Back to the source: Where did the value of Bitcoin and Ethereum come from?
Whenever people mention cryptocurrencies such as Bitcoin, it is always associated with speculation, investment, hype and even Ponzi schemes, it seems that cryptocurrencies are just a pile of waste paper.
This statement may not be completely wrong, but in fact, thousands of dollars in derivatives are traded every second in the financial market of the world, and these include stock market indices, CFDs, and spread betting are actually just betting contracts, not real For example, if you buy a (Long) XAUUSD gold trading pair on Vintage, in fact, your trading has nothing to do with gold at all. Your trading may not really affect the supply and demand of gold, and you will not really receive When it comes to gold, this is not Amazon sending you the gold you bought the next day. The gold that most people trade in this world is actually just a bill, and you don't really go to New York to get gold. Even in futures trading like oil or wheat, I don't hear how many traders end up going to a tanker or truck to pick up the physical. Everyone is doing these transactions almost only for profit. Except for some people who buy gold as dowry or jewelry, the gold held by most people is just a bill to exchange for gold and may not be available in their lifetime. Look at your own gold.
So, why do traders buy gold? There can be thousands of reasons, such as hedging inflation risks. But in the end, investing in gold has only one purpose: "hope that the next person will buy from you at a higher price".
In fact, the characteristics of bitcoin and gold are indeed very similar. Although some people say that gold can be used for industrial refining, I am sure that 90% of people who buy gold do not buy gold for its industrial use. "Expect the next person to buy from you at a higher price." In fact, although it is not a Ponzi scheme in operation, it can be regarded as a kind of Ponzi economics. There are many such Ponzi economics in the world, including pension funds, medical insurance, etc. in various countries.
Back to the topic, so what is cryptocurrency? At present, there are thousands of coins in the entire cryptocurrency market. There are at least hundreds of coins in the larger scale. There are also cryptocurrencies such as Game-fi, Web3, and even walk to earn. Going to talk about two of the most important cryptocurrencies: bitcoin and Ethereum.
The status of the two in the cryptocurrency market is already unbreakable. Among them, BTC, as the first cryptocurrency, is the leader of the blockchain or cryptocurrency market. Even people who do not know blockchain at all have heard its name. , its leading position is self-evident. When people mention Bitcoin, it will use its scarcity and limited circulation as its value basis. Of course, the economic price of an item is always determined by supply and demand. Of course, this statement is not wrong. The original economic model of Ethereum determines that it has no upper limit of supply, in other words, it can be issued indefinitely. Of course, under the current PoW situation, it will have a fixed supply of 12,000 more ETH per day.
As a "currency" (although in fact, the Ethereum token will be more suitable), of course, it must have three characteristics of currency, namely:
1. Medium of Exchange
It can be used as a trading tool between commodities.
2. Value Measurement Unit of Account
The price of the commodity can be marked and can be used as a split. Some cryptocurrencies, such as NFTs, do not have this feature, as their indivisible and heterogeneous nature makes it difficult to price transactions in other commodities.
3. Store of Value
Can store "purchasing power" for the future
Both BTC and ETH can basically meet the above conditions, except for NFTs. NFT cannot be traded as a currency because it cannot be used as a price measure. For example, the last transaction price of BAYC#3749 in OPENSEA was 740ETH. If you want to use a BAYC#3749 to buy a cup of coffee at Starbucks, then it always It is impossible to only charge you 0.00000420196 BAYC#3749 and then exchange the remaining 99.999…. BAYC#3749 of change for you. Because the essence of NFT is non-homogeneous and indivisible (ignore some Protocols that claim to be able to divide NFT and other things). But in addition, BTC and ETH do fulfill the three functions of currency. Of course, you said that the bitcoin you bought for $60,000 now only has 22,000 left. The purchasing power of Bitcoin is inflated today, and even the legal currency issued by the state can also greatly reduce your purchasing power like the current JPYUSD.
Essentially, what will happen when society comes to accept cryptocurrencies and adopt them in everyday life?
We first remove all factors, such as the Defi of ETH or the factors that can be used as a gas fee to run a smart contract (Smart Contract), etc., and only consider the factor of currency.
Suppose there are a hundred people in a small village.
