Bloomberg 13 Asks BTC: Is It Better Gold or Another Bubble?

Original article by Olga Kharif and Edward Robinson

Compiled by the Carbon Chain Value APP team

Bitcoin is crazy, really. Tesla founder Elon Musk simply changed his Twitter account signature to "#bitcoin", which immediately stimulated the price of this "king of cryptocurrency" to surge by 20%.

In fact, since the end of 2020, the price of Bitcoin has almost quadrupled, and this rise seems to have returned to the heyday of the cryptocurrency market three years ago. However, in 2017, after soaring to nearly $20,000, Bitcoin's price plummeted and its value shrank by more than two-thirds. At that time, few people thought that Bitcoin would evolve into a useful form of currency for most transactions. However, after the latest wave of roller-coaster turmoil, more and more institutional investors have begun to speculate that Bitcoin's acceptance will be further improved, and it can also hedge inflation better than gold, and may even shake up the entire traditional financial world.

1. Why is Bitcoin making a comeback?

In 2020, due to the COVID-19 pandemic, global financial markets experienced severe shocks, and "stimulating" Bitcoin took a big step towards the mainstream. In October 2020, global payment giant PayPal Holdings Ltd. announced that it would allow customers to use Bitcoin to purchase goods and services, and some large financial institutions also began to invest funds in cryptocurrencies, making it easier for their investors to add Bitcoin to their portfolios. At the same time, many countries around the world began to inject a large amount of liquidity into the financial system to stimulate a rapid economic recovery, but this practice also sparked debate about inflation. As a result, more and more people began to buy scarce assets such as gold and Bitcoin to avoid asset shrinkage.

2. Is Bitcoin another bubble?

In fact, every price increase seems to test the true Bitcoin believers in the market and attract public attention-on January 7, 2021, the total market value of cryptocurrencies exceeded $1 trillion for the first time. Today, hot financial technology startups such as Robinhood and Revolut have made cryptocurrencies a key component of daily transactions. Despite this, investing in cryptocurrencies is still full of risks. Since most cryptocurrency investment tools are not regulated, the market prices of many cryptocurrencies, including Bitcoin, are vulnerable to market turmoil. In early 2021, the speed of the Bitcoin price surge was so staggering that it dwarfed almost all financial asset boom cycles in the past 50 years.

3. Who is buying and using Bitcoin?

Well-known fund managers like Mike Novogratz and Alan Howard have invested hundreds of millions of dollars in Bitcoin and other cryptocurrencies. According to a survey conducted by Fidelity Investments in 2020, 36% of institutional respondents already hold cryptocurrencies in their portfolios, and 60% of respondents expressed interest in Bitcoin and other cryptocurrencies (this indicator was less than 50% in 2019). To be sure, Bitcoin is still a relatively "light" trading market, and those "whales" who control a large number of tokens play an important role in the crypto alternative market. According to researcher Flipside Crypto, according to anonymous accounts tracked in the digital currency distributed ledger, less than 2% of "whales" control 95% of the total supply of available tokens. Once the "whales" exit the market, it is likely to cause ripple effects throughout the ecosystem. Bitcoin is not only a "consensus concept" adhered to by believers, but there are also many pragmatic financial operators in this field, so everything is possible.

4. What is the appeal of Bitcoin to investors?

In short, greed and fear. Bitcoin supporters believe that with the participation of institutional investors, Bitcoin has become a mature asset. But some people also question whether Bitcoin's recent rise can be similar to the growth of traditional financial assets? Traditional assets (such as government bonds) have almost zero returns, and some have even reached negative returns, so many hedge funds have begun to look for alternative investment options. At this time, they found that the price of Bitcoin continued to climb, and more and more people were worried about missing out on this emerging asset. Although some cryptocurrency opponents continue to remind that Bitcoin will inevitably collapse again, many people have changed their minds recently - it seems that enough people have begun to believe in Bitcoin. In addition, there are more discussions in the market, hoping to include Bitcoin as a legitimate hedge against inflation risks and a weak dollar.

5.Why is Bitcoin compared to gold?

Gold, a scarce resource, has long been an effective hedge against inflation and surged to an all-time high in August 2020. In response to the coronavirus pandemic, many countries have accelerated the printing of money, causing their currencies to depreciate, but miners have been unable to inject gold into the market. Bitcoin is attractive in part because it is not controlled by governments or their monetary policies and has a fixed supply - Bitcoin is even more restricted in terms of supply than gold. As governments and central banks implement "stimulus measures", many people are also concerned about inflation, and people are paying more attention to Bitcoin as "digital gold" than ever before. JPMorgan Chase & Co. market strategists say that if Bitcoin can attract as much money as is currently invested in gold, then in the long run, in theory, the price of Bitcoin could exceed $146,000 in the future.

