Q&A series on basic concepts of Bitcoin (Part 1)

——Answers to the concepts in the article “Invite Satoshi Nakamoto to Welcome the New World”

Readers reported that the article involves too many concepts involving many fields, and many concepts are half-understood. Readers hope that I will explain the concepts in detail. I won’t explain the concepts that are too basic. I will discuss some confusing concepts and relatively new formulations with readers.

1. Stored value and reserve currency

2. Using Bitcoin as a Reserve Currency

3. Bitcoin inflation rate

4. Bitcoin is a commodity

5. The computing power bottom of Bitcoin

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1. Stored value and reserve currency

All assets that can preserve value have stored value. Gold has store value, so do antiques, and so does Bitcoin. Can real estate have value stores? Depends on location. Cars generally don’t have them, and neither do TVs. Because they are depreciating assets.

Does a store of value have to be a reserve currency?

No.

First, the currency has at least three characteristics, liquidity (transaction medium), value scale, and stored value.

From currency standards, gold is only a stored value, not a transaction medium and a measure of value, so it is not a currency.

Bitcoin does not have the property of value scale and therefore is not a currency. Thus, the bitcoin trading pairs in the early years of the blockchain were replaced after the emergence of stablecoins because Bitcoin is not a recognized measure of value now.

A reserve currency is a strong currency among currencies that central banks of various countries, such as the US dollar, euro, JPY, pound sterling, etc., collect. A central bank has also collected the renminbi.

The central bank reserves gold to hedge the risk of the reserve currency because the current reserve currency is legal tender and has no asset support. So gold is the central bank’s safe-haven asset.

Bitcoin currently has no place in major central banks’ safe-haven assets and reserve currency column.

2. Let Bitcoin as a Reserve Currency

A scale of value must accompany bitcoin to serve as a reserve currency. It is the design of the Bitcoin standard in Chapters 12-13 of the original text, and a UDAI equivalent to the U.S. dollar is assigned to Bitcoin as a ruler. A Bitcoin standard would make major central banks use Bitcoin as a reserve currency. Since Bitcoin has asset attributes similar to gold, it can be used as a safe-haven asset to hedge against fiat currency risk; bitcoin may replace gold as a safe-haven asset. At the same time, UDAI also has the function of reserve currency. But The UDAI is the ruler of value because it was equivalent to the US dollar at the beginning, and its performance is very close to that of the US dollar.

3. Bitcoin inflation rate

Inflation is when the issuance of money exceeds economic growth. Rising prices measure inflation. In theory, a general rise in prices is inflation. The Federal Reserve’s current practice is that no more than 2% price increases are not considered inflation. The inflation concept of Bitcoin is different, which refers to the number of Bitcoins dug out each year. In 2023, it will be about 320,000. By the end of 2022, approximately 19.35 million will be dug up. Divide by 320,000 to get an inflation rate of 1.65%. By the standards of the Federal Reserve, there is no inflation in Bitcoin now.

4. Bitcoin is a commodity

Bitcoin is a commodity suitable for the valuation of commodities, not the valuation method of stocks. Stocks represent the means of production that Buffett said can generate profits. Stocks are valued based on how much profit the means of production can generate and how consistently that profit is generated. The bitcoin system is the means of production; it can produce bitcoins. However, the Bitcoin system has no owner, and there is no profit corresponding to the owner, so the Bitcoin system cannot be valued. The commodities produced by the Bitcoin system—Bitcoin—are a distribution corresponding to computing power, so computing power can be valued using the stocks method. The valuation of commodities is a cost-and-demand decision. The below cost is an underestimation. Demand is determined by supply and usage. An overestimation of demand results in a price overestimation.

5. The computing power bottom of Bitcoin

Whether the price is high or low depends on the benchmark for comparison. Is it underestimated? To find out where it is at the bottom. Is it overrated? Find out where his top is. Generally speaking, goods without cost have no bottom. Cost is the base of the commodity. Less than cost is an underestimate. Computing power is the cost of Bitcoin production input, which can be estimated. The cost of computing power constitutes the price floor of Bitcoin.