First imagine that there is no currency in this village, and everyone is bartering. Obviously, it can work at the beginning, but later the villagers will find it strange and too inefficient. For example, I planted some bananas and wanted to buy a chicken from Xiaoqing, who raised chickens, but she didn’t want bananas, so the deal with Xiaoqing failed. If Xiaoqing happens to want apples, and Xiaohua who grows apples just wants to eat bananas, then I can exchange my bananas for Xiaohua's apples and then pay Xiaoqing the apples in exchange for her chickens. This situation is relatively optimistic. , but for a rural society, the changes can be even greater. After all, everyone’s desires are different. Some people want wheat and others want an axe. A hundred people alone may have a hundred kinds of demand and supply. It is extremely difficult to strike a deal, and of course you can still get it occasionally, but the transaction costs involved can bore you to death.
Trading is one thing, there are more troublesome situations, like when I was young in the village, I worked hard and planted a lot of bananas. There were more bananas than I needed, and I was full of fat every day but still There is a bunch of bananas that are stored here until they expire because I don't need them, and when I am old and lack of labor, I can't afford to grow bananas. At this time, I think that if the bananas of the day can be kept until today, then I can at least eat bananas. But the shelf life of food is limited after all.
As a result, because of the difficulties in transactions, currency finally came into being in human society. Different primitive societies around the world, from Mesopotamia in the Middle East to the aborigines in New Guinea, also have something similar to currency. , occasionally shells, and silk is usually a currency in the Silk Road, after all other spices such as pepper are too cumbersome to carry and expire.
Then the village evolved, this time envisioned with the idiosyncrasies of Bitcoin.
Now I ask you to imagine a situation. Suppose there are 100 people in a small village. If there are 10,000 gold coins in total, and the village is a closed village that does not trade with foreigners and does not produce gold, what will happen?
This village will operate normally at the beginning. Gold coins can normally provide villagers with a reliable trading tool as currency. People no longer need to barter, and the elderly will save a pile of gold coins because of their efforts in their youth. to survive. But when the population of this village gradually increased from 100 to 120, the situation began to change.
When the village grows, someone starts giving birth, and the farmer learns new techniques to increase his productivity, trouble starts. For example, Xiaoqing is the only chicken farmer in the village who keeps chickens. She learned that she can make hens lay a bunch of infertile eggs, which she named eggs. buy eggs from her. At the beginning, the situation will be quite stable, but as the countryside continues to progress, the society begins to show stronger productivity. Xiaokang finds that he can use cattle to help plough the fields so that his planting range can be wider. The improvement has greatly increased production, and some people can no longer engage in agriculture or animal husbandry. A smart young man Xiaoxin invented the carriage, which can make transportation more convenient. Various products in this rural area have increased, but as a closed rural area , the total wealth is only 10,000 gold coins, and the price of commodities has dropped as the commodity continues to increase! One pound of bananas that people used to spend one gold coin to buy can now buy two pounds for one gold coin.
Precisely because there will be no inflation, because no one will produce gold coins, and with the continuous increase of commodities, people's gold coins are more valuable than before. What will happen to the countryside at this time?
A young Jie who is very good at arithmetic finds that as long as he doesn't spend today, the gold coins he holds will be worth more tomorrow! He originally planned to buy a one-hundred-gold carriage today to deliver the goods, but he found that the carriage maker was getting faster and faster, and more and more people had carriages, and the price of carriages was lower every day than yesterday, so he decided to stay Put down gold coins and buy it tomorrow.
After all, human beings are selfish. When the first person finds out that as long as he saves gold coins, he can have higher purchasing power in the future. Even Xiaojie expected that as long as the goods continue to follow this trend, his 100 gold coins will be enough. He doesn't have to work anymore! And the rural population is increasing again, the technology is also constantly changing, and more commodities are coming out. The productivity of the entire rural area is higher every day, but the total amount of gold coins in this village will never change. The 10,000 gold coins (wealth Total) Originally, everyone in the village had an average of 100 gold coins, but when the village became 200 people, it became only 50 gold coins per capita! Moreover, when some old people dig gold coins under the tree but die before they can spend it, the gold coins are lost again, and the currency of the whole society continues to decrease and productivity increases.
This is the phenomenon of "deflation" in economics. And will this phenomenon be a good thing? Absolutely not. Deflation will cause people not to consume but keep the currency, and the operation of the economy depends on social consumption and the continuous operation of money. At this time, the society will enter another stage, that is, the rich decide to keep money at home. Spending, looking forward to buying cheaper goods tomorrow, and when more and more people in the society think like this, everyone will stop producing, but the productivity of the whole society will decrease, and everyone will wait for tomorrow with gold coins at home. free"! Just because everyone doesn't consume, the poor become poorer, and the fruits of their hard work become no one to buy (because the demand in society weakens).
