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The crypto industry has a sufficient "value consensus" on Bitcoin, and many people have discussed the value of Bitcoin from the perspectives of technology, finance, currency, etc., but from my observation, there seems to be no complete enough article to summarize it. This article will explore the value of Bitcoin based on my long-term thinking and judgment in VC and crypto investment, and combine the history of currency development, capitalist ideology, future development trends of society, and the characteristics of Bitcoin.
At the same time, because I hold Bitcoin, the views and positions in this article are closely related, and I hope that friends who read it carefully will be aware of this.
(Written on 2024/11/28, full text 6769 words)
Historical background:
1. The highest price of Bitcoin reached US$99,549, with a market value of US$1.95 trillion, ranking among the top ten assets in the world by market value and reaching 1/10 of the total market value of gold.
2. There are 47 listed companies and institutions holding Bitcoin in the world, with a total holding of 1,520,965 Bitcoins, with a total value of US$140.613 billion, accounting for 7.75% of the total market value of Bitcoin.
3. Governments around the world are estimated to hold 569,070 bitcoins, and Trump announced that the United States will strategically reserve bitcoins after taking office.
4. BlackRock is discussing a plan to purchase Bitcoin with its own funds, Microsoft shareholders are discussing the evaluation and investment in Bitcoin, and more and more asset management institutions are continuing to buy Bitcoin.
5. The number of addresses holding Bitcoin has exceeded 54,443,813, an increase of 4 million in one year.
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Bitcoin has achieved a past that started on May 22, 2010, when only 10,000 bitcoins could be used to buy a pizza. After 14 years, it has reached the current price of $99,549 per bitcoin. In the future, it will continue to break new highs. And, as expected, every time it breaks new highs, the media will spread the news to the ears of the general public. But obviously, these unreliable media have brought a lot of wrong and fragmented information. Since I am one of the biggest victims (I should have bought bitcoins in 2015, but was discouraged by all the "scams" due to limited search channels), I plan to talk about Bitcoin as popularly and comprehensively as possible.
The news of Bitcoin reaching a new high, Trump's plan to make the United States the world's encryption center, and the establishment of a national strategic reserve of Bitcoin, etc., were reported by major media. This is not much different from the news of Bitcoin breaking a new high in the past. The only difference is that the United States' attention to Bitcoin is mentioned. The effect may be to change the attitude of ordinary people towards Bitcoin. Maybe they will no longer be like me, who received all "financial scams" and "Ponzi schemes". They will begin to recognize Bitcoin. After all, even the United States has started strategic reserves, right?
At the same time, there are also some low-intelligence people who are conspiring, saying that Bitcoin is a tool created by the United States to suppress other countries, that it is replicable, virtual, etc. This is human nature. On the one hand, low-intelligence people (receivers) are isolated from information, but when they receive information shocks, they need to try to understand to reduce uncertainty. These conspiracy theories can form a set of logic and cannot be falsified, so they are the most acceptable. On the other hand, in order to satisfy their narcissistic needs, low-intelligence people (spreaders) also like to spread conspiracy theories that can provide secret, immediate and important "knowledge", or they may have a sour grape mentality.
Of course, whether it is the positive or negative publicity of the domestic media, it has little impact on the development of Bitcoin. To put it more bluntly, it really doesn’t matter whether we “recognize” Bitcoin or not, as long as the rich recognize it and most countries recognize it, that’s enough. If we don’t recognize it, Bitcoin will continue to break new highs. What we lose is just a very precious opportunity to make a fortune, that’s all.
Sovereign states, especially non-capitalist sovereign states, naturally hate uncontrollable factors. The centralized organizational form of the state was indeed first established based on voluntary contracts, and evolved from tribes as productivity increased. However, with the monopoly of means of production and human nature, vested interests will always suppress all those who attempt to come from behind in order to maintain their own rights, and eventually become what Max Weber called a regime that maintains monopoly through violence.
However, human technology is improving, and the means of production are being updated. So when new trends and new technologies bring about productivity innovation, the first thing people think of is to suppress and eliminate it. But trends do not stop for one person or one country, so in the end they actively suppress it, are forced to accept it, and then accept the suppression first and then accept it. In the past, the Internet was a new trend of certainty, and now Bitcoin is also a new trend of certainty.
It's just that Bitcoin is more thorough in being "uncontrollable". The Bitcoin code is completely open source, and anyone can download and audit every line of code. Even its creator Satoshi Nakamoto cannot leave a backdoor. The total number is 21 million, and it will not increase or decrease. To this day, any country that says it supports Bitcoin is forced to accept it. Because there are many people holding Bitcoin in the world, Trump said that he supports Bitcoin for votes, and the United States said that it supports Bitcoin to attract talent and funds. In the future, the later people accept Bitcoin, the more backward they will be, and it will not shake everything about Bitcoin.
