Bitcoin emerged because of distrust for the modern central bank system. Its advantages are also its disadvantages, so it cannot become the world’s currency in the future.
Exclusive interview guests: Huang Yiping
He is the vice-president of the NSD in Peking University, and a professor in economics. He is also a part-time professor on China’s economy at the Crawford School of Economics and Government of Australian National University and a member of China Finance 40 Forum. He is mainly engaged in macroeconomics and international finance. He also serves as the following: research assistant in the Research Center for Rural Development of the State Council, visiting professor of the Graduate School of Business of General Mills and Economics in Columbia University, director of the Chinese Economy Program in Crawford School of Economics and Government, managing director and chief Asian economist of Citigroup, director of investment fund and chief economist of Caixin Media, manager of Barclays and chief economist of Asian emerging countries.
Li Zengxin, Li Xianda and Huokan, reporters from Caixin
Since the collapse of Bretton Woods and mankind entering the era of currency, currency seems to be an inextricable problem. That is because the dollar is no longer linked to gold, and the issue of the dollar is entirely guaranteed by national credit. While the dollar has growing influence, the U.S. economy has ups and downs, and the U.S. trade deficit and the government's own debt is also expanding. Since the financial crisis in 2008, the quantitative easing policy of the Federal Reserve System has caused many countries to suffer. Confidence in the world's major economies declined and dependence on the dollar increased, which constitutes an inextricable paradox.
At the same time, to deal with a variety of economic issues, the independence of the world central banks as main party in issuing currency is also in jeopardy. In 2013, the Fed's money printing program was not terminated, and the number of China's broad money reached 100 trillion Yuan. Japan’s ultra-loose policy even shook international society. Is there a kind of currency, free from external force, while promoting the flow of international commodity?
Since 2009, "bitcoin", separating from the traditional form of currency in the central bank system, gained society’s widespread attention. Despite suffering from the suppression of multi-national central banks, its value is still strong, and the discussion of bitcoin among officials, economists and market investors has not cooled down. What is bitcoin? The essence of it is a kind of currency or virtual goods? What influence will bitcoin’s appearance have on the existing international monetary system? Should ordinary people invest in bitcoin? To this end, the reporter from Caixin had a dialogue with Yiping Huang, vice-president Peking University’s NSD. As the economist who paid attention to the monetary banking system and international capital flows, he not only explained the nature and reason for "bitcoin" in simple terms, but also put forward his own views on investment potential, as well as the development prospects of a decentralized currency.
Meal tickets and bitcoin
Caixin reporter: There are many discussions about bitcoin. From the perspective of scholars, what do you think bitcoin is?
Huang Yiping: According to general understanding, currency is issued by the central bank. Firstly, it is a material object, so it is issued by the central bank. Secondly, it has authority, supported by the credit of the central bank. Bitcoin originated from a kind of computational method, evented by Satoshi Nakamoto. Everyone can create bitcoin on the Internet, which is called mining. The following are the biggest differences between bitcoin and ordinary currency. Firstly, the amount of bitcoin is limited, namely what you can mine is limited. Secondly, bitcoin is on the Internet, so that everyone can mine, it is not necessarily mined by the central bank. This is the so-called decentralization. Lastly, it is difficult to forge bitcoin, which is also very important. For example, RMB can be forged. However, with Satoshi Nakamoto’s method, bitcoin is recorded in the network node—whether the bitcoin is on the Internet or transferred. So it is very difficult to forge. It solved the problem of distrust of currency in the past because ordinary people can also create it.
Caixin reporter: Is the amount of bitcoin an advantage?
Huang Yiping: The amount itself is the reason why people will think the currency is reliable. Looking back, why is bitcoin so popular? People currently doubt the existing monetary system, in which the central bank issues money. Its potential problem is that if the bill printing press doesn’t stop, serious inflation may occur. For ordinary people, they cannot control if this occurs. If I deposit 100 Yuan this year, and it will inflate 20% by next year, that is to say, the inflated amount has been taxed in disguise. In this online system, the amount of 21 million bitcoin is controlled. It means that new bitcoins cannot be issued randomly. In professional terms, it is strongly based in the principles of currency policy
Caixin reporter: We all know that in classical economics, currency can measure and store value, which is also the medium of exchange. There are ATMs of bitcoin in Canada already and many stores have begun to accept bitcoins as well. So is bitcoin a kind of currency?
