Re-discussing Bitcoin: The Block Theory and Leverage Theory of Wealth

Rational survival is more important than anything else to the next ten years

I. Preface

The reason for writing this article can be traced back to the two books I read before and the two “thunders” that exploded recently. Two books, one is “Economic Interpretation” by Mr. Zhang Wuchang just finished yesterday, a scientific and objective economics book with strong explanatory power; the other is “Small Island Economics” by Schiff and his son. An easy-to-understand primer on economics.

Two “thunders”, one is the “thunderbolt of U.S. stocks” that melted twice this week, and the other is the “thunder of Bitcoin” that followed the 60% drop, both of which have had a huge and far-reaching impact on the global economy. Both have had a huge and profound impact on the global economy.

In my previous article “Bitcoin Price, Dow Jones Index and US Presidency”, I discovered and analyzed the high positive correlation between Bitcoin and US stocks and US presidency, breaking all the “cycle myths” of the cryptocurrency mining circle, and found that the root cause of the cyclical performance of Bitcoin price lies in the economic policies of the US president after he took office. Therefore, in order to know the future price of Bitcoin, we must judge the whole global economic situation, and in order to deduce the future economic development and possible crisis, we must go deeper into the underlying nature, in order to come up with explanatory and predictive conclusions. That is the main purpose of this paper.

 

 

II. What Is Wealth

Borrowing the story of “Small Island Economics” to make some adjustments: suppose a group of people living in a closed island, fish as the only source of food, people at first only rely on fishing for a living, then the fish in the island is the real “wealth”. Everyone fishing level is different, some people are very clever invention of fishing nets, some people are strong with a fishing net can make up a lot of fish, so there is a division of labor overall production efficiency. Later, more and more fish can not be eaten every day, that is, “wealth” has a “balance”, then some people began to operate warehouses, you can store fish to save for later. Later on, families stored more and more fish, with the clear division of labor, material materials more and more abundant, some people use 100 fish in exchange for others to build a house, and so on and so forth more and more frequent transactions, people found that the direct use of fish to move around the transaction is very inconvenient, people need easy to carry, easy to divide, stable state of the alternative, from special stones, to shells, and then to special metal; later More and more people, under the tribe to tribe competition and trade have a sense of leadership managers and credit, so the tribal leaders invented paper fish coupons, more portable and trading, and the promise of a fish coupon can be exchanged for a fish in the warehouse at any time, from then on the trade is more developed, to promote further development of productivity.

At this point in the story, we can understand how “money” is created, but we should think more deeply about what is “wealth”, “money” and ” warehouse”? To be precise, “fish” is wealth, and “money” is only the storage vehicle and unit of measurement of wealth. Continuing the view of Mr. Zhang Wuchang’s “Economic Interpretation”, wealth is a resource, and resources are “lacking”, thus generating demand, trade and competition.

 

III. Wealth Needs to be Stored and Measured

The story of fishing on a small island we can know that transactions create wealth, wealth also needs to accumulate and measure. In the ” Economic Explanation”, Mr. Zhang put forward a “warehouse theory”, saying that the accumulation of wealth requires warehouses, and that human life is finite, and that warehouses allow wealth to continue, and that houses, stocks, collectibles, and currency are all different forms of “warehouses”. Regarding “money”, Mr. Zhang’s view is that “the purpose of money is to facilitate transactions, so the price should be relatively stable”.

Back to reality, I think the accumulation of wealth and transactions are often integrated, for example, if you have $1 million cash in hand to buy a car at some point in the future, “cash” achieves both the “storage” of wealth and “”measurement””. Meanwhile, in the “warehouse theory”, the classification of “warehouse” is only distinguished from the perspective of infinite and limited number of warehouses and whether the warehouse itself has a rental value, and simply lists several “warehouses” such as houses and collectibles “However, these two dimensions do not cover all the characteristics of warehouses in real life. Therefore, I reorganized the types of “warehouses” that exist in reality, and proposed the “block theory”.

IV. Block Theory

1. Definition of “Block

The term “block” comes from the term Block in Bitcoin technology, which originally refers to the data of recorded transactions packaged into a data block every 10 minutes or so, and this immutable data block is the proof of wealth accumulation and transactions. I therefore invoke the concept of a block to the broad field of wealth for defining the vehicle in which wealth is stored and traded.