So, why is Bitcoin a deterministic trend, or what is its value? This is the most frequently asked question, and also the most difficult to answer. Many Bitcoin evangelists use the method of proof by contradiction, for example, Buffett does not understand Microsoft, but it does not prevent Microsoft's market value from increasing, and you do not understand Bitcoin, but it does not prevent Bitcoin's market value from continuing to increase, and so on. This is obviously difficult to convince the public.
Bitcoin is now replacing the value of gold.
First of all, the most common thing about Bitcoin is "consensus". The most intuitive manifestation of consensus is that it brings price to assets. As mentioned above, if someone recognizes it, someone will buy it, and if someone buys it, there will be a price. But whether the consensus can be sustained, it needs more things to support it. This is just like love needs material things. Love without material things will be blown away by the wind, and the same is true for consensus. Things that can gather and accumulate consensus for a long time must have additional value, such as gold.
In the beginning, the way of trading in human society was barter. But because of problems such as storage and standards, it was very troublesome. For example, I wanted to exchange sheep for strawberries, but the person who had strawberries did not want sheep, but wanted cows. At this time, I had to exchange them many times. If I was unlucky, I could not exchange them, and the sheep would become smelly, and the value would be directly reduced to zero.
Currency solves this problem. At first, people used shells as a medium of exchange, then other things were used, and finally gold stood out. But did gold become currency because of propaganda and mandatory requirements? No, it is because gold has the characteristics of limited quantity, cannot be artificially made, easy to cut, and easy to carry, which meet the needs of currency. Marx said that gold and silver are not naturally currency, and this is precisely why currency is naturally gold and silver. Gold is a product of nature, but its characteristics allow people to continuously gather consensus on currency here, and finally it cannot be shaken.
But gold later withdrew from the monetary system, also because of its limited quantity and unman-made characteristics that restricted social development. For example, Athens first used gold coins. Athens spent extra military expenses to fight Sparta, but there were only so many gold coins. What to do? The Athenian government mixed gold coins with copper, and one gold coin became two. It collected 10,000 gold coins in taxes and spent 20,000 gold coins. This was the earliest deficit expenditure. At the same time, Athens did not forget public construction during the war. During the war, it also took time to build the Greek Temple of Victory. What to do if there is no money? Continue to reduce the gold content of gold coins, 50% to 30%, and finally to 0. The currency changed from gold coins to copper coins, and bad money drove out good money.
Every time a national regime is established, the primary requirement for currency is that it can be issued more, so that it can be consumed at a deficit, and currency becomes a product backed by national credit. As countries change, the distributed currencies will continue to depreciate until they return to zero. The way people deal with it is to use gold as a store of value. The US monetary system has gone from the gold standard to the current credit endorsement, which is no different from the past. Gold has finally become a special asset class that provides value storage.
Understanding the consensus on the value of gold means understanding the value of Bitcoin, because Bitcoin is a superior substitute for gold. In terms of quantity, Bitcoin is constant at 21 million and cannot be artificially manufactured. Although gold cannot be artificially manufactured and is scarce, it will continue to increase. At the same time, Bitcoin is easier to cut, easier to transmit, easier to store, and more free. Based on this, Bitcoin will absorb the consensus condensed on gold.
Speaking of this, many people will say that gold is a consensus that has been around for thousands of years, so how can Bitcoin replace it with a consensus of ten years? In fact, I think that Bitcoin has only reached 1/10 of the market value of gold in ten years, which is already a very slow development. The reason why it took so long to accumulate consensus on gold in the past was largely due to the limitation of information dissemination. Today, the globalization of information brought by the Internet has accelerated the process of consensus. It took seven years for the PC Internet to reach 100 million users, and only three years for mobile Internet users to reach 100 million. Such information dissemination efficiency will make the speed of consensus gathering much faster than in the past. Even if we look at the development of science and technology, from the industrial revolution to the present, isn’t it much faster than thousands of years in the past?
The possible concern here is that everyone thinks it is not good for consensus to be formed too quickly. There is no need to worry about this. The increased efficiency of information dissemination will also make competition more sufficient, so the elimination of inferior consensus will also be very fast. To put it bluntly, now everyone can make a choice quickly and well. The process of Bitcoin reaching 1/10 of the market value of gold is too slow, and it is still subject to great interference, such as government influence, operating threshold influence, etc., but my judgment is that once the number of Bitcoin holding addresses exceeds 100 million, Bitcoin will surpass gold at a faster rate.
Therefore, a bitcoin worth $1 million is a reality that is within our reach and will soon become reality without any need for imagination. If we add the depreciation of the U.S. dollar and the premium in the financial market, $1 million is just a starting point.