Huang Yiping: I think what you just said, in fact, proves that bitcoin is a kind of currency. What exactly is currency to us? It is issued by the central bank, and it is a kind of medium guaranteed by national credit. But in fact, we can see that throughout history even shells have served as currency. Agricultural products can act as such as well. There are three most important features of currency. Just as you said, the first is valuation, the second is to be useful to pay for things, and the third is store value. As long as bitcoin has these three functions, and quite a few people can accept it, it can play the role of currency. Once it takes the role of currency, it will then become currency.
But it is a little different from currency in the market economy. The biggest difference is that bitcoin has no credit endorsement from the central bank or the nation. Similarly, the meal ticket issued by our school is actually a kind of currency only circulated inside the school, because everyone can accept it, and it has a kind of valuation. But it has a more prominent characteristic, that is the price ratio between meal tickets and the RMB is determined. But in fact, after second thoughts, it is not necessarily determined. If the food in the cafeteria is very popular, but the meal tickets issued by the school are strictly controlled, the price ratio between meal tickets and the RMB is not determined. For example, in cafeterias in Peking University, the meal ticket is now called a meal card. If the meal card is sold to people outside our campus, they might be charged more for the same food (from 15% to 20%). And of course there are other factors, but I want to say that the price ratio cannot be equal, because what you buy is different. In this case, a meal ticket is a kind of currency and so is bitcoin.
Why is bitcoin prohibited?
Caixin reporter: At present, different countries have different attitudes towards it. Germans think it is an accounting unit. Ben Shalom Bernanke from FED said that visual currency has a long-term commitment, which means he admitted bitcoin had prospects. So why does the central bank in China say that it is not currency and why does Alibaba not accept payment with bitcoin. From what point of view are these countries viewing the issue?
Huang Yiping: I think the influences bitcoin has had on our official currency system should be taken into consideration. I guess there are many problems. Firstly, with the increase of bitcoin, despite the limited total amount in the world, it is difficult to control how much bitcoin will come into our country. A very prominent problem is whether it will interfere with the stability of our domestic monetary policy and system. Assuming that there are no bitcoins circulated in the domestic market today, but suddenly 21 million bitcoins are circulated in China. What impact will bitcoin have on our financial system? We are most concerned with the problem of so-called ‘flowing hot money’, or money laundering.
Just now, we did not discuss this, however, bitcoin in fact has an obvious advantage over all other currencies. That is, it has zero transaction costs. Two days ago, a friend who came back from Canada told me that he liked bitcoin and he informed me of what he felt the biggest advantage was. When coming back from Canada, he could only take his computer back. Otherwise, even if China's capital and financial account is liberated, and of course it is not liberated, you have to exchange the Canadian dollar with RMB in Beijing’s banks. First, you have to physically take the money, and secondly, you have to pay a very high cost. For him, if he uses bitcoin, he can trade with whomever he wants, as long as he takes his computer to Beijing. Even if the computer is stolen, as long as he has his password, he can access his bitcoin currency. Not only does he have the information of bitcoin on the node, everyone has.
However, for the central bank, the concern might be whether bitcoin will directly lead to the failure of capital controls. For example, we are now concerned that many corrupt officials and entrepreneurs in China will spend the money abroad, buying a house. It can be called avoiding capital controls, or ‘hot money’, whose amount is always limited. But imagine if everyone buys bitcoin on the Internet, then moves to the United States, they are then completely uncontrollable. So from this perspective, I think for China’s current financial system, bitcoins may actually bring about more risk than for other countries.
Caixin Reporter: You mentioned so many problems just now, is there a possibility that we will really admit bitcoin as a currency, to be regulated like other currencies? Is this a good idea in avoiding the risks?
