Bitcoin is intended to develop into a mature monetary value system, although it is still in the “infancy” stage, and it has not received enough recognition. What kind of possibilities do you think will emerge in the process of maturity?
Yang: If Bitcoin wants to grow like gold in the digital currency field, it will inevitably have to stand the test of time, and there are various possibilities in this process.
Zhou: I believe that digitization is an irreversible trend. Bitcoin, as the basic representative and the earliest cornerstone of digitization, will surely be accepted and recognized by more people in the future. However, how to accept and recognize will vary from country to country and individual to individual.
Perhaps the beginning of Bitcoin journey is a garnering of everyone’s trust. However, there is still a long way to go before it develops into a mature, trustworthy currency system.
About Amber World
“Amber World” is the flagship outlet of Amber Finance, whose full name is Shenzhen Qianhai Amber New Media Technology Co., Ltd. Formally established in November 2020, the team comprises senior professionals from well-known domestic media organizations and financial institutions such as China Business News Group, 330 Media and so on, aiming to create new financial media with international influence.
At present, the company has two major sub-companies, Amber New Media Shanghai Branch and Shenzhen 330 Culture Media. Its business is divided into four major sectors, including short and medium financial videos, political and economic columns, financial and economic MCN, and integrated marketing of new media. Its IP includes “Change” and “Dr. Crisis” with millions of fans, with total network traffic exceeding 60 million. It also runs video platform, Xigua Video, as well as Ximalaya FM.
RedBlock is a digital investments firm that advises and invests in global blockchain projects. It invests strategic capital across the entire blockchain stack with a special focus on Web 3.0 infrastructure and decentralized finance. RedBlock works with its portfolio companies in new market entries, particularly into APAC, as well as tokenomics design and growth initiatives. RedBlock’s core team comes from a background in venture capital, investment banking and software development and are experienced market participants in the blockchain sector.