Bitcoin: Money Revolution or speculative bubble? background(I)

1. Virtual currency: the product of Internet popularization

Virtual currency is a kind of currency widely existing in the Internet world, which is different from the real non entity currency with entity as the medium. Its common form is a series of numbers recorded on a network account. With the popularization of personal computer and the development of Internet technology, people's network activities have an explosive growth. As a kind of transaction medium in the network world, virtual currency is widely circulated in e-commerce, Internet Finance and other fields, which brings convenient transaction and payment experience for network users._DJMINER


According to the different ways of issuing virtual currency, it can be divided into two categories: one is represented by Tencent's q-coin, Shanda's coupons, various forum coins and game coins. The legal virtual currency with issuing center, like credit currency, is often credit currency, and its issuance is determined by the central organization. One is the decentralized virtual metal like currency represented by digital currencies such as bitcoin. Just like the limited production of precious metals in real life, the number of virtual metal like currency issues is often strictly limited by the algorithm. The main differences between them are as follows:

2. Bitcoin: the representative of decentralized digital currency

The concept of bitcoin was first proposed by zhongbencong in 2009. It is a P2P form of digital currency. Its production and transaction rely on the open source software designed and released by zhongbencong and the construction of P2P network on it. As a representative of decentralized virtual currency, bitcoin has developed rapidly in recent years, and has become the most influential virtual currency in the global market.


Bitcoin has created blockchain technology, which uses block chain data structure to verify and store data, uses distributed node consensus algorithm to generate and update data, uses cryptography to ensure the security of data transmission and access, and uses intelligent contract composed of automatic script code to program and operate data.


We can simply define that bitcoin is generated by computers, the total number is strictly limited, the transaction security is high, the data is difficult to lose and damage, and the historical transaction records are distributed in the bitcoin network. Unlike the credit currency issued by the central government, the value of bitcoin depends on people's comparison of the algorithm of the special currency system rather than their trust in the government. The transaction of bitcoin is based on the electronic cash system realized by the point-to-point technology, which allows both parties to make online payment directly, without the clearing and settlement links of the intermediate authority, improves the efficiency of transaction and settlement, and saves the cost of cross-border transaction.


Bitcoin has four main characteristics: the system sets the issuance mode, there is no central issuing agency; the annual issuance quantity is halved every four years, and the final total amount is limited; the balance information is difficult to tamper with, the transaction safety is guaranteed, and the overall system is robust; the historical transaction records are open._DJMINER

3. Production mode of bitcoin

The production of bitcoin has the characteristics of computing power determining output and cooperation smoothing income. The production process of bitcoin is to find a random number through a large number of calculations, and make a value in the block meet the requirements of the system through a specific function. Thus, a new block is generated, and users who successfully calculate the random number to meet the requirements will be rewarded by the system. In order to increase the probability of their own success, participants try to expand their share of the whole network computing power by improving their mining chip performance and expanding the scale of mining equipment.


The ore pool model has gradually become the mainstream of mining. Suppose that 1000 people participate in mining and each time they give 50 bitcoins, the expected time for a single miner to successfully dig is 1000 10 minutes, and the expected immediate income is about 7 days to get 50 bitcoins, but the real time may be longer or shorter, and the income of the miner fluctuates greatly. If these 1000 participants join together to form a "mining pool", all mining income will be shared equally by all participants, and the actual income of each miner will be smoothed to 0.05 bitcoin per 10 minutes, and the stability of the income will be greatly improved.


Investors can not only connect their own mining equipment to the mining pool to participate in the calculation, but also directly use the fund to rent the computing power of the mining pool to share the profits of the mining pool. At present, the concentration of bitcoin ore pools in the world is relatively high, and the computing power of the top ten ore pools accounts for 80%. The domestic well-known bitcoin commercial ore pools include f2pool, btccpool, antpool, bwpool, etc., which have a strong competitive advantage in the world. The power consumption of the mine is huge, which is generally built in the area with abundant power and low price.


