http://zl.yibite.com/point/2014/1011/23952.shtml
After several months of doldrums, Bitcoin’s price has recently sunk to a new low, and it is frankly appalling. At a time like this, talking about prices again is perhaps fitting.
Of course, I have no intention of predicting Bitcoin’s short-term trend. Although I did not expect it to fall this badly beforehand, it is really not a big deal either; it was always a long-term investment, something to be left there like a pension policy. Besides, over the past year, almost every indicator and performance metric in the Bitcoin world, apart from price, has been developing steadily, so there is nothing to worry about.
The reason I am talking about price here is that I want to discuss, in theoretical terms, where Bitcoin’s price base lies—what, exactly, determines or supports Bitcoin’s value.
In the short term, and on the surface, Bitcoin’s price depends on the influx of capital. Every day new bitcoins are created through mining, and mining farm operators face ever greater selling pressure in order to recover their costs. So if there is not a sustained inflow of funds buying in, then the Bitcoin market will have more supply than demand, and the price will naturally fall. Conversely, if the inflow of capital is sufficiently strong and the daily新增 supply is limited, then the price will naturally rise.
Of course, this is only in the short term, because most of the capital that comes in will, after some time, always be cashed out and flow back out. Funds that enter in pursuit of arbitrage will ultimately not support Bitcoin’s price. The winners who sell high and buy low need to be sustained by the losers who buy high and sell low; in theory, the speculative market is a zero-sum game.
What makes Bitcoin not a zero-sum game is undoubtedly its monetary attribute—in other words, it is not merely a speculative instrument in a zero-sum contest, but something that can also be spent directly in the market. We can buy Bitcoin on a Bitcoin exchange and then never come back to sell it, instead using it up in the commodity market. And in the market, people need ever more Bitcoin for circulation, and ever less renminbi for circulation; then the trend is for more Bitcoin to flow from the exchanges into the market, and more renminbi to flow from the market into the exchanges. In this way, although Bitcoin’s range of applications becomes broader and broader, the amount of Bitcoin waiting on exchanges to be traded against fiat currency becomes smaller and smaller, and in the end Bitcoin’s price will naturally continue to rise.
However, on closer thought, there still seems to be a problem here. Does the expansion of application scope itself necessarily support the coin’s value? Not necessarily. For example, many merchants now accept Bitcoin payments, but they all immediately sell the bitcoins they receive into dollars—through BitPay’s service, for instance, or by selling them themselves. Then the result of widespread adoption is actually to greatly intensify the selling pressure on exchanges, which in turn suppresses the coin price.
Of course, even so, this suppressive effect is only short-term, because every bitcoin that a Bitcoin user spends was often originally bought in the first place. Aside from the stable supply brought by the Bitcoin mining mechanism, buying and selling Bitcoin are also balanced in the long run. But in any case, we can see that the broadening of Bitcoin’s applications is not itself the fundamental factor supporting its price.
So what is the fundamental factor that supports the coin price? In fact, it is very simple: holding, or in other words, saving.
For example, gold is now used extremely rarely as a circulating currency in the market, yet its market capitalization can still be this high. This is of course not only because it can be made into jewelry or components, but also because people value gold for its “value preservation” function and are therefore willing to buy and hold it.
Here, in fact, there is a circularity: because gold has a value-preserving function, people are willing to keep it; but precisely because people are willing to keep it, gold acquires a value-preserving function. Of course, this also depends on the fact that gold has a stable total supply; if it were paper money that could be issued without limit, then even if people were willing to hold it, its value-preserving function would already be greatly weakened.
Even paper money, in the final analysis, derives its value from saving. If no one were willing to hold paper money, paper money would have no value.
What kind of tool is money, fundamentally speaking? What, in the final analysis, is its use? Nothing more than a means of storing value. “Storage” means a kind of lingering, a kind of “delay.” If I have chickens and want ducks, and you have ducks and want chickens, then we can complete the exchange on the spot without needing money. It is only because I cannot promptly produce what you want, or because I cannot directly get what I want in exchange, that money has value. My chickens were not exchanged for ducks but for money; this money is there to delay, for a period of time, the value I recovered from selling the chickens, until I find what I truly want to exchange it for.