6. Is Bitcoin legal now?

For investors with market intuition, they may be more willing to get involved in Bitcoin because Bitcoin has better protection measures. Of course, if you forget or lose your password, there is also the risk of losing millions of dollars. In the past few years, Bitcoin has also developed a stronger financial infrastructure, with custody services and trading services (with appropriate licenses and credentials), which has attracted many large regulated investors. For example, the US Treasury Department has proposed requiring banks and other intermediaries to keep records of cryptocurrency transactions and submit reports to verify the identity of customers of certain cryptocurrency transactions. In addition, many central banks, including the Federal Reserve and the European Central Bank, have begun to study how to digitize sovereign currencies, that is, to develop central bank digital currencies. However, US Treasury Secretary Janet Yellen believes that Bitcoin and other cryptocurrencies are still associated with activities such as fraud, money laundering, tax evasion, and cyber theft.

7. What exactly is Bitcoin?

Bitcoin, born out of the 2008 financial crisis, is an unusual form of money: it is not a currency you can hold, nor is it issued or backed by a national government. At its core, Bitcoin and its imitators are a set of software protocols for generating digital tokens that are difficult to counterfeit and reuse, and whose transactions are traceable. However, Bitcoin only has value within the scope of its consensus.

8.Where did the Bitcoin system come from?

The concept of Bitcoin was proposed in a white paper written in 2008 by a person or group of people using the name Satoshi Nakamoto, whose identity remains unknown to this day. In fact, many online games have already used virtual currencies before the advent of Bitcoin, but what makes Bitcoin different is the key idea behind it: blockchain. Blockchain is a publicly visible and largely anonymous online ledger that can be used to record Bitcoin transactions. In 2017, the frenzy swept the cryptocurrency market, when Bitcoin soared from $789 to $19,000, and thousands of people sold tokens in "initial coin offerings (ICOs)", but as the bear market arrived, many people lost money.

9. What is blockchain?

Imagine what would happen if you used a bank to make an online transfer? They would first verify that you have enough funds, then subtract the corresponding amount of funds from the account maintained by the bank itself, and then your account balance would change in a giant database, and then be credited to another database. Even though you log in to your so-called account, the transaction is actually completely controlled by the bank, and you just see the transaction results. Throughout the transaction process, you trust the bank to take out the appropriate amount and trust the bank not to spend the money again. The blockchain is a database that performs this series of transaction tracking functions, the only difference is that there is no bank or any other centralized institution involved in the whole process.

10. Who performs Bitcoin banking functions?

Bitcoin transactions are completed by consensus on a decentralized network. People can conduct Bitcoin transactions through sites that provide electronic "wallet" services. These sites upload data to the blockchain network. New transactions are bundled together and then broadcast to the entire network for verification by so-called Bitcoin miners. In 2020, the Bitcoin block reward halved, that is, the number of new Bitcoins distributed by the Bitcoin network to miners for verifying transactions was halved, which many people believe is one of the reasons for the recovery of Bitcoin prices. The Bitcoin block reward halving occurs every three to four years and is designed to slow the mining rate of new Bitcoins. If all 21 million Bitcoins are mined, mining production will stop completely, but the whole process is estimated to be achieved until 2140. By the end of 2020, the total number of Bitcoins mined on the market exceeded 18.5 million.

11.Who can become a miner?

Virtually anyone can become a Bitcoin miner, as long as you have a very fast computer and lots of electricity. The transaction data in each Bitcoin block is encrypted using a formula that can only be unlocked through large-scale, repeated calculations. Miners race to solve this puzzle first, requiring massive computing power. If a miner verifies a transaction first, the resulting data can be added to the linked blockchain of data, and the miner is rewarded with newly issued Bitcoins. Because each block contains links to earlier blocks, trying to spend the same Bitcoin twice means having to modify all the blocks in the entire chain, which is a huge workload, so this model effectively ensures network security. In addition, as miners compete, they verify each other's work on each transaction.

12. Can other cryptocurrencies replace Bitcoin?

The number of cryptocurrencies and crypto tokens on the market is growing - now numbering into the thousands - but Bitcoin remains the most famous, time-tested, and valuable cryptocurrency, and is widely recognized as the most potential store of value. Other cryptocurrencies have different uses, such as:

• Ethereum is a cryptocurrency network that can issue DeFi tokens;

• So-called stablecoins, such as Tether, are cryptocurrencies whose prices are pegged to the U.S. dollar or other fiat assets.

• There are also some cryptocurrencies that back their value through reserves.

13. How do I buy or invest in Bitcoin?

While there are many ways to buy cryptocurrencies on the market, all of them carry certain risks. Of course, people can buy directly from regulated cryptocurrency exchanges such as Coinbase. In addition, accredited investors can also choose some Bitcoin Investment Trust investment tools that track the price of Bitcoin (such as Grayscale). In addition, investors can also buy and sell Bitcoin futures, and once regulators approve this idea, it is expected that Bitcoin exchange-traded funds will be approved soon. But it should be noted that even many people who are optimistic about the future of Bitcoin admit that the cryptocurrency market is highly volatile. Take 2017, for example, when the price of Bitcoin rose sharply and then plummeted 83%, and then entered a long bear market that lasted for a year.