The decline of bitcoin and the future of block chain

The price of bitcoin fell from November 19th to November 25th, falling nearly 35% in a single week and at the lowest point of $4000. IMI researcher Yang Wang and Wang Yu, Wang of hander Institute of financial science and technology, pointed out that the cause of the bitcoin slump was that the project bubble continued to crack down on market confidence, the battle of BCH hard bifurcations caused market volatility and the tightness of encrypted monetary policy triggered market panic. Yang Wang shows that although the application of block chain involves many fields, the operation scale is not large, which is mainly due to the limitations of the physical performance of the block chain, and the three yuan paradox is difficult to break. But it is undeniable that block chain has made outstanding achievements in the two aspects of distributed database and digital bill platform, and the future block chain development bubble and value coexist.

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The price of bitcoin fell from November 19th to November 25th, falling nearly 35% in a single week and at the lowest point of $4000. As a matter of fact, since bitcoin rose more than $20000 in 2017, it began to plunge into a rapidly tumbled trend, falling more than 80% by November 25th.

What is the cause of the bitcoin slump? How should the block chain technology be considered, is it a bubble collapse or a coexistence of value? What is the future of encrypted currency?


The cause of the bitcoin slump: block chain bubbles, BCH bifurcations, and tighter policies

As shown in Figure 1, the factors affecting the price of bitcoin include the structure of supply and demand, psychological factors, macro factors, market structure, and asset allocation in five aspects. The influence of supply and demand structure, psychological factors and macro factors on the price of special currency is more direct and important to review the situation of bitcoin setback from November 19th to November 25th, which is also caused by the decline of demand and confidence caused by macro factors and psychological factors. The specific reasons are as follows: the following three aspects:

Figure 1: the bitcoin price analysis framework

Source: hande Institute of financial science and technology

Block chain project bubbles continue to crack down on market confidence. The current infrastructure of the block chain is still not sound, and the block chain projects in the market are uneven and chaotic. Part of the project wrapped the “public chain” of the coat, actually holding the money for investors to do the work of money. Or to issue the so-called “virtual currency” and “digital assets” to absorb funds and infringe on public rights and interests. And the collapse of these projects has led to a constant loss of confidence in the market.

The battle of BCH hard bifurcations caused market volatility. “Hard bifurcation” refers to the modification of the data structure of the bitcoin block (the “consensus mechanism”), and the new data nodes are not verified by the old data nodes, thus forming the “mining” situation of the different types of nodes. In November 15th, BCH (bitcoin cash) had a hard split, and the BCH ABC headed by Wu Jihan and BCH SV, headed by Australia Ben Cong, were always competing for sovereignty. The impact on the market is that, on the one hand, the miners after the hard bifurcations are mining their respective currencies, the division of the community will affect the centralization of the block chain and investor confidence; on the other hand, investors are worried that the current currency value will be thinned after the bitcoin split, so the sale of BCH and the falling price of BCH affect the market of bitcoin (as Figure 2).

Figure 2: bitcoin cash and bitcoin price trends (dollar denominated)

Data source: WIND, hande Institute of financial science and technology

The tightening of monetary policy has caused panic in the market. In November 16th, the US Securities Regulatory Commission issued a statement on the issuance and trading of digital assets securities, which was declared to be punished for two ICO projects. In fact, in the ICO (first currency issuance) regulation, countries have issued relevant policies, and most countries have strict regulatory attitudes (such as table 1). In addition, in November 20th the U.S. Department of justice opened an investigation into whether the December 2017 bitcoin boom was suspected of market manipulation.

Table 1: a list of ICO related policies in some countries

Source: open information, hande Institute of financial science and technology


Prospect of future development of block chain: coexistence of foam and value

The block chain, as the underlying technology of bitcoin, was put forward by the Chinese local village in its “bit – Currency: a point – to – point electronic cash system” in 2008. With the founding of the American R3 company in 2014 and the launch of the Linux Foundation’s Hyperledger project in 2015, the interest of the block chain in the investment market has gradually increased. In the past ten years, the application of block chain involves many fields, but its operation is not large, and the degree of relevance to the real economy is not high. This is mainly due to a lot of pain points in the block chain in terms of its performance.

The main pain point is that the physical property of the block chain is limited, and the three yuan paradox is difficult to break. First of all, because of the “de centralization” design, the block information check work time is long, and the physical performance of the public chain is not high. According to the relevant data, the largest number of bits per second of bitcoin support transactions is 6, while Visa supports 1600 transactions per second. Secondly, based on the application of block chain, there is a problem of “three yuan paradox”, that is, the block chain system can not achieve the three characteristics of “to mediate, ensure security, high efficiency” at the same time. In maintaining the core location of the block chain design, the security and efficiency can not be reached at the same time, and become a big obstacle to the application of the block chain in the specific transaction scene or the real economy. And there are still problems in the concrete implementation of “de centralization”.

Of course, the limitations of physical performance do not mean that block chain technology is not available to entity scenarios. At present, the block chain has achieved good results in the following two aspects:

One, distributed database. This kind of application scene does not involve the property right, only plays the function of the block chain sharing books, and uses it as the centralization database to solve the information asymmetry problem between the receiver and improve the efficiency of the information deposit. Specific applications, such as the information disclosure platform of Asset Securitization Based on block chain technology, developed by the digital money Research Institute of the people’s Bank of China.

Secondly, the digital bill platform. In the digital bill platform based on block chain technology, Token (“token”, the right to perform certain operations) can act as an internal settlement tool in the supply chain, thus helping banks and trade financing enterprises to reduce the cost significantly and increase the turnover rate of funds. For example, the people’s Bank of China’s digital bill trading platform based on block chain technology has been online and successfully operated in early 2018.

In summary, the overall mood of the current investment market has cooled down after the “irrational prosperity” of encrypting currency and block chains over the past few years. The value judgment and risk assessment around the block chain are also in the process of gradual improvement. The future development of block chain needs further breakthroughs in its physical performance; on the other hand, the design of products based on block chain technology needs more landing for the real economy and practical applications. Only through the “block chain” gimmicks to attract traffic, its creative income is doomed to not be long.

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