We classify carriers into four main categories based on whether the overall number is limited and whether the supply issuance mechanism is centralized, decentralized currency blocks (A), decentralized asset blocks (B), centralized asset blocks (C), and centralized currency blocks (D). I will first put up the most important one, the table of wealth blocks, and then slowly explain.

We have re-defined the “assets” in the market as “wealth” and the “blocks” that accumulate and measure wealth. From a macroscopic point of view, there are only three states of “fish” wealth, i.e., “constant”, “increasing” and “decreasing”. “Let’s quantify the specific numbers, for example, the initial 2,000 fish, and discuss the two basic cases of growth to 3,000 or reduction to 1,000. Assuming that each fish is the same and requires a box of the same size for storage, this “box” is the “block”; the “box” is limited by production costs and materials. Therefore, in the absence of intervention, in order to facilitate transactions, the number of fish should be produced at any time how many “boxes” to store and trade, that is, the “block A” type; of course, if there is no intervention, many businesses producing ” Boxes” will also compete to reduce costs or increase revenue, such as using better materials to store longer, or better methods to compress fish so that a box can hold several fish, this quality “box” is often limited, that is, ” Block C” type; there is also a possibility that each tribe has a designated person who can produce “boxes”, and when the transaction becomes complicated, there may be some boxes that do not contain fish and are traded in the market as “empty boxes”, i.e. “Block D” type. When D becomes risky, people start looking for block B to keep their wealth for a long time.

 

2. “Block” classification

We map “fish” and “boxes” to real-life “wealth” and “blocks” for storing and trading wealth. “We further categorize “blocks” as follows.

“Block A”: also known as decentralized currency block, the total amount is unlimited, the supply of issuance is not affected by the centralized role, the value is stable and conducive to trading; gold was once promoted as such a role, but the value of gold itself fluctuates greatly, and mining is slow there is no way to ensure the growth of wealth one-to-one correspondence, and small daily transactions are not convenient The silver, then the paper money linked to metal (such as the US dollar), then the paper money linked to paper currency (such as the Hong Kong dollar), then the unanchored currency (now the fiat currency of each country), then the digital currency (such as BTC), people have thought of countless alternatives to find the best choice of “block A”.

Considering the value stability, that is, a unit of block A needs to be relatively stable to buy a certain amount of fish, and the general trend of the total wealth of human society is definitely growing, then in order to achieve the stability of purchasing power, the total amount of block A must be infinite, and it can be quickly and dynamically adjusted to the amount of wealth one-to-one correspondence, and also cannot be subject to the intervention of individual will. At present, there is no perfect Class A block in the real world. The Class A block envisioned by Mr. Zhang Wuchang in his “Economic Interpretation” is the RMB that anchors dozens of basic products (such as rice) around the world and circulates freely without regional restrictions.

People holding Class A blocks (realistically limited mostly to Class D blocks) often do so to achieve the most basic and high-frequency immediate need for transactions, and partly for the purpose of storing value and obtaining the average market rental value (interest). This is also in line with the reality of the situation, there is excess wealth so that will often be in the form of fiat currency in the bank, the most mainstream transaction measurement of the carrier is fiat currency (the volume is not the largest because the C class centralized asset blocks can be leveraged to rapidly expand, making the nominal value of the block relative to the D class greatly increased).

“Block B”: also known as decentralized asset blocks, the total amount is limited, and the supply issue is not affected by the centralized role, which is conducive to long-term investment and avoiding the risk of centralized currency blocks; including gold, collectibles have this type of qualities, while Bitcoin is still in the early stage, the market acceptance is limited, but the characteristics of Bitcoin itself compared to gold and collectibles.

As a decentralized asset, Bitcoin maintains the security and stability of the entire system through computation and open source, lower mining (issuance) costs, lower circulation costs (through the network), and lower storage costs (private keys) than gold and collectibles. We know that without intervention, the market will definitely evolve towards greater efficiency and lower cost (choice), so we believe that Bitcoin will have great potential to replace gold and collectibles in the future.