Huang Yiping: I think it is probably a little difficult now. Whether it is recognized as a currency or not is only dependent on law now. For the central bank, what is most worrisome is what influences it will have on asset prices and liquidity? Objectively speaking, if you have no ability to forbid it, you just cannot control it. Therefore, the United States Department of the Treasury and the People's Bank of China may not be considering the same issues or problems when discussing bitcoin.
Electronic money like bitcoin
Caixin reporter: Should ordinary Chinese people or investors buy bitcoins? We know in 2009, its first batch of programmers traded a pizza for ten thousand bitcoins. It now seems that the pizza was too expensive! However, it is said in "The Economist" that if you are lucky enough to have a thing, and the price increases by 30 times within a year, should you sell it?
Huang Yiping: I think if you have enough money and have enough tolerance for risks, and if you are optimistic enough about the prospects of bitcoin, you can invest in bitcoin. But no one can guarantee whether its price will rise or decline afterwards. I do not think that people who work very hard to save a little money should buy bitcoin. I think it is a currency in real life. But without the guarantee of national credit, its advantages may also become a problem itself. For example, it is transparent, and it can be calculated by a mathematical formula, so that the central bank cannot intervene. But on the contrary, the problem is that the bitcoin’s credit seems to be better than that of the central bank, but it is also likely that it will become worthless tomorrow, or that it could be attacked by a hacker, or that some investors could suddenly discover a new currency on the Internet and abandon this one. There are many uncertainties as such. I think it is possible for professional investors to invest in bitcoin as a product, just as we buy hedge funds and derivatives. But in China, I think I should particularly remind everyone, especially ordinary people, not to invest in bitcoin like people have invested in the past with real estate or gold. Many people were trapped in making investments in real estate and gold, which teaches us that if you don’t understand something, don’t invest in it.
Caixin reporter: We can see that Li Ka-shing invested in BitPay, and JPMorgan Chase & Co also applied for a visual trading system. If bitcoin is not discussed here, are there prospects for bitcoin when entering the related industries?
Huang Yiping: If problems of official monetary systems are not solved, there are markets for electric money on the Internet. But in the future, it is difficult to say whether bitcoins will have a market or not. Maybe another currency will pop up, which you can simply consider as a kind of financial derivative. The demand for electronic money is because we are dissatisfied with the existing markets and tools. As long as the demand is not completely eliminated and we are not satisfied with the reforms of the monetary system, I believe new products and markets will emerge.
You must consider carefully when you invest. It is ok if you have a general trade in an investment market. But if you buy many machines especially to mine bitcoins, this is not a good choice because it is hard to say whether these machines are useful for other currencies. Most people say that these machines need to be updated no more than every six months. New industries develop very fast, and it is said that tens of thousands of machines have been produced. Anyway, whether the mining people make money or not, these people have made money.
Why is there bitcoin?
Caixin reporter: We say that bitcoin developed because of dissatisfaction with the existing monetary system. However, since the crisis in 2008, the prices of international bulk stock experienced fluctuation. Grain, gold, the bitcoin nowadays, as well as Chinese antiques, are traded. Does China have her own reasons for this trading besides the situation of the current currency system?
Yiping Huang: It is said that the monetary system is considered by a broad definition. Generally speaking, official currency tends to experience a very serious decline in purchasing power, which is the first factor. But the second factor is that in China we also have some special circumstances. Much more money is released. With so much money, people need to invest, that is why people hurry to invest in real estate, green beans and gold. In fact, people hurry to make investments in general. The first reason is that they have much money. The second reason is that there are few places to invest in. Actually, bitcoin is only a specific expression of a current societal trend. For example, let’s say you are a native of Beijing, what will you do with a large amount of money. In the past, you would use it to buy a house, which is now strictly controlled. Last year, people would buy gold with this money. Now the price of gold declined, so they think bitcoin is a new opportunity to invest.
In fact, I think bubbles are a serious problem not only with bitcoin but also in Internet finance. Actually, I am more optimistic about the prospects of the Internet. But in the nationwide craze, we are looking for the next chance of a market bubble. And bitcoin is precisely part of this frenzy.
