[이코노미스트] Cho Won-kyung’s End of Things You Want to Know (26) Is Bitcoin Really a Bubble?

When using cryptocurrency-based blockchain technology, innovation is possible, such as guaranteeing transaction fairness

When you hear the word blockchain, most of you think of bitcoin, a cryptocurrency. While cryptocurrency is the best-known example of how this technology is used, blockchain provides solutions to a variety of future problems. In fact, Bitcoin’s excessive surge is obscuring the advantages of blockchain technology.

Blockchain is often compared to the Internet. Just as the Internet appeared in the 1990s and connected the world, it reflects the expectation that great innovation will occur once again through the blockchain. It is not new to hear the news that companies and various organizations are launching blockchain projects, local governments issue their own cryptocurrencies, and replace company databases with blockchains.

Some blame the blockchain for nothing that has shown so far. Technology no one uses is meaningless. When useless techniques are exaggerated, bubbles are created. In the early 2000s, information and communication (IT) companies caused a dot-com bubble, and the social problem reached a serious level due to the aftereffects of the investment. As a result, distrust in dot-com companies spread around the world. Since then, the cryptocurrency bubble, surpassing the dot-com bubble from 2017, progressed until early 2018 and then turned off. Blockchain, a cryptocurrency-based technology at the time, worked as a technology like a panacea.

Now is the time to look at blockchain technology calmly. When I first came across the Internet, the number of people stayed up all night. The Internet, which used to be a fun and novel toy, was a sea of ​​information that documents were hyperlinked to the web. While surfing the Internet, I enjoyed the new continent, and while spreading information, I was able to send and receive e-mails and messages in real time with strangers on the other side of the globe. Earthlings fell into the magic of the Internet, and over the next 20 years, the world has changed greatly. All disruptive technologies take a significant amount of time from birth to maturity. It took 10 years for the Internet to become popular, and artificial intelligence (AI) had to spend a longer time. It seems that people aren’t as enthusiastic as the internet about a blockchain called the post internet. The reason is that it has yet to show Shincheonji that touches our perception in everyday life after Bitcoin.

Still, blockchain is a technology with many possibilities, and humanity’s task is to realize its potential. Looking at the United States alone, the amount of corporate investment in blockchain continues to increase. Although blockchain investment spending is the highest in the financial industry, electronic payments and peer-to-peer (P2P) loans are promising, but it is not limited to the financial industry. Logistics service business that tracks the entire distribution process, as well as digital authentication, authenticity appraisal of art works, counterfeit currency prevention, electronic voting, electronic citizenship issuance, vehicle sharing, real estate registration, medical record management sharing between hospitals, and various types of reliability that require copyright protection. Can be used in the field.

Speculation and investment are one letter for some and not one letter for some. In the global market, the market capitalization of Bitcoin has exceeded the 1 trillion dollar (about 1100 trillion won) line. This is above the $700 billion Tesla market cap. With a GDP of 24 trillion dollars per year in the United States, you can guess what the market cap is. It is not an exaggeration to say that the price of bitcoin is literally skyrocketing as it far exceeds the GDP of most countries.

The price per bitcoin, which surged more than four times in 2020, has risen more than 80% in 2021 alone, breaking an all-time high. According to the cryptocurrency site CoinDesk, the price of bitcoin was traded at 10 p.m. on February 20 at $57,269 per piece. On February 16, for the first time in history, it exceeded the 50,000 dollar mark, followed by the 52,000 dollar mark on the 18th, and is running without knowing that the sky is high.

Even before, the debate over bitcoin has been circulated around the world. Financial figures, including Warren Buffett, talked about bitcoin’s gruesome words. On the other hand, entrepreneurs like Bill Gates and Mark Zuckerberg were very interested in researching cryptocurrency as a technology. The International Monetary Fund (IMF) believes that blockchain, the underlying technology of cryptocurrency, will play an important role in the progress of financial services, but bitcoin with anonymity is money laundering, terrorist financing, tax evasion, financial fraud, capital control bypass. It emphasized that the possibility of being used for the purpose should be fully recognized. Therefore, it emphasized extensive international cooperation for cryptocurrency regulation measures around the world.

