——Answering the concepts in the article “Invet Satoshi Nakamoto to Welcome the New World”
updated on September 6, 2024 by Zhu Weisha
After the “Invite Satoshi Nakamoto to Welcome the New World” series was published, readers reported that the article involved too many concepts and covered too many fields, and many ideas were vaguely understood. They hoped that I would explain the concepts and terms in detail. Here are some easily confused concepts and relatively new terms for discussion with readers.
1. Stored value and reserve currency
All assets that can maintain value have stored value. Gold, antiques, and Bitcoin all have stored value. Does real estate have stored value? It depends on the location. Cars and televisions generally don’t have stored value because they are all depreciating assets.
Is it a reserve currency if it has stored value?
No.
A complete currency has at least three properties: liquidity (transaction medium), value scale, and stored value. Otherwise, it is just an incomplete currency.
By this standard, gold only has value storage, not liquidity and value scale, so it is not a complete form of currency.
Bitcoin does not have the property of a value scale, so it is not a complete currency. The Bitcoin trading pair in the early years of the blockchain was replaced after the emergence of stablecoins. The reason is that Bitcoin is not stable enough.
Stablecoins in cryptocurrencies have a complete currency form, but obtaining interest has great risks. They are usually interest-free and cannot hedge inflation risks, so the function of storing value is incomplete.
Central banks of various countries collect strong fiat currencies as reserve currencies, such as the US dollar, euro, yen, pound, etc. Central banks also collect the RMB, but their share is not large.
The central bank reserves gold to hedge the risks of fiat currencies and fiat currencies are not backed by assets behind them. Therefore, gold is a safe-haven asset for the central bank. Of course, it is also a reserve currency.
Currently, Bitcoin does not appear in the reserve currency column of major central banks. However, in 2024, politicians in the United States suggested using it as a reserve currency.
2. Bitcoin’s inflation rate
Currency is money. Inflation means that the issuance of currency exceeds economic growth. Price increases measure inflation. In theory, a general rise in prices is inflation. The current practice of the Federal Reserve is that price increases of no more than 2% are not considered inflation. The concept of inflation in Bitcoin is different. It refers to the number of Bitcoins mined each year. In 2023, it is about 320,000. By the end of 2022, about 19.35 million will be mined. Dividing it by 320,000, the inflation rate is 1.65%. According to the Fed’s standards, there is no inflation in Bitcoin now.
3. Bitcoin is a commodity
Bitcoin is a commodity suitable for commodity valuation, not stock valuation. Stocks represent the means of production that Buffett said can generate profits. Stocks are valued based on how much profit the means of production generate and the sustainability of the profits. The Bitcoin system is the means of production, and the commodity produced by the Bitcoin system is Bitcoin. The valuation of commodities is determined by cost and demand. The below cost is an underestimation. Demand is determined by supply and use. Overestimation of demand will lead to overestimation of prices
4. Bitcoin’s computing power bottom
Whether the price is high or low depends on the comparison benchmark. Is it undervalued? Find out where its bottom is. Is it overvalued? Find out where its top is. Generally speaking, commodities without cost have no bottom. Cost is the bottom of commodities. The below cost is an underestimate. Computing power is the cost of Bitcoin production input, which can be estimated. Computing power cost constitutes the price bottom of Bitcoin.
What is computing power? It is the ability to calculate hash values. The hash value is a number that is calculated using a unique formula. The number of times the hash value is calculated per second represents the computing power. The following units represent computing power, and we have entered the E era of computing power. It is 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.
Special machines for calculating hash values exist, commonly known as mining machines. Bitmain’s mining machine is the most competitive, representing the industry’s highest level.
At the end of 2022, the maximum computing power of the entire network is 300,000,000 (Th/s). Suppose each T is roughly estimated at $20. In that case, the cost of the whole network is $6 billion, with an annual output of 320,000 bitcoins, each at $20,000, and a payback period of one year. The power consumption of this mining machine is calculated at 0.35 RMB, which is about a little more than 5 cents. The profit margin is less than 40%, so the payback period is over two years. Suppose there are also manual management and mine management fees and machine wear and tear. In that case, 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 good project in the stock market, because it is equivalent to a price-earnings ratio of 3. However, mining machines are constrained by two factors:
First, the speed of replacement of mining machines is also three years. If Bitcoin lingers at the cost line for a long time, Bitcoin production is not profitable.
It is also the solution I proposed in Chapter 12 of the original article.
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 purchased at the bottom price.
Observing the growth of computing power and the ratio of the number of coins issued yearly can tell where Bitcoin’s bottom is. The increase in computing power means that Bitcoin’s bottom has been raised.
This series provides the conceptual explanations needed to read Chapters 10-13 of the article “Invite Satoshi Nakamoto to Welcome the New World” and Bitcoin USD Standard Series 1-10.
Original link.