Gold in also experienced a long period of imbalance between usage and mining leading to significant price fluctuations, as well as numerous centralized currencies and asset crises fueling the consensus for decentralized assets to secure wealth. Bitcoin has only been around for ten years and is still a very long way from a universal consensus, but will take less time to complete this journey than gold due to its inherent characteristics that lead to low cost of popularity.

“Block C”: also known as centralized asset blocks, the total amount is limited, favorable for investment, higher risk and higher return; the vast majority of financial assets or risk assets in the market belong to this category, including the stock market, housing market, bond market, etc., which are chosen by people who have settled their food and clothing with certain savings, and pursue investment returns higher than their savings.

Asset-based blocks are directly associated with a certain wealth (resources), and it can be said that asset-based blocks are themselves a kind of wealth. For example, stocks directly correspond to the income and intellectual property of a certain company, and property corresponds to the right to use land and space.

“Block D”: also known as centralized currency blocks, which imply force or legal power and are artificially priced by the owner in the power area to facilitate regulation; such blocks are mainly legal tender issued by countries, but of course also include mandatory points, etc., issued by organizations or individuals in their own right, whose quantity, circulation, etc., are issued by the issuers themselves The quantity and circulation are decided by the issuer.

“Parameter 1” and “Phenomenon 1”: Because block A corresponds to real wealth, parameter 1 represents the real price change in fiat currency, and because gold is given the function of decentralized currency, parameter 1 can also be understood as the fiat currency-denominated Gold price change, phenomenon 1 is the visual representation of the real world when parameter 1 changes, representing people’s choice when avoiding the risk of centralized currency.

“Parameter 2” and “Phenomenon 2”: Parameter 2 represents the change in the price of fiat-denominated asset class blocks, which is the trend of people’s choice to pursue higher returns when they satisfy their basic needs and save their wealth balances; the change in Parameter 2 that is, phenomenon 2 reflects the overall economic development and trends.

 

3. Conceptual distinction.

The main purpose of money is to facilitate the transaction of wealth, so it needs to be stable in value, divisible and easy to flow, so the total amount of unlimited, stable unit value of the block is conducive to improving transaction efficiency and reducing transaction costs. Money itself is not wealth (not a resource, not “lacking”, can be understood as a specific person printed out of paper), is a unit of measurement of wealth, money because there is no lack of so no rent value, that is, can be understood as the same amount of money under ideal conditions, the purchasing power of the same amount of money does not change, or the same amount of money does not generate additional revenue.

The main purpose of assets is to facilitate the accumulation of wealth. Investment, savings and consumption are one and the same thing, all are using the existing wealth as a cost (consideration) to exchange for some future demand, the total amount of assets is limited, the unit value is variable; assets need to have the ability to increase in value, and thus there will be the risk of decline, the value will be more volatile, assets have two main characteristics of liquidity leverage and borrowing leverage, will be introduced later in the leverage theory. The asset itself is often also wealth (is a resource will be missing), there are specific uses other than trading, for example, land can be built, houses can be lived in, stocks can be used for dividends, gold can be used for decoration, Bitcoin provides liquidity for energy. By giving assets the function of money, you will encounter problems such as gold, shells, and Bitcoin coin value instability hindering transactions.

Centralization and decentralization mainly lie in whether the issuance method is subject to human interference (single point of failure), while inflation and deflation are the ratio of the amount of centralized currency D relative to the real wealth (decentralized currency A), which will have both growth and decline, corresponding to the assets will produce 6 scenarios, which is why in the case of market perceived inflation, asset class blocks and currency class blocks go up and down.

Let’s continue the example of fishing, the initial state has 2000 fish as wealth, according to a certain ratio with blocks A/B/C/D storage and measurement, after a period of time the fish may grow to 3000 or may be reduced to 1000, at this time the parameters 1 and 2 is the change of the individual wealth blocks. If mapped to the real world, gold and U.S. stocks represent the global economic state, and both are denominated in U.S. dollars, we can derive the trend of change in the real world based on parameters 1 and 2.

 

4. Key explanation

The rise and fall in Phenomenon 1 and Phenomenon 2 are changes relative to the initial steady state, and the multiplier multiplied is the magnitude of the change. In reality, it is often one of the six states that changes to the other.

