Bitcoin: Not a Currency but a Currency Landmark

On June 2, we invited Mr. Xu Yuan to the Xiangshuai Reading Club to share his book "The Boundary of Currency: The Economic Logic of Digital Currency" through live broadcast. We compiled the essence of the live content and shared it with you.

Book club guests

**Xu Yuan: **Professor and doctoral supervisor of the National School of Development of Peking University, and researcher of the Digital Finance Research Center of Peking University.

**If the price of an asset fell by 70% in half a year, would you buy it? **

Perhaps the answer of most students is - dare not buy, there is a sense of sight when the bubble bursts.

Then let me ask another question: **If an asset rose from a few cents to more than 20,000 US dollars in 13 years, would you buy it? **

Perhaps the reaction of most students is that there is a sense of sight of a big bull stock, and they will consider buying it.

**However, the asset mentioned in both questions is Bitcoin. **

Since 2010, Bitcoin has had the largest increase among major assets, and none of them.

In 2022, Bitcoin fell from a high of 68,000 US dollars to below 20,000 US dollars to a minimum of 18,000 US dollars, a 70% decline, and it only took 7 months.

At present, cryptocurrencies represented by Bitcoin have risen, and the total market value of cryptocurrencies in the world once reached more than 3 trillion US dollars. Regulators in many countries have also begun to tolerate and accept Bitcoin and include it in regulation. At the same time, the underlying technology of Bitcoin - "block chain" - has officially entered the stage of history.

Against these backdrops, Bitcoin appears to be a core asset that cannot be missed.

But the question is: do you really understand Bitcoin?

**Understanding Bitcoin is different from simply understanding an investment product, but a key to understanding the future. **

01** What is the value of Bitcoin? **

In the physical sense, Bitcoin is a string of encrypted characters, which is worthless in itself, let alone the so-called "intrinsic value".

**Then why is Bitcoin so expensive? **

In fact, the starting point of this question is to compare it with sovereign currencies. Bitcoin has no intrinsic value, does the dollar have it? There are no dollars, and at best they are fine print.

The value of the U.S. dollar comes from the credit endorsement of the U.S. government and circulates in the U.S. and other parts of the world with the help of the U.S. government’s strong credit. This is true of sovereign currencies of all countries around the world.

**Like banknotes, bitcoins have no intrinsic value, but circulate on the network with the help of a new type of credit - "technical credit". **

Technical credit means that Bitcoin borrows a technical system called "block chain" to create a fully open, distributed, tamper-proof, and traceable database. This database can be viewed by anyone, it is open and transparent, and it is extremely difficult to tamper. The above is an existence that is out of anyone's control, so it has gained the trust of many people.

** For any asset, it is very attractive to be safe and not be manipulated by humans. **Since government credit can support a sovereign currency worth hundreds of trillions of dollars, it is not surprising that technology credit can support bitcoins worth hundreds of billions of dollars.

Behind the value of any asset is credit after all. In this sense, Bitcoin is indistinguishable from sovereign currencies. The last thing to compare is the strength and robustness of credit.

02****Why there is a sovereign currency,

** Still want to create Bitcoin? **

In modern society, legal currency is issued by the government, and the legal currency of a strong government has a high status. The credit of the US dollar reflects the credit of this strong government.

But this credit is not perfect. After the financial crisis in 2008 and the epidemic in 2020, the three major central banks of the United States, Europe, and Japan competed to print money. People are increasingly worried about excessive currency issuance, and the demand for alternative currencies and assets is increasing.

There are many hazards of excessive currency issuance:

**The first is inflation. The hard-earned income and wealth of ** residents will be diluted by excessive currency issuance. Therefore, people are very vigilant and disgusted with excessive currency issuance.

**The second is "robbing the poor and giving to the rich". ** You must know that the over-issued currency is not evenly distributed among the crowd. Someone always gets it first, and someone gets it later. Those who get it first pay a very low cost, and those who get it later have to exchange their labor and assets, and the cost is very high.

In each over-issuance of currency, relatively disadvantaged groups such as small, medium and micro enterprises and ordinary residents are often the last to receive currency, which will lead to greater inequality.

Therefore, although the sovereign currency is issued by the government, it is far from neutral to the distribution of wealth. **The closer to the distribution center, the more "seigniorage" will be shared. **

The birth of Bitcoin was the moment when the money printing competition between the United States, Europe and Japan became more intense after the 2008 financial crisis. Against this background, the total amount of Bitcoin was fixed at the beginning of its design, eliminating the possibility of over-issuance of currency.

**Bitcoin's birth naturally has the color of rebelling against traditional financial institutions. **

03** What will the currency of the future look like? **

The birth of Bitcoin is an impact on sovereign currency, so can Bitcoin replace sovereign currency?

**Cryptocurrencies are not intended to replace sovereign currencies for the foreseeable future. **Cryptocurrency without sovereign endorsement cannot be supported by the government and cannot be widely circulated.

Therefore, cryptocurrencies such as Bitcoin cannot fulfill the function of currency, and are more of a digital asset that serves as an investment tool for people.

**Although Bitcoin is not a currency, it may cause great changes in the human monetary system. **The technical elements contained in Bitcoin and the wave of cryptocurrency caused by it will all lead to the evolution of the mainstream currency system, and even the transformation of business organization methods and social organization methods. The stable coins that have been issued and the central bank's digital currency that has been developed on a large scale show that this evolution is already taking place.

**The future monetary system is still very uncertain. The only certainty is that the system is evolving rapidly. **

In order to understand the future evolution, we must gain a deeper understanding of the nature of money. Everything we know, including some firmly held beliefs, may be dogmas, is in the process of being broken.

For example, in the 1990s, Japan was widely criticized by mainstream economists in the United States because of its loose monetary policy. However, during the financial crisis in 2008, the US government's easing was even worse than that of Japan, and various theories were invented to prove it.

By 2020, the three major central banks of the United States, Europe, and Japan will start printing money together. There is no need for any explanation, but a race to the top.

The practice of European and American central banks since the 21st century shows that the criticisms against Japan in the 1990s are not valid. If Japan did not have easy money at the beginning, the consequences might have been disastrous.

**So standing 30 years ago, today's monetary policy can be described as magic. **

The signals we can see are that beliefs have changed, history has turned, and the future of the human currency system is full of variables.

**There is no truth in this world, only perception. ** Human perception of currency is changing rapidly.

Bitcoin is not a currency, and the future of Bitcoin is unclear, but the emergence of Bitcoin has accelerated the evolution of currency and revealed the possible future of currency.

It is almost certain that the currency of the future must contain some elements of Bitcoin. **

Therefore, although Bitcoin is not a currency, it is transformative and a landmark of currency.

Only by understanding the laws of currency movement can we understand the laws of the economy.

I hope that the book "The Boundary of Currency: The Economic Logic of Digital Currency" can help you better understand the evolution of cryptocurrency, refine the economic logic behind it, and analyze the impact on future currencies.

Believe that your questions about digital currency can be answered in the book.