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 Economic Network | www.ceweekly.cn Tang Ling, Vice Chairman of the Blockchain Finance Research Center of Tsinghua University School of Economics and Management  “Will the South Sea Bubble happen again? In 1711, the British South Sea Company was founded. In early 1720, the South Sea Company took the opportunity to drive up its stock price by lobbying officials to exchange stock for treasury bonds. In just 6 months, Nanhai Company's share price rose 9 times. For a time, imitators appeared in large numbers and manipulated stock prices by exaggerating the company's profit expectations and financial fraud. Many citizens who were kept in the dark also raised funds to enter the market. One of them was the famous astrophysicist Isaac Newton. The crazy increase in stock price allowed Nanhai Company to make huge profits. The British Parliament at that time realized that non-value investment would have a negative impact on the economy, and subsequently passed the "Bubble Act" to curb the bloody capital expansion of such companies. Under the influence of the policy, speculative sentiment quickly faded, and Nanhai Company's true profitability and company's operating capabilities were gradually revealed. Most investors lost their money, and Newton also exited the stock market with a loss of 10 years' salary. At this point, the term "bubble economy" was officially used to describe the hot false speculation market. On December 6, 2013, Dogecoin was jointly developed by an Australian brand and marketing person and a programmer from Portland, Oregon, USA. It uses the Scrypt algorithm to achieve faster transaction speeds and more convenient micropayments. Since then, Dogecoin, which is closely linked to the "tipping" culture, has started its wild growth from niche culture to the public eye.  As of May 5, 2021, the market value of Dogecoin reached US$85.3 billion, and the price rose from US$0.00026 at the time of issuance to US$0.5, with a cumulative increase of 1,923 times. Dogecoin is classified as an option for new investors, which is not unrelated to Space X and Tesla founder Musk’s posts on Twitter. Every time Musk comments on Dogecoin on a media platform, it will have a certain impact on its price trend. In January 2021, after Musk made a statement, Dogecoin rose 800% within 24 hours, reaching $0.07 per coin. ； In February, after Musk posted a tweet, the price of Dogecoin rose to $0.08 per coin. ； On April 16, after Musk posted a picture of "a dog barking at the moon", Dogecoin once rose by more than 200% within the day, and surged five times in just five days. Within a year, the price of Dogecoin has increased 200 times. Behind the rising price, Dogecoin has grown from a "decentralized" niche payment currency to a "price currency" with strong personal attribute endorsement, breaking away from the core concept of tip payment. Musk’s strong support for Dogecoin is actually constantly adding fuel to the price bubble. As a natural person, he cannot promise regular promotion activities to the majority of investors, nor is he obliged to disclose his financial reports, nor can he guarantee that he will not engage in behavior that endangers market stability, which adds great uncertainty to the price trend of Dogecoin. For example, when Musk participated in a show on May 8, under constant questioning by the host, he said that Dogecoin was a “scam”, and the price of Dogecoin immediately fell by 34%. After Pandora's box was opened, there were more and more "accessories". Recently, the "canine currency" Shiba Inu coin SHIB was listed on an exchange and surged by more than 100% in just 10 minutes, which directly caused the platform's traffic to be overloaded and all withdrawals were suspended. In the past week, the price of SHIB coin has increased by 1858.19%, and the increase in the past month has reached an astonishing 37606.58% (Editor's note: Shiba Inu Coin was heavily hyped before it was listed on an exchange this time). Many market analysts said that from a certain perspective, Shiba Inu Coin is a bit like a copycat version of Dogecoin, imitating the model of Dogecoin, and may eventually transform into a money-making machine. When the concept of a thing deviates from its value attribution, it often leads to people's accelerated recognition of the thing. If investors realize that the speculative value of Dogecoin is much higher than the culture supported by its own concept, a run may occur. Once a run crisis occurs, the incident of the British South Sea Company may happen again. When the hanging sword of Damocles falls, it is often new investors who lack awareness of market volatility who suffer heavy losses.  There is not enough value exchange, which goes against the essence of finance. In the stock market, in order to curb bubbles, various countries have introduced relatively complete investor protection clauses, and every investor needs to read and understand the risk treaty. This is not the case in the cryptocurrency market. Its 24-hour non-stop trading attribute coordinates all time zones around the world. The high information gap makes it difficult for multinational investors to receive effective information, and they may even buy a certain cryptocurrency without sufficient understanding. This goes against the nature of finance - when there is not enough value exchange, speculation has serious speculative attributes, and the bubbles accompanying speculation will cause investors to swing extremely between losses and profits, and even cause serious losses in a short period of time. The behavior of attracting investors with high volatility is "blind investment" that is not encouraged by the financial market. As a value carrier, whether Dogecoin can bear long-term value exchange, the answer is obviously uncertain.； In a short period of time, a negative answer can be given. The popularity of Dogecoin at the current stage is completely dependent on the endorsement and platform effect of a few celebrities. It has obvious idolatry and is a typical "air coin" without any actual value. Before exchanges and acceptors operate in full compliance, the investment information disclosure available to investors will be delayed, even wrong, misleading, and may even become a "ticking time bomb" under financial market policies. In a normal economic operating environment, policies encourage investors to take risks, obtain returns, and trade freely. But when the bubble economy is promoted by people with ulterior motives, policies will play a role in assisting the market to return to normal operation. Whether it is the "Bubble Bill" introduced by the British Parliament or the adjustments to monetary policies by central banks of various countries, they are all intended to help the market establish a healthy ecosystem. Emerging financial products such as Dogecoin are easily squeezed by policies, and the main endorsement is not enough to compete with the current economic system. When there is insufficient credit collateral, its ability to resist risks is extremely weak, which is an important indicator that investors need to pay attention to.   