Some my ideas about cryptocurrency

Section I: Motivation

I neither am an expert in economics nor have much understanding in cryptocurrency. I write this post simply because I am curious about the “reason” behind buying cryptocurrency. In the following statements, I am sure there would be many obvious mistakes. If you are also interested in this topic, please feel free to point these mistakes out and join the discussion with me!

Initially, I am planning to use this topic as my oral practice. Unfortunately, I am still suffering from Pneumonia-like disease and having spontaneous cough, which will make audience more difficult in understanding what I am going to say. Thus, at the end, this topic will be introduced through an article form.

Section II: Outlines

I have thought of different ways to convey my ideas about cryptocurrency. At the end, I believe the easiest way is to start with supply and demand. Also, for simplicity, let me focus on only the cryptocurrency with highest price — BITCOIN for now. Later on, I will talk about why I believe the price of BITCOIN is going to decline in the long run in Section IV. The government standpoint will be discussed in Section V; while the buying power of cryptocurrencies are discussed in Section VI. At the end, a quick conclusion is in Section VII.

Section III: Supply and Demand

The supply for BITCOIN is well-known to most of the people. To be short, the overall supply of BITCOIN is fixed and it is getting harder and harder for one to get one BITCOIN with time passes.

Let’s now talk about the demands for BITCOIN. From what I think of, there are three main demands for BITCOIN:

1. Investment
2. Money laundry
3. Expectation to its ability to buy real goods in the future

Investment is the most intuitive motive. People who wants to earn a lot will not want to miss this opportunity. However, it is questionable that whether the price of BITCOIN is increasing for long. In my understanding, the price will at the end drop to a lower price. I will provide my explanation in next section.

Money laundry is another main demand for BITCOIN. In the past, money laundry is relatively risky and might be discovered by either governments or banks. However, BITCOIN now is a wonderful platform for one to exchange money from one country to another country.

There are other people believe that BITCOIN or other cryptocurrencies will have the real buying power in the long run, just as normal currency. Moreover, they are convinced that cryptocurrencies might become the main currencies one day. Unfortunately, from my view point, only few cryptocurrencies have slightly chance to be admitted by the majority in the future. The reason for my claim will be disclosed in Section VI.

Section IV: Bitcoin Price in the Long Run

As I mentioned in Section III, there are three main demands for BITCOIN.

Investment in a short run will cause the price of BITCOIN maintain at a relatively high price. However, at the end, the price relies on the “real demand” but not investment.

Money laundry is a “real demand” for BITCOIN. Though it is hard for me to estimate how much portion in BITCOIN now is for money laundry, I believe most of the to-be-laundered money is still inside the market. In other words, when the money laundry pipeline reaches its balance, more money is going out of the BITCOIN market and the BITCOIN price will drop.

As I mentioned in last section, the expectation for the buying power of cryptocurrency will at the end be a false hope. Thus, the demand for this is going to vanish in the long run.

From all the demands I discussed above, I can conclude that the BITCOIN price is going to decline in the future.

Section V: Government Standpoint

Before I jump into government standpoint, lets first think of the property of currency itself before the appearance of cryptocurrency. I have two interesting questions for reflections.

• Question 1: Why cannot we have as many currencies as we wish? The answer is pretty simply. All the currencies worldwide now are given values by governments. If someday I want to create a currency by myself, it is illegal and no one will believe the value of “my currency”.
• Question 2: Why cannot we just have one currency worldwide? The answer is also very easy. Currencies have become tools for governments to control their imports and exports. I believe I don’t need to mention how currency decisions are used to maximize the benefits for each country.

With the above two questions, it is straightforward to tell that BITCOIN or other cryptocurrencies violate both of the above currency properties: all the cryptocurrency now can be “created” with different hash keys or slightly different trading mechanisms, and they are all worldwide currencies. That is to say, from governments’ viewpoints, allowing those cryptocurrencies are very dangerous, and most of the cryptocurrencies might be prohibited in a way in the long run.

Section VI: Cryptocurrency’s Buying Power

Although some of my friends believe that some cryptocurrencies will at the end be given the ability to exchange goods, just as normal currency. In my viewpoint, it is ridiculous and should never happen.

Let me describe this game with some real numbers. Assume that there are overall 100 BITCOINs, each worths 100. However, with the time passes, the BITCOIN worths 1,000,000.

If you didn’t see the absurdity of the story, let me pinpoint it to you: all the money has been diluted. Because no matter how the exchanges between BITCOIN and U.S. dollars happen, the U.S. dollars do not vanish. On the contrary, BITCOIN now has higher buying power and thus is able to buy more goods. If no one is going to stop this, the inflation caused by BITCOIN will at the end consume everyone. Not to mention there are almost two hundred well-known cryptocurrencies in the market now.

Section VII: Conclusion

As a quick summary:

1. Money laundry is the demand that will last for long. However, I believe most of the to-be-laundered money is still in market now, and the money will be gradually swapped out. By that time, the BITCOIN price will be much lower.
2. Cryptocurrencies themselves violate the currency properties held by governments. Governments should prohibit most or all the cryptocurrencies in the long run.
3. Currency feeding another currency is absurd. It will at the end cause unstoppable inflation.