Joseph Stiglitz, who won the Nobel Prize in Economics, saw the rising bitcoin price as a successful scam caused by lack of supervision by the authorities. He emphasized that bitcoin should be made illegal because it cannot function as a net social function. Professor Robert Schiller, another Nobel laureate in economics, also predicted a decline in the price of bitcoin, saying that bitcoin was only a temporary fad, but the reality went contrary to their arguments. In this situation, the identity of Satoshi Nakamoto, who is said to be a bitcoin developer, is inconsistent. I look forward to seeing him appear and give a cool answer.

There are no guidelines for Bitcoin trading. There is no reference to the company’s profits, bonds, or continuous cash flows on investment returns. It just refers to the increase in price and making a profit. So there is no fair price for Bitcoin. In this situation, let’s think about speculation and investment. There is a view that speculation and investment are often used interchangeably and it is difficult to distinguish between them. Some say there is a huge difference between the two terms. One of them is whether or not you have control over risk (risk). If you have the ability to control risk, it’s an investment, and if you don’t even think about it, it’s speculation.

Consider investing in raw materials. If you buy without thinking, it is speculation, not investment. However, let’s say we are fully aware of the fact that raw materials go hand in hand with the economy and have a high correlation with the strength of a specific currency. As an investment, it is desirable to construct a portfolio based on an analysis of the trend of the currency.

So why is speculation dangerous? Suppose that you and I jumped into the speculative board and formed a bubble based on the riding effect without a rational analysis. If loss goes on after that, it becomes a problem not only for individuals but also for society. If you lose money, you blame the society and the government. Moreover, personal and social suffering is indescribable if it causes system risk. Speculation is harmful to creating a good society and creates side effects that lead to social conflict.

The issue of regulation on cryptocurrency was also recognized. Is this a desirable social phenomenon if you do not take your eyes off the marketplace 24 hours a day after jumping into the minors as in the 2017 craze? Of course, whether it is investment or speculation, it can be argued that it is individual freedom. Consider a scene where a speculator hits and falls with the thought of making money, but good people who jumped in without thinking shed tears at the end of the bubble. If the cost to be paid by individuals and society and morality issues are enormous, it is not right for the state to remain silent. That’s why regulation is needed. Of course, you will need to properly weigh the costs and benefits of regulation and do it in a timely and appropriate manner.

Robert Schiller warns of the danger, calling the bubble formation process the transmission of thoughts. It is the logic that the story of making a story and making money as a whole spreads like a plague, and then you and I are enamored by the story and a huge bubble is formed. He also complains strongly that finance does not support the real thing and has made derivatives and complex products that are difficult for the general public to understand and become a battle game. We have witnessed how detrimental the asset bubble has to the economy, which has occurred several times, including the global financial crisis.

The continued generation of asset bubbles through speculation encourages distrust in the financial system. No matter how much bitcoin is the product of new technologies and innovations and can be used for interpersonal transactions, it is necessary to think about whether it is taking on another bubble. It is said that it can be questioned whether Satoshi Nakamoto’s imagined world of “personal transactions of trust” imagined by Satoshi Nakamoto to run through the story without being equipped with stability as a currency because it is so volatile.

If Satoshi Nakamoto considered bitcoin as a payment method, the stability of the bitcoin price should be guaranteed. If the’Technology Blockchain of Trust’, which has not yet blossomed, is stained with distrust in the volatility of bitcoin prices, it will be the main culprit for killing the technology. Regardless of the value, if you see the price increase through story and speculation, and jump like a fire moth, you are not a desirable society. It is like a poisonous mushroom to those who make money by working hard in this society. Regarding the formation of the bubble, renowned American economic historian Charles Kindleberg said that if a cousin buys land and earns money, it hurts his stomach. So, aren’t many people jumping into the speculative board with such a riding effect? If so, it is very dangerous. This is why it is difficult to comfortably watch Bitcoin’s price rise.

In the context of finance and economy, a bubble refers to a phenomenon in which the market price of a financial asset rises due to speculation, and the value of the asset contracts or collapses rapidly after repeating the process of raising the asset value again. In the economy, the bubble speaks of’a state in which asset prices are rising at a rate faster than the economic growth of the real economy’, which is unsustainable. Applying this to financial assets, the bubble of financial asset value means’a phenomenon in which the market value increases faster than the rate at which the intrinsic value of the asset’s future cash flows converted into present value increases.’ This also does not last. The condition to satisfy the bubble is: First, speculation must drive up the price. Second, there must be a’self-value cycle’ in which an increase in asset price leads to an increase in asset value again. Third, there must be a’drastic drop in value’ after a rapid increase in value. In other words, all bubbles are perceptible only after death.

