加密货币：是货币还是泡沫？（上） --科技属性的泡沫

Text ｜ Chen Ningdi

Since Bitcoin became the first decentralized cryptocurrency in 2009, the cryptocurrency market has been booming for more than 10 years. From Bitcoin as a cryptocurrency to thousands of cryptocurrencies around the world, the market capitalization once surpassed 2 trillion US dollars. At the same time, cryptocurrency has also gone from being a digital game within the Geek (Geek) community to a “commodity” with a price, and has entered the public eye. However, what most people know about cryptocurrencies is limited to their sharp rise and fall, and stories that have been heard about “trading coins” to achieve freedom of wealth.As professionals in the financial industry, we cannot blindly trust all kinds of articles that promote or belittle cryptocurrencies. Instead, we need to objectively and calmly combine history to analyze whether cryptocurrencies are assets or bubbles.

1. Background of the birth of cryptocurrencies

--Financial crisis and crisis of trust

The concept of cryptocurrency was born in 2009 with the advent of Bitcoin, and every time cryptocurrencies are mentioned, one concept that cannot be circumvented is blockchain. In a nutshell, we can think of blockchain as an online platform through which cryptocurrencies are traded and generated. Blockchain is decentralized, tamper-proof, and uses cryptographic algorithms to ensure the security of transactions.

The birth of cryptocurrency is a product of a certain stage in the development of digital currency. Many people mistakenly equate cryptocurrency with digital currency. In fact, cryptocurrency is only a form of digital currency. Another type of digital currency is virtual currency, that is, the virtualization and digitization of fiat money. The birth of digital currency marks the real beginning of the development of modern payment technology. The earliest expression was credit cards. By the 80s, credit cards were ubiquitous in American society. They replaced traditional payment methods such as cash, checks, and remittance, bringing great convenience to transactions, so it quickly spread to other countries, triggering a revolution in cashless payments since then.

The next iteration of payment technology was initiated by the Internet. Efficient global Internet transactions have brought digital cash transactions to a new level. In the early days of the internet, almost all payments were made by credit card. Subsequently, in order to improve the efficiency of transactions, ensure the security of Internet transactions, and increase trust among counterparties, local Internet payment solutions finally appeared. The first widely successful online payment company was Paypal, which was listed in 2002. Third-party payment companies such as Alipay and Amazon Wallet that have appeared since then all fall into this category. These types of companies are all supervised and reviewed by large financial institutions such as the government and banks. The virtual currency they manage is actually the virtualization of fiat money.

The US experienced the bursting of the Internet bubble in 2000, deflation, and interest rates. People began to pay attention to the credit bond and fixed income markets, and large amounts of capital invested in the Internet were also destroyed. At the time of 9/11, the federal funds rate was 3%, and monetary easing was intensified after the incident. Interest rates fell directly to 1% in 2002 and 2003, thus speeding up the bond securitization market. Theoretically, the market should experience inflation at this time, but the development and application of the Internet and technology industry and the influence of China's entry into the WTO have greatly increased production efficiency and greatly reduced costs, thereby curbing inflation. At the same time, financial institutions use derivatives such as CDS (Credit Default Swap, Credit Default Swap) to earn huge profits through real estate securitization, and capital flows to real estate and related financial markets, while also creating huge financial bubbles. Inflation reflected asset prices and the virtual economy, and eventually reached untenable heights, triggering the 2008 financial crisis.In order to cope with endless bank failures, central banks around the world have taken steps to bail out financial institutions, print large amounts of currency, and carry out large-scale asset purchases. This practice is known as quantitative easing. On the one hand, before the financial crisis, the government and financial institutions did not effectively supervise the institutions that caused the bubble and let them go. On the other hand, after the crisis, quantitative easing was carried out in order to preserve large institutions, causing money in people's hands to depreciate in disguise, causing the public to have great distrust of the government, banks, Wall Street, etc. This is also the reason why some people later sought cryptocurrencies.

Furthermore, the development of Internet technology has greatly facilitated digital cash transactions in exchange for valuable products, and at the same time, data analysis generated by customers through Internet applications is also used to generate another kind of commodity value.However, the development and innovation of internet transactions has also caused two problems. One is that it is centrally regulated by the government, which restricts transactions in certain countries or certain products. Second, the data value of Internet users is being exploited in large quantities by Internet companies. As a result of these two, users' rights to privacy and freedom are greatly infringed upon. The birth of Bitcoin and blockchain technology and its decentralized nature can theoretically solve the problem of trust among users, and also avoid negative factors caused by centralized management of government banking institutions or large Internet companies.


2. Is cryptocurrency the new bubble?

The technical foundation of cryptocurrency is blockchain technology, and cryptocurrency is also the first application method of blockchain technology. It is currently the most successful and mature example of the industrialization of blockchain technology, and can be regarded as blockchain 1.0. Bitcoin, which represents cryptocurrency, is the reward users receive after recording transactions and generating new blocks on a decentralized ledger. Many people are optimistic about the future of cryptocurrencies because of their confidence in blockchain technology. They refer to blockchain technology as the “next internet,” and extend the concept of “metaverse” in recent years, as well as NFTs (non-homogenized tokens) of virtual art, which have become extremely popular recently.