Of course, many people will think, how about I make a Bitcoin system? Another doubt many people have about Bitcoin is that Bitcoin can be copied. In the past, gold also faced similar competition. After Bitcoin had a certain consensus, many people began to try to "copy" it, but in the end, all of them failed.
The closest to success was when Wu Jihan, who controls more than 30% of the computing power of the Bitcoin network, forked Bitcoin, but he also failed. Why? Because consensus is chosen by the market with its feet. Even if you are the leader, you cannot make choices for others violently (especially in the free market). Today, Bitcoin's leading effect is more obvious. It has the largest market value, the most secure network, and is the most valuable and has the most consensus. It has continued to cycle positively and has reached a position where its dominant position cannot be shaken.
Of course, Bitcoin can still be controlled, such as launching a 51% attack on the Bitcoin network to forcibly tamper with it (referring to controlling more than 50% of the computing power in the Bitcoin network). Few people have the financial resources to do this now, and the cost for people or organizations who can do this is far greater than the cost of gaining benefits, so they will not do it either. In the future, as the price of Bitcoin continues to rise, its system will continue to consolidate and become increasingly difficult to shake. It's that simple.
The Future Value of Bitcoin Currency & Store of Value
Next, let’s make a judgment about the future. The starting point of Bitcoin’s value is gold, but the end point is not gold. I think Bitcoin will have a higher value and price. The reason is the “decentralized” ideology brought by Bitcoin and the future we will reach, the metaverse.
The core of investment is nothing more than finding products that solve key problems encountered in social development. Because only such new products can replace old products, and this replacement process is the process of wealth transfer. For example, from horse-drawn carriages to cars, physical stores to e-commerce, cash payments to electronic payments, in the reshaping of these industries, many great companies will be born. Investing in them and holding their stocks will bring huge monetary wealth returns.
And since the Internet era, this return has become even greater, because the Internet has brought about the socialization of P2P, and incidentally integrated the industry. In the past, I have given several examples. The top ten companies in the domestic women's clothing industry account for less than 15% of the market share combined. Toyota, which is so powerful, only accounts for 4.3% of the fuel vehicle market. After the Internet integrates the industry, one company often eats up more than half of the market share: Alipay and WeChat account for 95% of the domestic payment industry, and Didi accounts for 90% of the market share of online car-hailing O2O platforms. Think about it, if a company can occupy most of the profits of the entire industry, the market valuation given to them is naturally very exaggerated. For example, Apple's market value has caught up with Germany's GDP.
So what kind of problems does Bitcoin solve? It solves the problem of periodic collapse of the financial system in capitalism. In the past, when people talked about "financial crisis", many people only felt that it was like a beautiful woman in the clouds. They have only heard about it from others, but have not really experienced it, so they don't have a particularly deep feeling, so they only think that "Bitcoin is used to solve the financial crisis" is a "gimmick" or just a "false and empty" hype. However, after players in the circle have experienced so many centralized lending platforms and exchanges in the past few years, looking back on the past few financial crises, they will be able to understand what I am going to talk about next.
In the world we live in, as long as it is a capitalist country, there will always be periodic financial crises. Even if the source of each financial crisis is different, the underlying reasons are the same, which is the essence of capitalism and centralization. The essence of capitalism is "the pursuit of all ways to obtain the maximum profit." Based on the rapid development of Western accounting, banking and private ownership, capitalists will try every means to reduce costs and increase income as much as possible in order to obtain greater profits. There is no such thing as morality, right or wrong, good or evil, so that promoting social progress is also a by-product of the pursuit of profit - because behind social progress is technological innovation, and the original intention of capitalists is only to use technological monopoly to bring huge monetary wealth.
When social rules are established, they will also create huge wealth for those who trample on them. Based on the nature of capitalism, capitalists will inevitably trample on the rules until the rules are broken and all is paralyzed. Then they will "learn from their mistakes" and re-establish new rules. In this way, although the rules are constantly being improved, the root problems cannot be solved, and financial crises will recur. The two most representative examples are the LTCM bankruptcy in 1998 and the subprime mortgage crisis in 2008.
LTCM is called Long-Term Capital Management. The team is composed of a group of mathematicians and economists with extremely high IQs. They achieved extremely high investment returns for four consecutive years after their establishment in 1994, shocking the entire Wall Street. Their operation method is also very simple, which is to use huge leverage to earn risk-free arbitrage of treasury bonds. The way to increase leverage is to buy treasury bonds and then mortgage them to banks in exchange for cash, and use the cash to continue to open short positions in treasury bond futures.
Theoretically, such leverage is limited. For example, if we use 100 yuan of treasury bonds as collateral, we can only get 97 yuan in cash. The difference of 3 yuan is the "pad" set by the bank to control risks and leverage ratios. However, in pursuit of high returns, more than 30 banks disregarded the rules and provided LTCM with unsecured loans, allowing LTCM to leverage 150 billion US dollars in leveraged funds with only more than a billion US dollars. Then, LTCM failed in Russia and suffered huge losses. Because of the nearly 100-fold leverage, it almost caused a debt default of 1 trillion US dollars, which almost triggered a global financial crisis.