There is skepticism that Bitcoin is the worst bubble and has become a speculative board for investors seeking big returns in the era of low interest rates. In particular, volatility is pointed out as a problem. It can fall as rapidly as it has risen sharply. JPMorgan pointed out that Bitcoin is five times more volatile than gold. Of course, he added that this problem could be solved with the participation of the institution. US Treasury Secretary Janet Yellen cited the possibility of tightening regulations. In an interview with CNBC on February 18 (local time), Minister Yellen asked if he thinks that Bitcoin needs to be regulated, “Bitcoin is a highly speculative asset. “There is a high level of volatility in recent years.” “(Bitcoin) should not be used as a means of inducing transactions, and it should be well equipped for investors,” he said. “It is very important to regulate the institutions that trade bitcoin and ensure that they comply with regulatory responsibilities.” said.

Professor Nouriel Rubini of’Doctor Doom’ also told The Wall Street Journal (WSJ), “A lot of people are buying bitcoin at ridiculous prices.” “Bitcoin is rarely used and does not provide a stable income like bonds or stocks.” Pointed out. He predicted that “a lot of people will be scorching and won’t go back afterwards.”

However, it seems to have to be admitted that the eyes on bitcoin have changed recently. In October 2020, PayPal, the world’s largest global payment and remittance company, declared that cryptocurrency payments were allowed, so the foundation seems to be different from that of the bubble cloud a few years ago. In recent years, it is predicted that it will rise to $1 million (approximately 1.1 billion won) over $100,000. It is true that it looks a little too far. It seems to be true that people are looking for a “store of value” that will increase their price, assuming that prices will rise and debt will increase despite the huge volatility of Bitcoin.

There is a prevalent opinion that the price will exceed $20 if more companies incorporate bitcoin into their assets. In this situation, a specialized agency that predicts that bitcoin will become a global reserve currency (an international currency held by the government as a means of storing value) will eventually become larger than gold has emerged. However, there are several differences from the previous frenzy. It is true that bitcoin, a leading cryptocurrency leader, has a high-speed rally, and interest in the’big hands’ that support bitcoin has grown. The increase in the number of institutional investors entering the market is the background of the price surge. This is also a fundamental difference from the personal-led 2017 bitcoin craze.

Above all, in the asset market, institutional investors recognize the value of bitcoin and regard it as an asset. US fintech payment application Square, which allowed Bitcoin payments before PayPal, invested $50 million in Bitcoin in October 2020. Why did Square, which dominates the three flows of money, consumption, investment, and remittance ecosystem, bought Bitcoin? This is because it will become a currency that can be used anywhere in the future. From June 2020, decentralized finance (DeFi, Decentralized Finance) began in earnest. An example is a method of borrowing cryptocurrency with cryptocurrency as collateral, or providing other collateral and borrowing cryptocurrency. A special coin for cryptocurrency lending has been driving the craze, and the market is expected to expand. The world is now paying attention to P2P financial transactions using cryptocurrency, not a centralized banking system. The number of services that can be used by using DApp, a decentralized application worldwide, is increasing.

Non-Fungible Tokens (NFTs, tokens with unique information or characteristics), which cannot replace one token with another, are also being implemented in the Ethereum network. In 2020, the price of Ethereum rose more rapidly than Bitcoin. Let’s run the blockchain version of Minecraft, The Sandbox Game, which uses SAND, an NFT, as a utility token for the Ethereum platform. A world where you create your own creations, share them with people, and enjoy games has become a reality. Since we are expanding the blockchain game community by creating sandbox characters and selling them to winners with profits, it feels like the desire of the birth of a Killer Dapp (a platform that secures convenience and utility) is realizing.

The background of the rising bitcoin price was largely influenced by the recognition of bitcoin as a payment method by electric car companies Tesla and Mastercard. Tesla announced in its February 8 announcement that it will invest about $1.5 billion in bitcoin and then make it possible to buy its products with bitcoin. Tesla’s CEO Elon Musk fired up investor sentiment on Twitter on February 19th, saying that only fools (like bitcoin) aren’t looking anywhere else when the real interest rate of fiat currency is negative. Financial companies responded immediately when a company that would use bitcoin as a payment method first appeared among large manufacturers. Mastercard announced on February 10 that it plans to include some cryptocurrency in its payment method. To give customers, franchisees and companies the option to transfer value.