The bitcoin market is highly concentrated. In the overseas market, the mainstream exchanges occupy most of the market share, and the new exchanges obtain customers through differential positioning. In the domestic market, before 2017, bitcoin trading platform presented the situation of triple confrontation of bitcoin network, okcoin and bitcoin China. In September 2017, the central bank, together with seven ministries and commissions, issued the announcement on preventing the financing risk of token issuance, requiring all kinds of ICOS to stop immediately and all major trading platforms to stop operation one after another._DJMINER

4. The development path of bitcoin

Since the advent of bitcoin 10 years ago, from the initial programmers' self entertaining games to the digital assets attracting worldwide attention, people have been questioning it. In the past 10 years, the value of bitcoin has achieved an amazing increase in the sharp fluctuations. As of February 19, 2018, bitcoin has been mined out with a total number of 16.8737 million blocks, a total of 509898 blocks, a price of US $10484, and a total market value of more than US $180 billion, making it an eye-catching part of the global asset allocation. As a controversial new asset, bitcoin is not only influenced by macro conditions such as international economy, monetary policy and foreign exchange policy, but also closely related to factors such as trading platform supervision, grey industry rigid demand and blockchain technology development. The development of bitcoin can be summarized into the following four stages._DJMINER

The first stage: the rise of new things from October 2008 to June 2011

Bitcoin came into being in the financial crisis in 2008 because of the fear of central banks and the distrust of inflation currencies. In October 2009, the first published bitcoin exchange rate was 1 US dollar to 1309.03 bitcoins. The calculation method is to generate the power consumption of a bitcoin. In May 2010, bitcoin was first given the attribute of "currency": a programmer in Florida exchanged 10000 bitcoins for $25 worth of pizza coupons, which gave birth to the first fair exchange rate of bitcoin: 0.25 cents / bitcoin. In July of the same year, the news released by bitcoin client was mentioned by Slashdot, a famous news website, which brought a large number of new users to bitcoin. After that, the price of bitcoin rose to $0.08 in five days. With the increasing attention of time, Forbes and other public opinions, as well as the rise of convertible types of bitcoin, the price of bitcoin has soared.

The second stage: the breakdown of the two bubble of 2011.6-2013.12

On June 19, 2011, mt.gox website carrying more than 70% of bitcoin transactions was attacked by hackers, resulting in the data leakage of 60000 users. Some hackers obtained the login right of website administrators and sold a large number of fake bitcoin, which made the price of bitcoin drop from $17.51 to $0.01. In the following six months, many platforms were hacked, and bitconinica platform was permanently closed due to two attacks. These disasters made bitcoin trading platform and bitcoin investors fully aware of the security risks brought by hackers.


After the vicious events, 2012 became a year for bitcoin to restore market confidence. In this year, the first bitcoin magazine was born, and the first credit default swap transaction only aimed at comparing with bitcoin took place, and commodity and service providers began to accept bitcoin payment in succession. Bitcoin's price returned to $13.41 at the end of 2012. In 2013, with the market warming back, the influx of a large number of Chinese investors and the volatility brought by short-term events, the price of bitcoin rose to $100 level in April, and remained in the range of $60-140 until October.


On December 5, 2013, the central bank issued a circular banning Chinese banks and payments from directly or indirectly participating in bitcoin exchange transactions. The ban only applies to government-owned banks and government approved payment processing. Ordinary Chinese citizens can still trade free bitcoin as a commodity. On December 18, 2013, bitcoin prices in China dropped to 2011 yuan (about US $330). The collapse of this bubble reflects the market risk caused by the difference in the attitude of the special currency.

The third stage: March 2014 to November 2016: rebound after a weak downturn

The price of bitcoin in 2014-2016 presents a "U" shape as a whole. In the past three years, mt.gox, once the most popular website, has been defeated by hackers and gone bankrupt; more and more enterprises accept bitcoin payment; a group of senior investors like Mark Anderson, Yang Zhiyuan and Li Jiacheng have emerged in bitcoin market, while Sequoia, light speed, Softbank and other investment institutions have also made layout in bitcoin industry.