Financial supervision is not a ruthless hammer, but a well-intentioned guide Before the speculative wave of Dogecoin intensified, my country’s regulators had cooled down the cryptocurrency market several times. In 2017, the central bank and seven other ministries and commissions issued the "Announcement on Preventing Financing Risks of Token Issuance", which severely cracked down on illegal financing in the market. The essence of ICO financing is an act of illegal public financing without approval. Its core concept is to guide investors to raise large amounts of funds in advance and then attract secondary market investors to take over. The short-term wealth effect stimulates investors' pursuit, and at the same time, many investors lose their money. In the following time, ICO has derived many variants, including IDO, IEO and other forms. The cryptocurrency market promotes bubbles by packaging different definitions to attract investors. In addition to ICOs, the popularity of cryptocurrency has also increased the pressure and difficulty of regulatory agencies in anti-money laundering, anti-terrorism, and anti-tax evasion. Cryptocurrencies including Dogecoin and Bitcoin are widely used in the circulation and transaction of illegal funds and gray assets. Therefore, the supervision of cryptocurrency is imperative. Since 2020, my country’s regulators have launched a protracted “freezing card operation”, and the banking industry has also focused on monitoring the flow of currency used to purchase cryptocurrencies. Recently, China CITIC Bank issued a special announcement stating that no institution or individual may use CITIC Bank accounts for activities such as recharging and withdrawing transaction funds, purchasing and selling related transaction recharge codes for Bitcoin, Litecoin, etc., and shall not transfer related transaction funds through CITIC Bank accounts. Once discovered, CITIC Bank has the right to take measures such as suspending relevant account transactions and canceling relevant accounts. Speculators often describe regulation as a "ruthless hammer" and place regulators on the opposite side. This is due to their expectation of the continuation of speculative behavior. Wrong views on wealth and values put these investors in a circle that confuses right and wrong and makes no distinction between right and wrong, and thus they fall into the trap of dreaming of getting rich all at once and speculating on shortcuts. There is no free lunch in the world. In November last year, the second trial of the largest cryptocurrency case "PlusToken" was pronounced. The principal culprit was sentenced to fixed-term imprisonment ranging from 2 to 11 years. The amount involved was as high as 40 billion yuan, with tens of thousands of victims, seriously endangering normal social order. Therefore, it is necessary for our country's regulatory agencies to formulate comprehensive regulatory regulations for the upstream and downstream of the cryptocurrency market industry chain, including exchanges, project parties, market makers, and even "mines". On the one hand, we will use new technologies such as big data and artificial intelligence to monitor cryptocurrency transactions and financing activities, and achieve early detection, early warning, and early handling of abnormal situations.； On the other hand, regulatory agencies should strengthen investor education and guide investors to rationally participate in the market through market risk early warning and other mechanisms. We must resolutely crack down on suspected fraud, illegal fund-raising, pyramid schemes, money laundering and other illegal and criminal activities. At present, the main regulatory agencies have conducted comprehensive discussions on the compliance of domestic exchanges, the legality of legal tender acceptors, regulatory rules and other issues, and formulated some measures. For value investors, regulators are always a capable assistant, providing well-intentioned guidance and correcting market behavior so that value investors can obtain more stable and cognitive returns. At the same time, they also play an important role in promoting the domestic financial environment and infrastructure. Embracing regulation and staying away from speculation are "market rules" that all investors should keep in mind.  Risk control stems from the recognition of value The booming market for cryptocurrencies hides huge financial risks. The cryptocurrency market requires the exchange of RMB for stable coins for deposits, resulting in a decrease in domestic M2 and disrupting the normal order of economic development. It will also lead to a shift from reality to virtuality, causing a large amount of capital to flow to industries that cannot support the development of the real economy. In fact, most countries and regions are encouraging financial innovation and development, and almost all of them have set a prerequisite - related to the real economy. Encouraging technological innovation, supporting emerging enterprises, and optimizing productivity relationships are all inseparable from the operation and support of the financial market. Only by allowing finance to return to the determination and growth of value can it bring reasonable returns to investors. What you need to be wary of is that excess returns are often the trap of a Ponzi scheme. The cryptocurrency market has created a fragile economy without credit endorsement. On the surface, there is a stable scene of high yields, but in fact it is constantly increasing the probability of black swan events (meaning negative events with extremely low probability). Cryptocurrencies are interconnected and interdependent. Once a crisis occurs, it will quickly grow into a large-scale cryptocurrency tsunami crisis. After experiencing the South Sea Company incident, Isaac Newton, the proposer of the gold standard, once warned those around him: “I can calculate the trajectories of celestial bodies, but it is difficult for me to calculate the madness of people. ” Many cryptocurrencies that were born along with Dogecoin are gradually emerging, trying to reproduce the legendary "excess returns" that Dogecoin brings to investors. When a bubble gradually rises, the wish of all speculators is that it will continue to expand, begin to sacrifice the good for the last, and be induced to engage in irrational investment behavior. The outcome of chasing bubbles is certainly tragic. Ending this speculation with ulterior motives, guiding investors to make value investments, building a healthy financial ecosystem, and allowing capital to empower the real economy is the correct investment method. Editor | Zhou Qi Layout | Meng Fanting WeChat on duty: Zhou Qi    |
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