As early as 700 years before Sweden issued the first European banknotes in 1661, China had begun to study how to reduce the burden of people carrying copper coins. These coins make life difficult: it is heavy and it makes travel dangerous. Later, the merchants decided to deposit these coins with each other and issue paper certificates based on the value of the coins.
Private issuance triggered a surge in inflation and currency devaluation: the government followed suit and issued its own banknotes backed by gold reserves, making it the world’s first legal tender.
In the past few centuries, countries began to adopt the “gold standard”, using commodities such as gold and silver to mint coins of a certain weight. And it represents a certain value until the coin is tampered with, which leads to the rise of representative currencies.
Banks issue “golden bonds”, that is, banknotes with a face value of US$50 can be exchanged for US$50 in gold.
In 1944, the Bretton Woods system decided that the 44 countries attending the meeting would keep their currencies pegged to the US dollar because the US dollar is backed by gold reserves. This actually means that the U.S. dollar can be converted into gold at any time.
This actually means that the U.S. dollar can be converted into gold at any time.
The effect is good, but the duration is not long. Growing public debt, currency inflation, and negative growth in the balance of payments mean that the US dollar is under greater pressure. In response, some European countries even withdrew from the system and exchanged US dollars for gold. At that time, their reserves contained more dollars than gold.
In 1971, former US President Richard Nixon closed the golden window and changed this situation. Foreign governments hold too many dollars, and the United States is prone to gold shortages. Together with 15 other consultants, they announced a new economic plan to avoid inflation, reduce unemployment, and convert U.S. dollars into legal tender, which mainly relied on the consent of currency users rather than commodities and standards.
Therefore, the hope is whether all parties will accept your currency, which is entirely based on faith.
The same is true for Bitcoin, this cryptocurrency once hit a record high of $19,783.06. What gives Bitcoin value? The claim that it is achieved through supply and demand does not seem to cover all the circumstances. It has no basis and is not controlled by anyone.
At least, you can rely on a legal management agency to maintain the value of a currency.
Bitcoin has the characteristics of a legal currency. However, from a governance perspective, no one “owns” Bitcoin. It seems to operate in the same way as fiat cash, but the essentially different ecosystem makes economists and financial experts think: who sets the price for it?

What you see is 5 of the millions of lines of code in Bitcoin. Bitcoin was originally only a few thousand lines of code, developed by Satoshi Nakamoto in 2008 and released in early 2009. In the famous white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” (bitcoin: A Peer-to-Peer Electronic Cash System), the concept of Bitcoin is elaborated.
His original idea was to create a form of cash that does not need to pass through financial institutions because it is encrypted.
The biggest innovation is the application of blockchain technology. Each block represents a transaction in the Bitcoin network-the more blocks, the longer the transaction will last. Therefore, it formed a “chain”, hence its name.
In order to generate a block, miners need to use the original computer processing power and a large amount of electricity to verify the existence of X value and Y time transactions between A and B. When it is confirmed, the block appears and the transaction passes. The miners received Bitcoin as a reward.
However, this digital currency has no intrinsic value-it cannot be used as a commodity. People who are skeptical of Bitcoin often say that for Bitcoin to survive, it must first be accepted and used for other commodities. Slowly, over time, it will become money. For example, because gold is used in jewelry and electronic products, people hoard gold to preserve its value.
In a far-reaching work by the Austrian economist Carl Menger, he began to describe currency as “the fact that certain commodities have become a generally accepted medium of exchange.” On the basis of Menger, Ludwig von Mises, also an economist, classifies commodity currency as a currency that “is also a commercial commodity.” Legal tender is currency composed of “items with special legal qualifications”.
“…Nominal currency versus currency, including things with special legal qualifications…”-Ludwig von Mises Theory of Money and Credit
The idea of ​​intrinsic value is deeply ingrained in humans, and even Aristotle once wrote about why money needs intrinsic value. In essence, no matter what currency it is, its value must come from its own usefulness. As history proves that nothing needs commodity value to become currency, Aristotle’s argument is untenable.
In parts of Africa and North America, glass beads are used as currency, although they have proven to be of little use as a commodity. The Yap people in the Pacific use limestone as currency.
People who are skeptical of Bitcoin often use intrinsic value arguments to condemn Bitcoin’s viability. Unfortunately, Bitcoin is a purely digital existence, so it is free from the shackles of the real world. It does not need to have intrinsic value like gold, nor does it need to be granted special rights by others to make it legal tender. Although this may seem like an explanation-Bitcoin is a brand new entity that is not subject to our human rules-but it still has no full meaning.
Think of it this way: Bitcoin and fiat currencies are different financial ecosystems.
Fiat currency belongs to the physical world, which brings other currency restrictions. Power belongs to those who control the currency, and the central bank can always print more money to promote inflation and circulation. However, no one can tell you exactly how many tangible dollars are flowing in the world.
The supply of gold is limited, but it will be affected by inflation. If someone finds a large amount of gold outside the current supply, ownership may be completely diluted. Innovations in materials science may also reduce the need to use gold in electronics and consumer products.