What is computing power? It is the ability to calculate the hash value. The hash value is a number calculated by a unique formula. The computing power is represented by the number of times the hash value is calculated per second. The following units represent computing power, and we have entered the E era of computing power. Expressed as follows:

Among them, 1E=1024P, 1P=1024T, 1T=1024G, 1G=1024M, 1M=1024k, 1K=1000. H stands for hash. s stands for seconds.

1 kH/s = 1,000 hashes per second

1 MH/s = 1,000,000 hashes per second.

1 GH/s = 1,000,000,000 hashes per second.

1 TH/s = 1,000,000,000,000 hashes per second.

1 PH/s = 1,000,000,000,000,000 hashes per second.

1 EH/s = 1,000,000,000,000,000,000 hashes per second.

There are special machines for calculating hash value, commonly known as mining machines. The most competitive is the mining machine of Bitmain, which represents the industry’s highest level.

There are many mining machine models in Bitmain, and the more advanced mining machine is Bitcoin Miner S19 Pro+ Hyd. The indicators are as follows:

Function: BTC/BCH/BSV SHA256, water-cooled mining machine

Parameter: 191T, 5252.5W, 27.5J/T

Price/Unit: $3,629

Price/T: $19

Pay attention to the price per T, which is the data to be used below.

At the end of 2022, the maximum computing power of the entire network was 300,000,000 (Th/s). If each T is roughly estimated at $20, the cost of the whole network is $6 billion; in 2022, the output of 320,000 bitcoins, each calculated at $20,000; the equipment payback period is one year. The actual power consumption of this kind of mining machine is estimated at RMB 0.35, which is a little more than 5 cents, and the profit rate is less than 40%, so the payback period is more than two years. If there are manual costs, mine management fees, and machine loss, the payback period is about 3 years. So when Bitcoin falls below $20,000, it is better to buy Bitcoin directly.

As a project, if the cost is recovered in three years, it is a perfect project in the stock market because it is equivalent to a price-earnings ratio of 3. But the mining machine is restricted by two factors:

First of all, the replacement speed of mining machines is three years. So if Bitcoin hovers at the cost line for a long time, Bitcoin production is not profitable.

The second profit fluctuates too much. If Bitcoin rises to $60,000, the cost will be recovered in a few months. Although the yield is high, it does not meet the requirements of continuous profitability in the stock market and cannot be valued. In order to mainstream funds to participate, the problem of sustainable and stable profitability must be solved. It is also the solution I proposed in Chapter 12 of the original text.

The more significant the amount of funds accumulated on the cost line, the harder it is to break through the bottom. Based on old experience, many people predict that the price of Bitcoin will fall to 12,000. Due to the effective accumulation of funds, around 17,000 US dollars is the bottom of this computing power. If you buy at 17,000, congratulations, you have purchased the bottom price.

Observing the ratio between the growth of computing power and the number of coins issued in a year can help know where the bottom of Bitcoin is. Conversely, the increase in computing power means that the bottom of Bitcoin is raised.

The following section begins with needs valuation.

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This series provides the conceptual explanations needed to read chapters 10-13 of the article “Invite Satoshi Nakamoto to welcome the new world” and the previous article Q&A 1-10.

1. Full-text links

This article was published in Bitpush Serial.

Chinese link:

https://www.bitpush.news/articles/tag/%E8%AF%B7%E5%87%BA%E4%B8%AD%E6%9C%AC%E8%81%AA

English link: https://en.bitpush.news/?s=Weisha+Zhu

2. Supplementary video explanation (over the wall in China)

This series of articles is explained on Sun TV, and the articles and TV explanations are complementary.

The TV show is the interpretation of the point of the article. Broadcast schedule: The broadcast schedule is as follows:

Every 1, 3, and 5, Beijing time noon.

Sun TV’s link is as follows:

The whole program is divided into two parts. The first part proves who Satoshi Nakamoto is, and the second part is about the Bitcoin standard. The program will continue, followed by discussions and Q&A, hoping to form a Bitcoin-based theoretical system. Users are welcome to leave messages in the TV comment area, and viewers will be selected to participate in the conversation.

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