The most direct example, according to the trend of gold and U.S. stocks, we can judge that the United States in 17-19 years in the economic growth of inflation, and into the early 20 the onset of the crisis and gold U.S. stocks to verify the U.S. economy into a short-lived recession and deflation, at this time the centralized assets (U.S. stocks) from 2 times up to twice the rate of decline, is 4 times the effect of the decline, just also verified the history of the emergence of this week rare two meltdowns in U.S. stocks. We can further predict that the short-term by the epidemic and many aspects of the impact of the overall economy is still in recession, the current countries have introduced the water release policy to make the economy if the recessionary expansion state, compared to the current recessionary crunch gold will rise quickly, the U.S. stocks slowly; then the gradual recovery of the economy water release continued and the effect gradually appear, the U.S. stocks will enter a rapid rise phase.

 

5. Risk-averse assets

The so-called risk-averse assets, in order to avoid ambiguity, should be said to be risk-averse blocks, as to what type of risk to avoid will have to be discussed by situation.

centralized currency inflation: whether during economic growth or recession, decentralized currency blocks (gold) will rise, especially in recession will rise rapidly.

Centralized currency deflation: asset blocks (relative to fiat currencies) will fall, meaning that the purchasing power of the centralized currency will increase at this time, when cash is king.

According to the above table, we can determine what kind of wealth blocks are more suitable for hedging under different circumstances.

 

V. Leverage Theory

We have the wealth block table in the block theory divides the blocks into asset-based blocks and currency-based blocks. Asset-based blocks include decentralized asset blocks and centralized asset blocks, and since they are all wealth carriers with limited unit value changes in total, and the assets themselves are also wealth or directly related to resources, I will use leverage theory to elaborate on the value changes and risk sources of asset-based blocks.

 

1. Liquidity leverage

To give an extreme example of stocks, stocks in circulation on the exchange, issued 10,000 shares issued price of 1 yuan per share, of which 9,999 shares in my hands do not move, the other 1 shares in the market circulation transactions, then I left hand 100 yuan to sell the right hand 100 yuan to buy, at this time the display price should be 100 yuan, the market value from 10,000 yuan to pull 1 million yuan (stock market coin circle are the same, this extreme situation want to pull how much pull to (how much). But is it that I can sell all 9999 shares in my hand for 100 yuan per share to get 999,900 yuan in cash? Obviously not possible.

Real estate is actually the same, the same neighborhood on the chain of 1000 households, of which there are 5 households want to sell their houses, there is a household because of the urgent need for money to sell 20,000 yuan / square meter price, showing that the recent transaction price of this neighborhood is 20,000 yuan / square meter, at this time you also come to buy can buy this price? Obviously not necessarily. Maybe the other four sellers are not in a hurry to sell, the price listed is 40,000 yuan / square meters, if you are in a hurry and must buy now, you can only buy 40,000 yuan / square meters of the house; if at this time there are 999 households in 1,000 households to sell and are very anxious to use the money, then in the case of not many buyers can only offer lower prices, and will be lower and lower, lower to the floor.

Real life is not so extreme, but this example is showing that the asset class block itself is not 100% liquid, so the value of the liquidity leverage, want to rise without providing 100% of the corresponding funds, the rise is fast fall also fast.

Another layer of liquidity leverage is that it magnifies the imbalance between supply and demand, because not all blocks are held by everyone and not all blocks are in circulation, so when a large amount of new buying capital appears in a short period of time, there will be a price spike, and when selling demand increases the lack of buying capital, there will be a price spike.

 

2. Borrowing leverage

The “Economic Explanation” focuses on borrowing inflation, pointing out that historically crises brought about by borrowing inflation have hit the economy hard. The subprime mortgage crisis of ’08 was a cascading crisis caused by the inability to repay debt when the risk of overleveraging came to a head. The core reason for the surge in the U.S. stock market in ’17-’20 was the soaring stock prices due to stock buybacks (which themselves had liquidity leverage, amplifying price volatility and supply imbalances), while the epidemic and the oil price crash caused stock prices to plummet. The huge drop in Bitcoin in March 20 years came from the high leverage of lending, many people pledged their BTC for a part of USDT, then use USDT to buy BTC to pledge for USDT, and so on and so forth according to the 60% pledge rate minus the commission, so the operation down originally 1 BTC can probably be operated as 2 BTC, so once the price of the coin rises will get nearly twice the return compared to the previous; the same mining market also has lending leverage, the exchange also has lending. All of these lending levers bring excess returns on the upside and excess losses on the downside.