The digital nature of Bitcoin requires a new theoretical basis. Economists have long recognized the limitations of precious metals and fiat currencies. Therefore, the introduction of Bitcoin gave birth to a new set of rules, which many people call “the upstart financial ecosystem”.
The problem is that, as the Bitcoin maximizers have told you, the legal currency and cryptocurrency ecosystems cannot truly coexist. Since there is no intrinsic value as a financial instrument, investment product or securities, the biggest bet is to make Bitcoin a global currency.
Today, the global money supply (M1) is 7.6 trillion US dollars. If you add check deposits, short-term bonds, time deposits and other financial instruments, it will reach a staggering $90 trillion. To become a global currency, Bitcoin needs to have at least the value of the global money supply-but this is not the case, because the market value of Bitcoin is only $130 billion at the time of writing.
However, the rapidly growing sovereign debt and foreign debt may prompt investors to start looking for a reinflation hedging tool that is easier to obtain and more replaceable than gold. This may promote the valuation of Bitcoin because it has a value store function. In order to fight inflation, many people are content to hold dollars, euros or yen in their portfolios-Argentines and Venezuelans do this, they hold relatively stable dollars.
This may bring practical value to it: Bitcoin can be used as a store of value.
We see it as an asset. If it is, then Bitcoin is essentially an anti-inflationary currency. In order to stimulate network growth, every time a new block is created in the blockchain, 50 new bitcoins will be generated. After every 210,000 squares, the reward will be halved (now rewards 12.5 per square, and will be halved to 6.25 on May 14, 2020). Coupled with the inherent scarcity and the supply cap of 21 million Bitcoins, it is no wonder that people and financial institutions can treat Bitcoin as hard currency (also known as a safe-haven currency).
This means that internal monetary policy is driving Bitcoin’s purchasing power – but what determines its price?
If you look at the classic school of economics, you will find that the price of Bitcoin is determined by its production cost. This means hardware and electricity. As Bitcoin continues to suffer from deflation, the number of miners will gradually decrease due to high mining costs. Nevertheless, there are still some miners willing to sell bitcoin at a loss, which may indicate that someone is hedging the rise of bitcoin in the future: price does not entirely depend on the cost of production, although it is a factor.
The neoclassical school of economics has expanded on this theory and added another objective factor: supply and demand. Since the supply of bitcoin is capped, the number of bitcoins mined will also decrease over time, so the demand for more bitcoins may rise. More demand equals higher prices.
Relying solely on objective factors does not seem to be able to paint the whole picture. If production costs are the main reason, then the value of Bitcoin should be close to the US broad money supply (M3).
Despite this, miners are still at a loss, despite the higher cost of mining Bitcoin.
If the balance of demand and supply is important, then Bitcoin’s clear, audited supply ceiling should determine a stable demand. However, Bitcoin is still prone to extreme volatility and may collapse and soar on the same day.
Entering the Austrian school of economics, Bitcoin supporters like this school very much. Austrian economists believe that the price of anything is determined by subjective factors, even including production costs. Supply and demand are determined by personal preferences. Therefore, it can explain the value of Bitcoin—perceived value and subjective factors may be more important components.
It can be seen that there is no clear explanation for why cryptocurrency (or even currency) is valuable. In this case, the price of Bitcoin seems to be driven by classic economic models, market sentiment and internal monetary policy.
However, no matter what economic theory people adopt, cryptocurrency will still usher in a financial revolution. If it can evolve into another form of global currency, the global financial ecosystem will be overturned (whether it is good or bad, we don’t know).
Ultimately, Bitcoin is the launch pad for financial experiments. From 2016 to 2017, blockchain technology led the prosperity of cryptocurrency and brought a whole new world of blockchain innovation. Today, we will use the concept of asset pegs and reserve banks to study stable cryptocurrencies that can maintain the price of one dollar.
Rather than treating Bitcoin as a currency, it is better to treat it as a payment system.
Therefore, the true value of Bitcoin lies in its network. The more people involved, the better. Essentially, this means that the value of Bitcoin depends on who owns it. Nowadays, with the popularity of Bitcoin (not for daily use, but for investment and trading), more and more curious people are starting to pay attention to this new technology. This means more distribution.
However, in order for Bitcoin to truly operate as expected, it needs to get rid of miners and mining pools by switching to a proof-of-stake (PoS) system. Bitcoin’s proof-of-work system makes transactions extremely expensive-miners spend millions of dollars to verify Bitcoin transactions on the network with electricity and raw computer processing power. With the PoS system, Bitcoin will be valued because of its network. Most stakeholders will give up part of their holdings to allow the network to grow, thereby increasing their holdings proportionally.
It sounds simple, but most bitcoins today are mined by Chinese miners. If it can replace (for example) the U.S. broad money supply, then why does the U.S. government adopt a global currency controlled by opposing superpower miners?
If the superpowers are unwilling, why do small congresses follow? The global monetary goal may seem like a pipe dream, but in the end, whether Bitcoin can work will depend on who you hear it from, like where it gets its value.