Caixin Reporter: But it is impossible that mobility has always been so loose. Fed’s QE policies have been tapering, and reforms have been carried out in China. Once the mobility is tightened, will these bubbles burst?
Huang Yiping: Absolutely. Just like what I said just now, if you don’t understand bitcoin, don’t invest in it. If you think you have a better understanding of it, and if you are qualified with the following three conditions, you can consider it as a kind of investment. Firstly, you have much money and a little loss wont make a difference to your life. Secondly, you know to some extent about bitcoins. Thirdly, your capability of adapting yourself in situations of risk is high. With these three conditions, you can consider bitcoins as a kind of investment, just like making money and losing money in shares.
And as we all know, just like in real estate, we know there is a risk, but it doesn’t mean you cannot invest. We know that over the past 10 years, some economists have constantly been saying that the real estate bubble would burst, so some investors have been waiting for the burst of the bubbles. Later, they regretted losing a 10-year investment opportunity. Compare this with bitcoin; I think there is an investment opportunity because the root cause of the advent and development of bitcoin has not been eliminated, and it will not disappear overnight. But just like as you said, regulatory authorities in different countries have different attitudes towards bitcoin. So it is not necessarily an illegal product, and later it might not necessarily have vitality. If it cannot work in this place, it can work in another place. Even in China, regulators did not refuse it as an investment commodity, so you can invest. But you have to know that the bubble is sure to burst, especially something like bitcoin, which has no value in and of itself. That being said, we think that it has a value. It is not as good as real estate, which at least has practical value; therefore I think the bubble of bitcoin is more vulnerable than that of real estate. Of course, as long as you understand this, I am not against you investing.
The Central bank is necessary
Caixin reporter: We know that bitcoin is not the first electronic money in history. With the appearance of bitcoin, we also see other new electronic currencies popping up. What is the overall prospect of electronic money exactly?
Huang Yiping: It is very difficult to replace our currency in real life. But it can play a supplementary role, such as Internet trade on Taobao. I think it is absolutely possible that electronic money play a certain role.
From the perspective of the whole monetary system, I do not agree with someone saying that bitcoin can replace the dollar and the RMB; this is impossible. One important reason that some are saying this is that we really like bitcoin for having such a controlled amount. Quantity under control is its biggest advantage, making it prevent inflation. However, with the advent of bitcoin, its characteristics have been defined, and it is a deflationary currency. We all like deflationary currency because it will not be devalued. But as a kind of currency in the economy, deflationary currency has disastrous consequences for the economy. We know that deflation is very bad for the economy, that is to say, no one wants to invest, and so the economy will experience a downturn. In a simple analogy, the Great Depression happened in 1929 because limited gold led to a very serious deflation. So in this way, the currency has its advantages, but it cannot become our every-day currency in real life. My personal view is that no matter how much we dislike the central bank, it should exist in the modern market.
Caixin reporter: Here is the last question. What do you think of the decentralized currency and prospects of reforms for the central bank system?
Huang Yiping: In my view, the central bank is certainly needed, but now the question is why electronic currency, such as bitcoin, will be produced when the main reason is because the credibility of the central bank has been damaged. In the long run, whether electronic currency has a future or not mainly depends on the work of the central bank. If the central bank improves, we simply will not want the bitcoin, and the dollar and the RMB will be enough. If the central bank is a must, but its credibility, especially the issue of loose discipline in issuing money, will lead to many problems, then there will be a greater place for the bitcoin. I think whether it is electronic money, or some other alternative, it may continue to be produced in this case. Like some time ago, we all have discussed whether the price of gold may rise or not. The question itself is not to say whether there will be other forms of currency, but rather if our central bank will satisfy the market and the public.
Reporter Comments: Bitcoin is popular, and the debate about it is fierce. Yiping Huang analyzes the situation of the bitcoin. So far, the causes and effects of bitcoin, basic properties and future prospects have been clear. Inevitably, some may object to this view, but it is good to understand the basic theoretical framework and principles. Here is the warning for people who are fanatically chasing after bitcoin, "There is a risk in investment, and investment wants discretion."