SAN FRANCISCO — Digital gold. The new tulip mania. A
virtual currency.
Whatever you want to call it, Bitcoin is on an
extraordinary run, with the price of a single Bitcoin crossing $10,000 on some
exchanges for the first time on Monday — less than two months after it crossed
$5,000 for the first time.
It is a bull market with few precedents in recent
investing history. The Dow Jones industrial average, in its biggest year, 1915,
went up 82 percent, or one-tenth as much as Bitcoin has gone up this year.
Amazon’s red-hot stock is up only one-fifteenth as much as Bitcoin this year.
The price has been pushed up by a flood
of new buyers from around the world who
think they have spotted a new
kind of investment that could ultimately compete with gold as a place to store
money outside the control of companies and governments.
These mainstream investors have not just been the
libertarian-minded programmers who helped Bitcoin survive its rocky first seven
years, after the mysterious creator Satoshi Nakamoto released it in 2009.
In recent months, trading among ordinary investors
has taken off in South
Korea and Japan. Seoul now has multiple storefronts where less technically
adept people can buy and sell Bitcoin. It was on Korean exchanges where the
price of Bitcoin first hit $10,000 on Monday.
On American exchanges, the price was hovering around
$9,700 on Monday.
The skyrocketing price has brought forth no shortage
of skeptics, from Jamie
Dimon,
the chief executive of JPMorgan Chase, to Warren E. Buffett, who have
variously called it a fraud, a bubble and a Ponzi scheme.
The untethered price increase has, to a degree,
proved their point, suggesting that this is an investment tied to few
real-world fundamentals.
But each time the skeptics have come forward,
investors have defied them and bought more Bitcoins at higher prices. On
Sunday, more than $5 billion was traded on Bitcoin exchanges, according to the
data site Coinmarketcap.com — a greater volume than what many American stock exchanges
see on a normal day.
Believers in the Bitcoin technology, which is backed
by a new kind of computer network, have argued that what we are seeing is the
formation of a new asset class that could join stocks, bonds and physical
commodities in the investment portfolios of ordinary people.
If this is a new digital gold, today’s extraordinary
prices still leave the total supply of Bitcoins in the world at a value that is
only one-sixtieth of all the real gold in the world.
But even aficionados have been dumbstruck by just
how quickly the price has gone up in recent months.
“While there has been a slew of bullish news for
Bitcoin of late, the rapidity of the ascent to $10,000 has taken many of us by
surprise,” said Chris Burniske, an investor and a co-author of the book
“Cryptoassets.”
Or as one trending comment on the Reddit social
network put it: “This is officially madness. I am going to prepare myself for a
large correction.”
Hedge
funds have also been clamoring to get a piece of the action. More than
100 hedge funds invest only in Bitcoin and other virtual currencies.
In many places, this trading is happening on
exchanges with little regulatory oversight or transparency. This has given rise
to fears that a problem at one of the exchanges could trigger a panicked run on
Bitcoin, something that is not unlikely given the relative inexperience of many
of the new investors.
A steep rise in the price of Bitcoin in late 2013
was punctured when the biggest exchange at the time, Mt. Gox, was discovered
not to have the Bitcoins it claimed to have. That led to a three-year lull in
the price.
But current investors see that after all the
previous popped bubbles — and there have been several — the price eventually
returned to its old high and then vaulted past it. The price of a Bitcoin is
now more than seven times the high it reached in 2013.
What’s more, the Bitcoin ecosystem is now more
distributed around the world, with less reliance on a single
company like Mt. Gox, which collapsed three years ago.
While Mt. Gox hosted
more than 75 percent of all Bitcoin trading in 2013, the largest exchanges
today have only around 10 percent of the business. That should theoretically
make the industry less vulnerable to problems at one institution.
Bitcoin has been able to flow around the world and
reach investors in countries large and small, because of the singular design
that was laid out by its creator.
Bitcoins are stored and traded on a decentralized
network of computers that is not under the control of any government or
company. That has been attractive to people in countries, like China and
Zimbabwe, where the government has a history of seizing bank accounts and
assets.
The growing number of people using it in all these
countries, often against the wishes of their governments, has also underscored
the degree to which the software that manages Bitcoin has remained impervious
to hackers and government control for nearly a decade.
The recent price increases, though, have meant that
Bitcoin is not living up to its promise as a currency routinely used for small
purchases. Few people want to spend their Bitcoins if they believe the price
will double in the next month.
Bitcoin has remained popular as a way to pay for
illegal drugs online because of the ability to open a Bitcoin wallet without
providing any personal information.
But Bitcoin has faced competition on this front from
virtual currencies that provide more privacy. And the overall black market
trade has diminished this year after the authorities took down some of the
largest black market websites in the summer.
This has been welcome news for many Bitcoin backers
who want to see it lose its shadowy associations.
Many Bitcoin investors have also come to believe
that the Bitcoin network is not particularly well suited to handle lots of
little transactions.
These investors frequently argue that what Bitcoin
is designed to do well is store money securely and outside the control of any
company or government that could seize it, like a more transportable version of
gold.
“The reason people own Bitcoin is because it’s a
great store of value, possibly the greatest that has ever existed,” said Jimmy
Song, a programmer who works on the Bitcoin software.
The last few years have brought a proliferation of
virtual currencies that aim to compete with Bitcoin, sometimes with the goal of
handling transactions more cheaply and quickly.
This year, it appeared that the most popular virtual
currency network other than Bitcoin, Ethereum, might pass Bitcoin in value. At
the time, Bitcoin was hobbled by an internal battle over how to update the
software and expand the network.
In October, though, one side gave up the fight, and
since then the price of Bitcoin has shot up, sometimes rising more in a week
than it rose in its first seven years.
In recent weeks, Bitcoin isn’t the only virtual
currency that has been moving up. Ether, which lives on the Ethereum network,
and Bitcoin Cash, another Bitcoin competitor, have also been rising quickly in
value as investors look for anything that might have the same durability and
upward mobility as the original.
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