The right kind of collateralized lending can be used to alleviate a liquidity crisis, which can be seen formally as pledging asset blocks for currency blocks, and because the price of currency blocks is stable, the pledged asset blocks are within the margin of safety if they fall sharply at the right collateralization rate. However, if the pledged currency block is then used to buy the asset block, then there is a risk that both asset blocks will fall at the same time.

 

3. Borrowing leverage crisis

With regard to the leverage crisis, leverage is a false boom that doubles the cost of overdrawing one’s wealth in pursuit of excess returns, bringing in inflows of capital and rising prices. The crisis may come from a liquidity crisis of its own, such as high interest rates or failure to return the principal at the end of the contract, or from external market volatility that forces the liquidation of positions due to insufficient collateral. There are countless real-life cases where when a crisis occurs and the bubble bursts, what is lost is the wealth that has been accumulated and the wealth that will be created in the future, so it takes several times the wealth accumulation to get back to the current level of false prosperity that should not have occurred in the first place. So real-world borrowing and leverage crises all take quite a long time to recover slowly and do tremendous damage to the economy.

 

V. The Value of Bitcoin

1.U.S. stocks are the inevitable choice for wealth allocation in the past decade

The United States is the world’s largest economy and the past decade has been a period of economic recovery and growth after the U.S. subprime mortgage crisis, while the U.S. government’s monetary policy continues to deflate, according to the wealth block table, it is necessary to allocate wealth in U.S. dollars to avoid the risk of dollar overdraft and obtain higher returns. asset class blocks. In the U.S. centralized asset block, why U.S. stocks instead of U.S. housing and debt markets?

Because after the subprime mortgage crisis, the U.S. real estate is in a state of collapse, the main path of the U.S. government’s fiat currency over-issuance is also the U.S. stock, the U.S. stock itself also represents the world’s most recent advanced productivity (wealth), and therefore become the U.S. economic vane, but also become one of the world’s three major bubbles, so people also prefer to choose U.S. stocks in the wealth allocation when choosing asset class block, rather than property or bonds, the data also confirms this The data also confirms this fact, with the average wealth allocation of Americans accounting for 28% of U.S. stocks ranking first in the asset class block.

 

2. Why is Bitcoin not moving like gold but like the Dow?

We mentioned in “Bitcoin Prices, the Dow and the U.S. Presidency” that Bitcoin’s monthly K-line overlaps highly with the Dow’s monthly K-line and that there is a proportional relationship between volatility, and this week’s sharp drop once again validates that conclusion.

It was mentioned above that wealth should be allocated more to the dollar-denominated asset class block given the economic conditions of the past decade, and based on the reality, U.S. stocks are the best choice, and this has in fact been verified. The Dow Jones Index is the bellwether for U.S. stocks, with 30 constituents with a total market capitalization of more than $10 trillion, representing almost the world’s leading business enterprises. As a result, the Dow has also become a global economic bellwether and a major wealth allocation target for the asset class segment.

As mentioned earlier gold is given a decentralized currency function and will be considered more of a decentralized currency block when it comes to wealth allocation. Bitcoin, in turn, as a standard decentralized asset block, has the following similarities to the Dow Jones Index:

a. All are asset-based blocks with proven liquidity leverage and lending leverage (exchanges, lending services).

b. All are denominated in U.S. dollars, with U.S. dollar compliant fiat currency access, global capital trading, and high liquidity.

Therefore, when the market chooses to allocate its wealth to dollar-denominated asset class blocks, it naturally finds similarities between Bitcoin and US stocks and allocates more or less a certain percentage, which is why Bitcoin and the Dow move so similarly.

 

3. Bitcoin’s Short-Term Goal – Global Energy Technology Finance Index

The energy, technology and finance industries are major forces in global technological advancement. Asset class blocks are wealth in themselves, with energy, technology and finance stocks accounting for over 80% of the Dow Jones constituents, and Bitcoin is tied to the energy, technology and finance industries.

