Bitcoin Price Soars, Fueled by Speculation and Global Currency Turmoil

The Fresh York Times

January Trio, 2017

SAN FRANCISCO — The virtual currency Bitcoin has been swept up in yet another speculative madness, pushing its price toward the peak it last reached in late 2013.

The price of Bitcoin has been buoyed by enlargened interest from places like Venezuela, where the local currency has lost much of its value, and India, where the government recently liquidated the largest cash notes from circulation.

More broadly, a tilt toward isolationism that has emerged in American and European politics — highlighted by Donald J. Trump’s election victory — has given a fresh gloss to a currency that can budge inbetween countries with little oversight.

“The more there is an expectation for fresh barriers to be erected, the more there is an expectation that Bitcoin will be valuable for moving money across borders,” said Gil Luria, the director of research at Wedbush Securities.

Still, most of the people actually buying and selling Bitcoin these days are coming from a single country: China.

Graphic | Price of a Bitcoin

Some wealthy Chinese have used Bitcoin to evade their government’s stringent controls on moving money in and out of the country, according to Bitcoin specialists in China.

But the strenuous trading on Chinese Bitcoin exchanges, much of it by automated software, suggests that most of the price movement is a result of bets by speculators.

In latest days, the price of a Bitcoin has been about three percent higher on these exchanges than on dollar denominated exchanges, suggesting more request in China than outside.

The importance of speculators suggests that the value of Bitcoin is still driven by the hope of how it might be used someday, rather than real world use today, which has generally been hard to quantify.

In dollar terms, a Bitcoin was going for about $1,025 on Tuesday, or about one hundred forty percent more than what it cost at the beginning of 2016.

The volatile price has led many analysts to conclude that is less similar to a currency than to a commodity, like gold, which has a value resulting from its scarcity. In Bitcoin’s case, the rules of the network dictate that only twenty one million Bitcoin will ever be created.

Interactive Feature | Sign Up for the DealBook Newsletter Every weekday, twice a day, get the news driving the markets and the latest on mergers and acquisitions.

The latest rise has brought the price of one Bitcoin to within striking distance of the price of an ounce of gold, which was about $1,150 on Monday.

The price has enlargened in the last year despite the lack of interest in Bitcoin from banks and a majority of more sophisticated investors.

After demonstrating early interest in the currency, most big banks have moved on to make investments in the blockchain, the fresh type of ledger technology introduced by Bitcoin, while eschewing Bitcoin itself.

Some central banks have talked about issuing their own national currencies on some sort of blockchain inspired by but unrelated to the blockchain that Bitcoin uses.

Bitcoin and the blockchain were introduced in late two thousand eight by a mysterious coder who used the name Satoshi Nakamoto. Anyone with a computer and internet access can open a Bitcoin wallet and help maintain the blockchain ledger where all Bitcoin transactions are recorded.

Because it is run by a decentralized network of computers around the world, Bitcoin does not require a central authority like a central bank or financial institution. That has made it attractive to people who hope to do financial transactions anonymously, such as the drug dealers who have sold illicit goods for Bitcoin on the Silk Road website and its successors.

Audio | Listen: ‘Bitcoin Divided,’ From Planet Money The writer, Nathaniel Popper, joined NPR’s Planet Money to explore how a behind-the-scenes fight over Bitcoin spilled out into the real world.

Fresh Bitcoins are released at regular intervals to computers helping to support the Bitcoin network, and previously released Bitcoins can be bought and sold on exchanges around the world.

Since 2009, the price of Bitcoin has generally been defined by long periods of stability marked by brief periods of speculative excitement.

The only other time the price of Bitcoin has exceeded $1,000 was in late 2013, when the request was driven by a surge of interest from Chinese investors and traders.

The price soon crashed when one of the largest Bitcoin exchanges, Mt. Gox, which was based in Tokyo and went bankrupt, announced that it had lost most of the Bitcoins held by its customers (the cause remains in dispute). The Bitcoin price fell to its low — under $200 — in early 2015.

Since then, the price has risen in fits and starts, in part because of continuing hacking and fraud, and because of fights over the direction of the Bitcoin network.

Many Bitcoin businesses have dreamed to edit the basic Bitcoin software to switch the number of transactions that can stir through the network every day. But the proposed switches have run into opposition from the team of coders responsible for maintaining the basic Bitcoin software. Many Chinese Bitcoin companies have sided with the coders.

That disagreement has led to slowdowns on the Bitcoin network, with some transactions taking days to be processed. The slowdowns have made it firmer to use Bitcoin for everyday payments.

But through the controversy the security of the basic Bitcoin wallets and transaction software has held up, making it a potential alternative for people in countries with less secure currencies and financial institutions.

In November, interest in Bitcoin spiked in India after the government announced moves to quickly ban the largest Indian bank notes, in an effort to crack down on corruption.

The continued fall in the value of the Venezuelan currency, the bolívar, has led to reports about Venezuelans desperate to exchange their money for Bitcoin.

But despite the fresh request, the total value of all outstanding Bitcoin, about $16 billion, is still only that of a medium-size American company, and is not large enough to sustain the request of even a moderate number of Indians or Venezuelans looking to store their wealth in the virtual currency.

That points back to the importance of speculators, who are betting that someday soon people worldwide will turn to Bitcoin for their daily financial needs, and thrust the price much higher.

“I ascribe only ten percent of the value of Bitcoin to current day usage, and more like ninety percent of it to the expectation of future usage,” Mr. Luria of Webush Securities said.

Related video:

Leave a Reply