China Economic Weekly

Although regulators have defined virtual currency business as illegal activities, the “underground” virtual currency business is still banned repeatedly.

In March this year, the Guangzhou Municipal Development and Reform Commission launched the first on-site rectification action of “mining” of virtual currency in Guangzhou. More than 190 professional mining machines of “mining” of virtual currency were found at the virtual currency mine in an electric vehicle charging station, with a value of more than 5 million yuan; Jieyang City seized 916 “mining machines” in cracking down on the “mining” activities of virtual currency. As the virtual currency business is not stopped, the central bank working meeting in March also put forward the work goal of “continuously maintaining the high-pressure crackdown on the speculation of virtual currency transactions”.

Bitcoin’s performance in major crises

One of the important reasons why virtual currency is difficult to eradicate is that virtual currency is still considered by its investors to have the function of hedging assets, that is, it can provide hedging function as part of the investment portfolio in case of drastic market adjustment. Taking bitcoin, which accounts for half of the “currency circle”, as an example, bitcoin is called “digital gold” by its investors. It is believed that due to the scarcity, encryption and limited supply of bitcoin, it is a higher quality hedging asset than gold and can hedge against losses in case of economic recession and major crisis. Goldman Sachs Group restarted the trading cryptocurrency account in the upsurge of virtual currency in 2021, and said in the 2022 annual research report that bitcoin will assume more of the role of gold in the future, occupy the market share of gold, and become a new choice for precious metals with the function of “storage value” in the hearts of investors, and its price is expected to continue to rise.

Can virtual currency help investors avoid risks? We take bitcoin, the virtual currency with the highest market value, as an example for in-depth analysis.

Since the high point in early November 2021, bitcoin has not shown the function of risk aversion. When the market is facing major downside risks, the performance of bitcoin is not satisfactory. Since the emergence of COVID-19’s variant COVID-19 in South Africa in November 2021, the price of bitcoin and the global stock market plunged by 8.9%. At the beginning of this year, the conflict between Russia and Ukraine brought turbulence to global financial markets. On February 24, pessimistic expectations caused a sharp decline in the global stock market, but the prices of traditional safe haven assets, such as gold and crude oil, rose sharply, playing a safe haven role. The price of bitcoin plunged sharply. On February 24, the price of a single bitcoin fell by $2688, or more than 7%. In these two major crises, bitcoin did not show the function of safe haven assets.

Volatility and legitimacy of bitcoin

Bitcoin does not have the function of hedging against market turbulence and uncertainty.

First, bitcoin does not have stable purchasing power. Since ancient times, gold has always occupied a place in human economic life. Due to its rarity and physical stability, gold can not only be used as decorative and religious articles, but also become a general equivalent recognized all over the world, and even derived the monetary system of the gold standard. In contrast, bitcoin, as a digital product, lacks endogenous value. In a popular sense, bitcoin is similar to a digital medal. The stock is limited and exists in a series of blockchains. Miners can obtain the bookkeeping right of a bitcoin by solving the problem violently through a computer and obtaining the correct hash value. Bitcoin lacks real value support, sovereign credit and commercial credit, which is essentially different from other financial products. Whether this kind of digital assets outside the economic system has actual internal value is controversial.

Secondly, the price of bitcoin fluctuates greatly and cannot maintain price stability in case of market shock. The price of bitcoin is easily affected by market sentiment and is prone to sharp rise and fall, showing much higher volatility than ordinary financial assets. The words and deeds of the “money circle bosses” will greatly affect the price of bitcoin. Elon Musk is one of the most famous bitcoin advocates. His twitter speech will have a significant impact on the price of bitcoin. In June 2021, musk announced on twitter that Tesla would accept bitcoin payment again. Then, the price of bitcoin increased by 12%, the highest in three weeks. In May of the same year, musk also announced on twitter that Tesla would no longer accept bitcoin as a payment method, which led to a decline in the price of bitcoin by about 15%, although not many people actually use bitcoin to pay Tesla. However, it can be seen that the bitcoin market is highly volatile and easy to be manipulated by market sentiment. As a tool for value storage and risk hedging, it is not stable.

Finally, the policy risk of bitcoin is high and lacks international official recognition. In addition to speculative risk, the regulatory risk of virtual currency also makes it unable to become a safe haven asset. Due to its anonymity, non supervision, free trading and other characteristics, virtual currency completely bypasses the traditional “bank central bank” system, and will not leave verifiable payment or transfer records. Therefore, virtual currency is favored by the illegal market, and a large number of virtual currencies are used for illegal transactions by dark networks and black markets. In October 2013, before bitcoin was popularized, the FBI seized a dark network “Silk Road” that specializes in buying and selling weapons and drugs with bitcoin, and banned the online black market of special bitcoin transactions such as “alpha bay” and “Hansa” in 2017, with a monthly transaction volume of tens of millions of dollars. At present, China has clearly defined the business activities related to virtual currency as illegal financial activities, and the attitude of regulatory authorities in other countries towards bitcoin tends to be conservative. For quite a long time in the future, bitcoin will not be able to achieve the same level of recognition and legitimacy as gold in the world.

In fact, overseas regulators are cautious about bitcoin as a safe haven asset. During the online activities of the bank for International Settlements (BIS) Innovation Summit in March 2021, Federal Reserve Chairman Powell said that bitcoin is a “speculative asset”, which lacks endogenous value and has great volatility, and is not suitable as a means of value storage. In September 2021, the notice on further preventing and dealing with the risk of speculation in virtual currency transactions jointly issued by the people’s Bank of China and other ten departments pointed out that virtual currencies such as bitcoin are not legally reimbursable and should not and cannot be used as currencies