The meaning of money is to preserve corresponding value between one transaction and the next. One might say that “value preservation” is money’s primary duty.
Human beings are rational animals. What is rationality? Rationality is nothing more than a capacity for planning, scheming, or designing; in other words, people can “take precautions.” People do not rush at every apparent benefit they see; they do not only attend to things visible before their eyes, but also to possibilities that have not yet appeared on the stage. Thus, even before seeing ducks or fish, people can sell chickens for money; even if I do not yet know how I will use this money, I am still willing to keep it for a rainy day, and so people are willing to save.
Of course, savings, like speculation or application, are in theory also balanced in the long run, because coins that are held back will sooner or later still have to be sold or spent. But the crux lies in this “sooner or later.” In a certain sense, value is time; in a static system without time, money is meaningless. It is precisely because there is a time issue, a question of sooner or later, that there is a need to store value, and thus money.
Contemporary inflationary money and credit systems have reversed people’s need to save. People seem not to need to hold onto money for unexpected needs anymore; when they need it, they can just take out a loan. I have mentioned that this is a pathological culture, but in any case it has not altered the fact that money is the lingering of value. Inflationary money reverses deferred consumption into advance consumption, but whether it is spending money saved in the past or spending money advanced from the future, that “time difference” is what the value of money rests upon.
One could say that Bitcoin’s long-term value depends on “the long term” itself. Whether they are speculators, merchants, or hoarders, all of them, in different ways, make coins linger; the length of this lingering determines Bitcoin’s value.
If a person borrows 10,000 yuan every month and repays 10,000 yuan every month, then how much money do they have? If the money they borrow can linger for two months, then they can have 20,000 yuan in liquid funds; if it can linger for one year, then they can have 120,000 yuan in liquid funds.
The same is roughly true for the monetary market as a whole: the flow of money itself is balanced. In the market, wherever there is buying, there is selling; wherever there is inflow, there is outflow. If every day bitcoins worth 10,000 U.S. dollars are bought by people (whether using goods or fiat currency), and bitcoins worth 10,000 U.S. dollars are also sold by people, then what should Bitcoin’s market capitalization be? No one knows. The more crucial issue is the period of lingering.
Some things, such as stamps and other collectibles, may have very little circulation of any kind on a daily basis, yet their prices can still be very high. Why? Nothing more than because people are willing to hold them for a long time. Some things circulate in huge quantities, yet precisely while circulating widely, they depreciate sharply.
Those who think Bitcoin is suitable for long-term holding and therefore unsuitable as a circulating currency are obviously mistaken. The meaning of money as money lies first of all in holding it; especially in terms of value, it depends even more on holding. More money being held by more people for longer periods does not impede that currency’s ability to circulate. Bitcoin’s quality of being suitable for exchange will not be diminished in the slightest by more people hoarding it; what is affected is only the currency’s value. The more people trust its value-preserving function, the more it will be lingered over, and the longer it will be lingered over; and the higher that currency’s value will become. This is actually a very simple principle.
Finally, just a side note: how should one estimate Bitcoin’s future value? Should one compare it with fiat currency’s M0, M1, M2 and the like, or with the market capitalization of gold, silver, or some company’s stock? In my view, all such comparisons are suspect, because Bitcoin itself is subverting the existing financial order, and it is hard to compare it with any existing asset. But we do know that Bitcoin will satisfy people’s need for savings and value preservation. If so, then we can imagine how much Bitcoin, in terms of value, each person needs to hold. China’s per capita savings are roughly several ten-thousand yuan, I suppose. Taking into account that fiat-currency savings are still mainly just reserves for a rainy day, rather than long-term planning for value preservation and appreciation, while the public’s need for long-term planning has been forcibly pushed by the inflationary system into the so-called “wealth management” sphere, such as funds and stocks. Then, if we add these two together—that is, how much value each resident of the Bitcoin world would be willing to keep at hand for emergency reserves and long-term planning—how much might that be worth? For example, if 1 million people believe Bitcoin is the best means of saving, and on average each person is willing to hold through Bitcoin value equivalent to about 100,000 yuan, then Bitcoin would need a total market capitalization of at least 100 billion yuan.
Translated from the Chinese original with AI assistance. The original text is authoritative.
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