Only 10 years after LTCM went bankrupt, the United States ushered in the subprime mortgage crisis. Under normal circumstances, if I borrow money from a bank to buy a house, the bank will need to examine my repayment ability, such as whether my job is stable, whether I have assets, etc. If I meet the requirements, the bank will lend me money, and I will repay on time, which will not cause too many problems.
But the problem is that the bank has limited funds, and can only lend so much and earn so much interest. In order to make more money, the bank came up with a "smart" way. They mortgaged my "loan contract" to other financial institutions and got the cash back, so that the bank would have more funds to lend and earn more interest. This is the "subprime loan" and "subprime mortgage loan".
As for the financial institutions that take over, they need to make money, so they will package the "loan contract" they signed with the bank and mortgage it to the next financial institution that takes over. The next financial institution repeats this operation. In this way, the entire capital chain has become a grasshopper on a rope. Will this be a problem? In fact, it is unlikely, as long as the bank strictly controls the qualifications of the borrowers and ensures that most of the loans can be repaid normally. But unfortunately, the bank did not do this.
The American movie "The Big Short" restores the whole story to be extremely real. When you go to the bank for a loan, the relevant staff of the banking system will not do due diligence to make money. Instead, they let it go. Even if you fill in the name of your dog when applying, the loan can be approved. At the same time, as housing demand continues to rise and housing prices continue to rise, all participants have gone crazy. Everyone is more and more permissive and ignores the rules. In the end, when most of the contracts that cannot be repaid for the mortgage expire, this game of passing the parcel can no longer be played. The entire chain began to collapse, the disaster began to spread, and eventually swept the world, turning into a world-class financial crisis.
The root cause of the crisis is the evil consequences brought about by centralized power trampling on rules in pursuit of profit, but although they make money, we are the ones who pay the bill in the end.
In the past, these problems could not be solved until Bitcoin achieved decentralization. Decentralization means trusting an institution or a person, but building trust in the code. The established procedures cannot be manipulated by people, and everyone must follow this set of rules. No one can override the rules. The Bitcoin ledger is open, transparent and cannot be tampered with. What is implemented in the Bitcoin network is proof of work (POW). Whoever has higher computing power is more likely to get Bitcoin. Even if you have great power and more monetary wealth, you have to operate according to the rules. Even a powerful country like the United States cannot change the code rules. If you want to build a strategic reserve of Bitcoin, you can either buy it on the market or build a mine to mine it yourself.
However, in the real world, Bitcoin will never become a real currency, and sovereign states will not give up the right to mint coins. At present, the organizational form of "state" matches productivity and technology, but with the advancement of productivity, production relations will change again. In the past, tribes evolved into states, and in the future, states will still evolve into a new form of social organization, which may be a federation? Parliament? Uncertain, but it will definitely be a decentralized organization.
Why? The next productivity revolution is driven by AI, and the biggest problem with AI is that it is opaque and is formulated by a small group of people. If the accuracy of AI is so high that ordinary people cannot distinguish it, and the accuracy rate reaches 99.99%, and the remaining 0.01% is wrong, but it involves issues such as faith, outlook on life, and ideology, there will be serious hidden dangers------this model is made by only a few people, who knows what they think, or, when the whole people trust AI, the controller of OpenAI can control the whole world. The only solution is to add decentralized conditions. Ultimately, AI can avoid the core problem of being controlled by a centralized system by running in a decentralized manner. In turn, blockchain can also use AI to improve the code loopholes left by the project party intentionally or unintentionally, and execute DAO in the fairest way.
At this point, we can preview a long-term vision. If the blockchain eventually evolves into a "virtual world" (global economy) like Oasis, Ready Player One, or even The Matrix, then AI is an "emotionless God" that makes and maintains rules based on set programs. Zooming in a little bit, AI will handle the formulation and maintenance of rules for an industry or a track. Bitcoin will become the currency of such a world and the value storage of the entire world. There will be no place for "gold" in such a virtual world.
Think about it, when 21 million bitcoins are used to measure the wealth of the entire world, what will be the price? This is the ultimate value of Bitcoin.
Having said that, I am not trying to convince everyone to buy Bitcoin, but to explain more clearly the most realistic value and price of Bitcoin to friends who already hold or are preparing to hold Bitcoin, which can only help these friends hold Bitcoin more firmly.
Finally, I have to say one more thing: We don’t recognize Bitcoin, we don’t buy Bitcoin, and Bitcoin will continue to break new highs. All we lose is an extremely precious opportunity to make a fortune, that’s all.