Stage 4: disillusionment again after 2017-2018 crazy bull market

At this stage, the influx of speculators and institutional investors, the increase of market acceptance and the news of technology upgrading spurred bitcoin to enter the crazy bull market. However, bitcoin's hot market did not last for a long time. After the price reached the high point, it quickly fell back. The huge drop cost the speculators who entered the high position nothing, and the dispute between bitcoin and bitcoin also became more and more heated._DJMINER

5. The first appearance of chaos: bifurcated coins and Shanzhai coins

Bitcoin traders use a set of uniform rules (data structure), which is the key to ensure bitcoin transaction and circulation, while bitcoin wallet determines the validity of each transaction by identifying the transaction records on the block. So why does bitcoin diverge?


The block size limitation of bitcoin reduces the mining revenue and keeps the mining cost high. In order to prevent the overload risk of bitcoin network and encourage the whole network computing force to participate in mining, Nakamoto initially limited the block size of bitcoin to 1m. However, with the increasing acceptance of bitcoin and the increasing demand for mining and trading, the block size limit of 1m makes the network prone to congestion. The improvement of the whole network computing power increases the mining difficulty and cost of bitcoin, and the income of miner is also reduced by the increase of mining difficulty. According to the data released by BTC, from November 30, 2017 to March 30, 2018, the weekly average computing power of bitcoin in the whole network increased from 10.82eh/s to 24.89eh/s, with an increase rate of about 130%. The difficulty of mining increased rapidly, and the weekly average miner's fee dropped from the highest point of 6.95 to 0.17 in the same period.


Bitcoin focuses on minority interest groups, and new entrants seek new ways to participate. In the eight years since the birth of bitcoin, about 14 million bitcoins have been mined, and most of them are concentrated in the hands of bitcoin development teams and a few large mine owners. Therefore, new virtual currency traders are looking for virtual currencies with appreciation potential.


In this context, two mainstream upgrading strategies are proposed in the market: hard fork and soft fork. Hard branching is simply to say that new nodes are formed on the blockchain in the mining process. Because the mining behavior of miner is relatively independent, part of the calculation force may continue to dig on the new nodes to form a new specification for branching. New specifications are often published, and only when the majority of nodes agree can they be officially published. At this time, if the old node does not accept the upgrade and continues to maintain the original blockchain, then the blocks generated by the new node cannot be recognized by the old block, which causes the occurrence of hard fork. The soft fork is a two-way compatible specification design. The blocks generated under the new specification can be identified by the old nodes, and the blocks generated by the old nodes can also be identified by the new nodes. Such an upgrade mode will not generate a real fork, which is applicable to the situation of slight modification compared with the data structure of special currency.


The technology upgrade of bitcoin is on the way, but the improvement schemes proposed by the development team are different, which makes a wide variety of bifurcated coins such as BCH, BTG, b2x, BCD, SBTC and bchc appear in the market.


With the rapid development of bitcoin, some development teams are inspired by the design of bitcoin. Through the improvement of bitcoin algorithm, they have created a variety of other virtual currencies, among which the more active one is litecoin. The birth of litecoin is inspired by bitcoin, which has the same principle in technology and aims to improve bitcoin. There are three significant differences compared with bitcoin: first, the litecoin network can process one block every 2.5 minutes (instead of 10 minutes), so it can provide faster transaction confirmation. Second, it is expected to produce 84 million litecoin, four times the amount of money issued by the bitcoin network. Thirdly, the workload proves that the amount of computation of the encryption algorithm used in the algorithm is slightly less than bitcoin, which reduces the difficulty of mining.


The virtual currency similar to litecoin is based on the implementation of bitcoin, and some changes are made more or less. Technically, it is not difficult, but it will cause market confusion. Whether it's bitcoin fork or counterfeit, these so-called improvements or upgrades do not deviate from the implementation principle of bitcoin. However, the emergence of these currencies will not only divert the computing power of bitcoin, but also lack the authority to regulate the issuance and circulation of these currencies. Hundreds of virtual currencies emerge in a short time, so it is difficult to ensure the safety of investors' funds through supervision._DJMINER