However, judging from the history of scientific and technological development, all epoch-making scientific and technological innovations will create a certain degree of bubble in the early stages of development. For example, the Internet, which is closest to us, has also gone through the stages of web 1.0, 2.0, and 3.0, and the US internet bubble also occurred during the transition from web 1.0 to 2.0.These bubbles all have the following characteristics: 1. It may be a revolutionary technology industry that will drastically change future lives; 2. Easy and low interest monetary environment; 3. Investors and consumers are optimistic about this; 4. Wave after wave of articles, publications, and publicity praising this technology; 5. Sufficient supply and entities that can be invested; 6. It is completely impossible to evaluate using a normal valuation system.

Let's take a look back at the internet bubble from 1995 to 2000. In 1995, the stock price of Netscape (Nascape), which was founded only one year ago, rose 108% on the day it went public, marking the beginning of the Internet investment boom. Since then, in many stock markets in Europe, America, and Asia, investors have invested large amounts of wealth in overvalued high-tech companies, and the stock prices of Internet and IT related companies have risen rapidly. At the same time, the low interest rate environment since 1991 has provided funding for many internet startups。Although most of these companies lack actual operating capacity, they can still obtain significant investment and even go public due to the novel “DOT COM” concept. The “DOT COM” company's business model relies on continuous network effects to gain market share at the cost of long-term losses. During periods of loss, the company relies on venture capital, particularly initial shares (funds raised) to cover expenses. The novelty of these stocks, combined with the fact that the company actually lost money and was difficult to value, pushed many stocks to jawfully high prices.

In March 2000, the Nasdaq Composite Index climbed to 5,048 points, more than double the index a year ago. The Internet bubble reached its highest point, and then began to burst. The bubble subsided in 2001, and most internet companies stopped operating after burning up their venture capital, and many were not even profitable. Meanwhile, during this period, some companies that once dominated the Internet industry also stepped down, and their stock prices plummeted, then they were bought out or even went out of business, leaving the market bleak. Among them, the most famous ones include leading figures in the Web1.0 era, including Netscape (Netscape), AOL (AOL), Yahoo, etc.

The Nasdaq began to rebound in 2003, starting a new round of prosperity in the Internet economy and the high-tech industry. However, the only two giants that survived after the Internet bubble burst were Apple and Amazon. Among them, Amazon's current business model was slowly formed only after the Internet bubble and developed new competitiveness. After entering the Web 2.0 era in 2003, companies newly established or re-established business models began to take the lead. Facebook (now renamed Meta), Netflix (Netflix), and Google from the well-known tech giant Faang all appeared after the bubble.

Another similarity between the craziness of the cryptocurrency market and the internet bubble is the correlation between the monetary environment and price trends. As can be seen from the chart below, the federal funds rate was 3% in 1993, then remained below 6%, and continued until 2000. The Nasdaq Composite Index continued to rise during the same period, and the bubble burst after interest rose above 6% in March 2000. From 2002 to 2004, the federal funds rate remained in the low interest rate range of 1-2%. The Internet industry was readjusted, some companies gradually recovered, another group of new companies emerged, and the industry was reshuffled. Since then, new Internet giants have been born.

Cryptocurrency was born at the end of 2009. Between 2010 and 2018, the Federal Reserve implemented quantitative easing, and interest rates remained at 0.25%. In December 2016, the Federal Reserve began raising interest rates eight times in total, and the benchmark interest rate was raised to 2.5%. The entire cryptocurrency crashed in 2018, and Bitcoin plummeted 80%. With the beginning of the 2020 pandemic, the Federal Reserve cut interest rates and quantitative easing again, and cryptocurrencies rebounded sharply and repeatedly reached new highs.

The development of cryptocurrencies to date has shown many of the same characteristics as the development of the first generation of the Internet, the Internet bubble.The first is the loose monetary policy and the environment of low interest rates; the second is the “decentralized” nature of cryptocurrencies, which is thought to represent the future, so there are also many articles and advertisements promoting the technology; the third is the high price, taking Bitcoin as an example. The current price is 40,000 US dollars, which reached the highest price of 60,000 US dollars, yet its high price is not supported by reasonable intrinsic value and cannot be evaluated by any valuation system; finally, the “decentralized” characteristics of cryptocurrencies, which are thought to be likely to disrupt the entire payment industry and replace existing ones in the future currency.

Next post,Let's talk about cryptocurrencies from a monetary point of view, is it possible for cryptocurrencies to replace money in the modern sense of the traditional sense?

(The author is the co-founder/chairman of the board/CEO of Delin Holdings 1709.HK)