This situation can be roughly applied to Bitcoin. When I first heard that the supply of Bitcoin is limited, my first reaction was "the one who buys the earliest will get the most advantage!" Indeed, we have all heard that Few people get rich by investing in Bitcoin in the early days, and many cryptocurrency rich people are financially free because of one decision, but this may not be a good thing for cryptocurrency and even the blockchain, especially many people are like old people in the countryside, because they lost their money. The actual supply of Bitcoin in the market is less than the 21 million originally envisaged, and these cases will only become more and more. Everyone knows that the processing of keys is very troublesome, and one is accidentally lost. .
When people in the whole society see that Bitcoin is becoming more and more scarce, then everyone will only buy it as a "store of value", put it in a cold wallet and then throw it in a bank safe for financial freedom, but the corresponding Fewer and fewer people are transacting with bitcoin, and dozens of bitcoin whales are waiting for bitcoin to become a million dollars apiece. A total of 129,699 bitcoins held by MicroStrategy will be worth $130 billion. Seeing that people get rich out of thin air, will anyone still be willing to use bitcoin?
I'm not judging BTC's price cap, but I do think that bitcoin will be less and less used because of its scarcity, become more like gold, and become a kind of reserve currency things, but if an economy is completely dependent on something like bitcoin as a currency, it will limit the productivity of the economy, because bitcoin is limited, and even if bitcoin is regarded as a reserve currency, the same will limit the ultimate economy of the society. After all, to a large extent, the economic growth of various countries has a positive relationship with their M2. When the overall wealth of the society is only so much, even if the society produces more things, it will not increase the wealth, and only the problem of deflation is in exchange.
Deflation doesn't sound as bad as inflation, but it isn't. Most people (including me) have never lived in a society with a highly tightened monetary system, but in 1980, the then chairman of the US Federal Reserve, Paul Volcker, raised interest rates to 20%, shrinking the monetary system of the entire society. To the extreme, at that time, buying a house and a car required a 20% interest rate (simplified interest rate, the actual interest rate depends on the situation), and the annual interest rate of depositing money in the bank is about 10%. , the interest charged annually is enough for them to live. Who else would innovate and work?
Under the economic model of replacing this rural area with Ethereum, it is actually not much different from the current currency, depending on what the Federal Reserve (Central Bank) in Ethereum will do. PoS, the daily new supply of ETH will decrease, and if the supply decreases, assuming that the demand remains unchanged, of course, the price of ETH will increase. However, this is a very esoteric knowledge. How much does it reduce to prevent deflation? There is no absolute answer here, and I am also sure that no economist in the world can answer it, because it is affected by many factors, including the number of users, popularity, usage scenarios of ETH, future markets, etc. Even the Federal Reserve has so many Nor can a central bank with top economists be able to keep US interest rates/money issuance at a moderate pace to balance unemployment and inflation. But we have all faced how expensive the gas fee of 4,800 yuan of Ethereum is under the prevalence of NFT. If Ethereum goes to 100,000 US dollars, and the gas fee is 0.01ETH each time, it will also be 1,000 US dollars. , this situation is unsustainable and will only make Ethereum users switch to other alternatives such as layer2 or public chains such as Near/Avalanche/Solana/Atom.
As an investor, you should never blindly follow some KOLs to shout "One million BTC! One hundred thousand Ethereum!", but to think about various possibilities according to normal logic and economic perspective, rather than listening to KOL's shouting orders It is the most important thing to read more books to broaden your knowledge.
The purpose of this article is to briefly describe the difference between BTC and ETH in terms of currency. The actual price can be extremely irrational. For example, tulips in the Netherlands can be so expensive that they can go bankrupt, but the madness is unsustainable, and the party will end one day. The situation of ETH is different, because it is not only a currency, but also a network certificate. In the world of blockchain, anything can happen. For example, the gas fee can be greatly reduced after being converted into PoS, and the supply of ETH will be reduced. At the same time, the amount of blockchain has also decreased. As an emerging revolutionary technology, various changes in blockchain are unpredictable. Again, the economic theory of this article is only a simple but not completely correct description of BTC and ETH as currencies. In the case of the following, not all factors have been considered.
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