제 18 호 Bitcoin
Kicker: OPINION (Economy)
Bitcoin
By Jun-Seo Park, Cub-reporter
Bitcoin price is rising as the end of the U.S. FED*'s rate hike has recently become visible. This price rise can be seen as reasonable because the market always looks to the future, not the present. However, the increased economic risks along with bankruptcy of banks in the U.S., which continued several times until recently, have adverse effect on the stock market. The reason is that in the case of stocks, valuation is based on the future cash flows of companies. So, if economic risk increases above a certain level, companies’ cash flow and financial soundness will deteriorate. In summary, the current situation is a mixture of two aspects. It is an increase of recession risk and liquidity supply due to a rate cut. In this situation, how about Bitcoin? Recently, there has been little correlation between Bitcoin and the stock market, and it has a higher correlation with gold. This is because it still belongs to risky assets, but at the same time, it also belongs to commodity assets. In other words, the economic risk increases, and accordingly, the favorable factors of increased liquidity due to interest rate cuts have a significant impact on Bitcoin. Also, the high correlation between Bitcoin and gold can be said that what Bitcoin ultimately aims for is to become a safe asset such as gold. So, let’s focus on the intrinsic value and principles of Bitcoin as to whether it can really be considered a safe asset.
* FED: abbreviation of Federal Reserve System, United States central bank system that carries out the country’s monetary and financial policies
What is Bitcoin?
Bitcoin is an open-source program created by an anonymous programmer named Satoshi Nakamoto on January 3, 2009. Satoshi Nakamoto has not been identified so far and is believed to be dead. For this reason, there is no issuer, and unlike existing currencies, quick and safe transactions between individuals called P2P are possible without the intervention of the government, central bank, or financial institutions. In addition, unlike the existing legal currency, which the government can mint more if it wants, the maximum issuance is limited to 21,000,000. So far, about 19,000,000 Bitcoins are in circulation.
Bitcoin
So, how is Bitcoin being made? Receiving new Bitcoin payments is called ‘mining’. Bitcoin mining can be said to be a reward for Proof-of-Work (PoW). To mine Bitcoin, you have to use tremendous computing power to find a very complex password called a ‘hash’ value, which is called PoW.
Bitcoin’s Intrinsic Value
People think of Bitcoin as a negative being with a strong speculative nature. For a representative reason, they think that Bitcoin is an illusion that has no intrinsic value.Before discussing the intrinsic value of Bitcoin, let’s think about the intrinsic value of legal tender. The legal tender used by most countries as a medium of transaction is secured only by trust of the country and has no collateral value other than that. In extreme terms, when the country goes bankrupt or is on the verge of survival, our legal tender immediately becomes a piece of paper. In other words, even the legal tender that we commonly use has no intrinsic value. The legal tender lost its value after President Richard Nixon of the United States declared on August 15, 1971, that the dollar would no longer be converted into gold. Previously, dollars had intrinsic value because dollars and gold were exchanged equally. However, from the day the dollars were freed from gold, the United States government was able to issue dollars without any collateral. Since then, legal tender, including U.S. dollars in most countries, have steadily lost their value, and inflation has continued to arise from the prices of goods and assets that should be purchased by exchanging currencies such as dollars.
The Mechanism of Bitcoin: Blockchain and Halving
Bitcoin’s system is a trust system based on no trust. To understand the meaning of this phrase, we need to understand blockchain, a technology used in Bitcoin. Blockchain is a form of distributed database managed through a P2P (Peer to Peer) network. And it is a technology that stores books containing transaction information in several computers connected to the blockchain network rather than in a central server. Therefore, since records of all Bitcoin transactions are recorded on the blockchain network, forgery is difficult and Bitcoin provides market participants with transparency and reliability. The ‘consensus mechanism’ is used to verify the validity of the transactions recorded on these blockchains. Here, the term ‘consensus’ is reached using the aforementioned PoW.
Bitcoin Halving
Bitcoin has a ‘halving’. Halving is that the number of Bitcoins per block mined through the process of PoW decreases by half every four years. On January 3, 2009, the first bitcoins were mined 50 bitcoins as compensation for the creation of the ‘Genesis Block’. Since then, due to the halving, it has been reduced by half every four years to 50, 25, 12.5, and 6.25 and as of 2023, 6.25 per block will be given as compensation. What does this mean? Assuming that demand is constant or increases further, prices rise, so if Bitcoin becomes scarce in the future, a price increase can be expected accordingly.
It will be difficult for Bitcoin to be used as a key currency itself. Rather, in the current inflationary era, where legal tender can be printed without any limit, I think Bitcoin will be a means of storing value to preserve purchasing power in the long run. Now, Bitcoin is an object that we should study with interest, not with a negative view.
Source:
https://bitcoinone.net/bitcoin/reference/2021/the-genesis-block.html
Image sources:
https://www.news.com.au/finance/money/wealth/why-the-price-of-bitcoin-and-ethereum-is-surging-after-svb-collapse/news-story/8e98645e0592c2848f271041afca1c7f