On the energy side, the Bitcoin system itself maintains security and stability through mining (computing). We mentioned in ” computing and energy – The Fourth Technology Revolution Driven by Computing” that computing is energy-based, so it can be assumed that Bitcoin maps globally distributed energy (electricity) and brings a liquidity premium to energy owners (higher than direct higher returns from selling electricity).

Financial aspects, and the decentralized nature of Bitcoin itself, in large cross-border transactions and anonymous security and become a major highlight of the global financial sector, itself become a high-quality wealth trading carrier, while tens of thousands of exchanges around the world 24H trading, its liquidity to exceed the U.S. stock.

Technology, Bitcoin computing requires high-performance chips, and semiconductors (chips) and is the main force driving the progress of technology in the past 50 years, Bitcoin servers to promote the rapid development of ASIC chips, the first to use the 7nm process, bit mainland also become one of TSMC head customers.

If we consider Bitcoin as a company’s stock, then this company has no centralized management team and leaders; employees are developers, miners, mining machine manufacturers, application service providers, energy owners all over the world, and users from all over the world; the value created includes: providing a liquidity premium for energy owners, providing a medium of exchange for the safe and fast flow of funds, providing fiat currency disadvantaged and financial service deficient areas To provide decentralized and inclusive financial services, to provide global investors with a high-quality decentralized asset block to fight inflation, etc.

Dow Jones 30 constituent stocks, energy, finance, technology companies with a total market value of $ 5 trillion, today’s BTC market value of about $ 100 billion, and as an asset class block itself has the circulation leverage (a large number of users influx to amplify the contradiction between supply and demand and price increases) and lending leverage (this March 20 years of lending leverage rupture will remove a lot of risk potential), the long-term future of BTC will certainly create greater value.

 

4. Bitcoin’s long-term goal – the largest decentralized asset class block in scale

The current market cap of Bitcoin is very small and the user participation size is not more than 50 million people, which is still very large compared to the global population of over 7 billion people. In the block theory of wealth, we mentioned that Bitcoin as a decentralized asset block has very big advantages over gold and collectibles, including lower issuance costs, circulation costs, and storage costs. Combined with the popularity of the Internet and young people’s awareness of new finance, Bitcoin is very promising to gradually surpass gold and collectibles to become the largest decentralized asset block.

 

VI. Rational View of Bitcoin

Recent studies and reflections have taught me to look at issues rationally and discover the essence of the problem, for example, I believe that

Bitcoin does not have a so-called halving cycle, this cyclicality, like US stocks, is derived from global (US) economic conditions, monetary policy and the frequency of water releases.

Bitcoin does not yet have currency block properties and should encourage the emergence of competing coins. On the one hand, the Bitcoin market is too small, the volume and crowd consensus is still far from gold; on the other hand, Bitcoin itself is unstable and volatile in value and slow to confirm transactions are not conducive to market trading behavior, which may be solved in the future or replaced by more decentralized currency block properties in the competition.

Bitcoin is a quality choice for wealth allocation under specific economic and monetary conditions, although of course in the long run economic growth and fiat currency overdraft is the norm.

Bitcoin should not be the entire source of personal wealth growth, it is more recommended to create and acquire more wealth through hard work and then if you really agree with the value of Bitcoin, you can choose to allocate part of your wealth to Bitcoin in asset class blocks, don’t dump it all and don’t use borrowing leverage because the wealth block table tells us that it will fall faster when we encounter a black swan (this week’s crash is a living case in point)

Bitcoin is not the freedom of de-government, is the freedom of personal perception and choice, should not be used to engage in illegal and harmful behavior (asset transfer and illegal tax evasion), do not be opposed to the government’s pursuit of freedom, freedom is always the freedom of restraint; government is also composed of people, like the company, will make mistakes in decision-making will have a variety of problems, but do not forget that the current security and stability and the world’s most impressive infrastructure is also this “From the economics point of view, the government is an inevitable choice for the market to evolve and improve its efficiency.

Bitcoin is a good tool to learn economics, do not be biased only to see the Austrian school of economics, to learn more about Keynes, Chicago, Washington and other schools of theory, economics is not a good or bad values, should be a scientific logic can have the power to explain the inference of world affairs.

 

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