Bitcoin has been getting more and more popular lately, which made me want to research it. Here I would like to share some of my thoughts. However, I have only just started looking into this new thing, so if I have got anything wrong, please feel free to let me know.
The first thing about Bitcoin is that it is truly a revolutionary invention. Who would have thought of using virtual, non-existent data as money? Its biggest feature is freedom: no one can freeze it, and it does not belong to any issuer. In the current general monetary system, if the government is dissatisfied with you, it can freeze your assets. But if what you hold is Bitcoin, the government cannot do anything about it. The “government being dissatisfied with you” here does not necessarily refer to something illegal. Of course, some people use this characteristic of Bitcoin for illegal transactions. But there is also the case where you oppose some action of the government, and the government then freezes your assets so you cannot act. Such cases were common in the communist world. The biggest advantage of using Bitcoin is that the government cannot freeze it.
However, even though governments cannot freeze Bitcoin, that does not mean governments have no way to deal with you. At the current level of adoption, Bitcoin is merely a commodity and cannot really be used for transactions. So you need exchanges like Mtgox to convert Bitcoin into real currency for you. If the government freezes Mtgox’s funding accounts, you cannot convert your Bitcoin into real currency, and so you cannot use it for trading. But this situation will no longer exist once Bitcoin’s supply and demand are large enough and it is widely adopted. By then, some governments will surely be very troubled!
Second, I think Bitcoin’s outlook is worrying. Bitcoin was originally meant to be a currency for transactions, meaning you could pay for things with it directly. But right now, Bitcoin has evolved into a speculative tool. In my understanding, Bitcoin is like stocks, except even more dangerous and easier to make money from. I only started looking into it a few days ago, and it happened to coincide with a wave of sharp rises and falls. Within a single day, the Bitcoin exchange rate could go from 1:550 USD to 1:800 USD. The reason for these sharp swings is that the currency supply of Bitcoin is extremely insufficient relative to demand. Because of media coverage, more and more people around the world have come to know about Bitcoin, and on top of that, people with ulterior motives deliberately hype it, so Bitcoin’s price stays high. If I had enough money, manipulating Bitcoin would be far easier than manipulating real currency or stocks, because the supply of Bitcoin is so small. People with ulterior motives can easily push the price up and then sell off the large amounts of Bitcoin they hold. You can see this on the bitcointicker website. At certain moments (within one or two seconds), thousands of BTC are sold, while normal trading volume is only dozens of BTC. This is clearly a case of a single holder dumping coins to push the price down.
So why do I say its outlook is worrying? Because the most important thing about a currency is that its value is stable. If its value is unstable, how can people use it to price things, or even trade with it? If in the morning you could buy a block of tofu for 10 dollars, but in the evening it cost 1000 dollars, wouldn’t that be very inconvenient for consumers and producers? But for speculators, once the value is stable, there is no profit to be made. I think this problem will take time to resolve. As more and more Bitcoin is mined and the currency supply grows, it will become harder for certain individuals to manipulate its price, and the problem will resolve itself at that point. In addition, from what I observe, Bitcoin’s exchange rate has risen to an incredible degree. If it keeps going this way, I think it will turn into a bubble. If you are really interested in Bitcoin, then absolutely do not buy in at this point. Or you can play around with it, but do not seriously spend large amounts of money on it, because you will just become a target for people with ulterior motives to profit from.
You can actually learn quite a lot from Bitcoin. In particular, you can find traces of economic theories such as supply, demand, and money in it. For example, when a large amount is sold off, the exchange rate drops immediately. Isn’t this exactly the same as the real world? I think I might buy some BTC to play around with. I am really curious about what happens next!
Of course, it is also possible that everything I said above is completely wrong. After all, I do not have a deep understanding of economics or of Bitcoin. These are just my opinions.