On the same day, New York Melon Bank, one of the oldest banks in the United States, announced that it was offering cryptocurrency-related services to wealth management customers. Prior to this, Visa also announced that it is preparing to launch a cryptocurrency payment system with banks. Asset managers who used to be “dubious” to Bitcoin are also jumping into investments one by one as the market size has grown to the level of 1 trillion dollars. A Morgan Stanley asset management subsidiary is considering investing in bitcoin, and Rick Leader, Black Rock’s Chief Investment Officer of Global Bonds (CIO), formalized the investment in an interview with CNBC, saying that he “began to try a bit” for bitcoin.

Given this situation, Bitcoin is recognized as’digital gold’. This situation is clearly very different from 2017, when customers were not allowed to trade Bitcoin futures. Still, it seems that we need to pay attention to the reaction after Elon Musk’s bitcoin investment. Elon Musk expressed the opinion that the price of the cryptocurrency Bitcoin and Ethereum seems to be high. Musk commented on a Twitter post by Peter Seef, a leading bitcoin skeptic and gold investment advocate, Reuters reported on February 20 (local time). Musk said when Seef said that “gold is better than bitcoin and conventional cash,” he said, “Money is just data that avoids the inconvenience of bartering. That said, the price of Bitcoin and Ethereum seems to be high.” Reuters noted that “Musk said this when the bitcoin market cap exceeded 1 trillion dollars (about 1100 trillion won),” said insider, an economic media outlet, “Musk admitted that the price of Bitcoin and Ethereum seems to be high.” He said.

Central bank-issued digital currency (CBDC) is a global trend. According to a report released by the Bank of International Settlements (BIS) on January 27, it was found that about 86% of central banks in the world are studying CBDC. Bitcoin and CBDC have in common that they are not real, but they have the opposite characteristics. Bitcoin pursuing decentralization is based on a distributed ledger (blockchain) in which all participants in the network verify and store transaction information, whereas CBDC is a currency that directly responds to decentralization, and the central bank holds all transaction data. do.

First of all, it is worth paying attention to the confrontation between Bitcoin and the CBDC digital yuan by the People’s Bank of China. The issuance of currency is the sole responsibility of the central bank, and China’s CBDC is under’centralized management’, so the state’s monopoly on currency issuance is strong. With Facebook’s’Libra (changed to Diem)’ challenged with national currency issuance, it is natural for the Chinese government to try to maintain the state’s power over currency issuance and monetary policy through a digital renminbi equivalent to the existing currency. . The vast mobile payment market cannot be handed over to the cryptocurrency or private payment market. This is something I cannot say when it comes to a situation where the payment platform of private companies can dominate the entire Chinese financial system beyond the mobile market. The usage of digital renminbi is almost the same as Alipay or WeChat Pay, which can greatly reduce the dependence on payments between the two companies.

CBDC, by its nature, can identify the flow of funds and the current location, so if the government decides, the status of individual transactions and assets can be understood at a glance. The Chinese government is planning to design the digital renminbi to be as anonymous as cash, and to be traced only when suspected criminal charges such as tax evasion, money laundering or terrorism are suspected. The CBDC application is expected to contribute to the internationalization of the digital renminbi with a payment and remittance function.

Next, we need to quickly create a world of blockchain that contributes to society in addition to cryptocurrency. If the blockchain opens up the following world, I wonder if the state needs to actively support it and even regard the cryptocurrency behind it as a sin. For example, when reselling a used car, questions such as “How far is this car traveled?” “Is there an accident?” Some ask, “Did the previous owner have regular checkups?” Blockchain-based solutions can provide a solution to this problem. This is because the blockchain application allows users to track and check the entire vehicle record and share data such as mileage with third parties. Blockchain-based energy business models are also emerging. Representative cases of venture companies are being shared around the world, focusing on electric vehicle charging management. Looking at a blockchain venture that is both an electric vehicle charging and payment system, a solar power sharing system, and also an electric vehicle charging sharing business, we will visualize the future where cryptocurrency and blockchain create synergy.

※ I am an international economy expert and currently the vice mayor of economy in Ulsan. He served as the head of the tax division of the OECD Policy Center of the Republic of Korea, the Foreign Economic Cooperation Officer, and the International Finance Review Officer. By writing [한 권으로 읽는 디지털 혁명 4.0] [식탁 위의 경제학자들] [명작의 경제][법정에 선 경제학자들] [나를 사랑하는 시간들] Etc.