The surge of cryptocurrencies led by bitcoin has always been looked at with skepticism by regulators and governments, especially with events such as the collapse of Mt. Gox and Silk Road. With numerous allegations of shadiness, Bitcoin and its acolytes continued to live in a sort of parallel world. But things around the Bitcoin universe have slowly changed! The digital currency has received more acceptance in terms of both users and regulators. Mainstream institutions finding merit in it, especially the technology backing it.
Bitcoin is yet again in news for the sudden movement in its price. But before we try to answer the basic question - why is bitcoin skyrocketing in value - we need to have another look at its price trend in the past, which has seen a much sharper rise and fall. The graph below shows the movement in bitcoin prices since January 2013 till November 4, 2015. The graph is based on the bitcoin prices by the Global Bitcoin Index, which was developed to address Bitcoin's unusually dynamic price activity. The index reflects all major bitcoin indexes that report on the bitcoin price.
In 2013, bitcoin prices stayed below $20 during the whole month of January. But the same year saw the digital currency touch its lifetime high crossing the $1,100 mark. The prices eventually cooled down and during 2014, bitcoin moved in the range of $300 to $900. In 2015, the digital currency moved up by 152.37%, up from the low of $176.89 on January 14, 2015. The uptrend has been strong, especially in the past month or so. With about 14,799,593.75 bitcoins in circulation (according to Coindesk as of November 2, 2015), bitcoins currently have a market capitalization of about $6.5 billion. Let’s explore some factors driving the bitcoin prices up this time around.
Some Possible Reasons
The first and foremost reason is the changing public perspective toward the digital currency. Bitcoin has always been of interest to media, but the majority of the coverage it received was negative. That’s all changing now. The mention of bitcoin in the mainstream is on the rise – platforms such as Bloomberg and the Economist featured the cryptocurrency with a positive stance – something that boosts confidence and changes the way people look at it.
And it’s not just that perceptions have changed--the world has started to realize that the blockchain technology on which bitcoin is based on is sound, which has given a rise to a new class of fans. The Economist story “The Trust Machine” reads, “among regulators and financial institutions, skepticism has given way to enthusiasm (the European Union recently recognized it as a currency). But most unfair of all is that bitcoin's shady image causes people to overlook the extraordinary potential of the 'blockchain', the technology that underpins it.”
The blockchain is seen as the main technological innovation of Bitcoin, since it stands as proof of all the transactions on the network. To use conventional banking as an analogy, the blockchain is like a full history of all banking transactions in the world from the beginning of bitcoin history. Bitcoin transactions are entered chronologically in the blockchain just the way bank transactions are. This is probably the reason why banks are showing great interest in this technology. According to the Financial Times, “Banks are now racing to harness the power of the blockchain technology, in a belief that it could cut up to $20 billion off costs and transform the way the industry works.”
There are already 25 banks (like Barclays, Bank of America, Credit Suisse, Deutsche Bank, J.P. Morgan, Goldman Sachs, HSBC, Morgan Stanley, National Australia Bank, Royal Bank of Canada among others) in partnership with New York-based financial tech firm R3. The firm is working on a project to use the blockchain technology in the financial services industry and banking. This project was launched in September 2015 and has grown from an initial nine banks to 25 in a short span; the timing coincides with the rising price of bitcoin.
Another boost to the bitcoin prices has been the decision by the Court of Justice of the European Union given in October 2015, which says that bitcoin transactions “are exempt from value added tax (VAT) under the provision concerning transactions relating to currency, bank notes and coins used as legal tender.” With this decision, bitcoin transactions and exchange for other currencies will be tax-free in the European Union region, as the digital currency will be treated the way traditional money is.
News related to bitcoin would be incomplete without the mention of China--The recent rise in bitcoin prices has links with the mainland. One of the reasons for the rising Chinese demand is the foreign exchange regulators' new annual cap on overseas cash withdrawals to slow the outflow of capital. This has indirectly guided people to alternatives such as bitcoin. In addition to the cap on capital outflow, the state of the Chinese stock markets and devaluation of currency has also increased the interest in exploring an entirely different asset. According to an article in Bitcoin magazine, “As has been the case since September, China is leading the charge, with the price trading anywhere from $10-$15 above the rates on U.S. and European exchanges.” The trend of rising prices tends to attract more people toward bitcoin for fear of missing out. And with newer entrants joining in, the prices are further pushed up.
Last but not the least, the final auction scheduled on November 5, 2015 by US Marshall Service of coins seized during the Silk Road Investigation is cited as a trigger for the rise in bitcoin prices. The bitcoin prices had witnessed a rising trend (though not very steep) back in early March as well as in June this year before similar auctions. This auction is the final one for the bitcoins seized from convicted Silk Road mastermind Ross Ulbricht.
The Bottom Line
While logic can be attached to what’s going on, it would be unwise to ignore the fact that this may just be a bitcoin bubble in the making. Although bitcoin has proved that it’s here to stay, a small asset class like bitcoin can be a victim of manipulation. Perhap, the price volatility is among the biggest obstacles that has kept bitcoin away from mainstream adoption. Considering its merit, bitcoin is a great innovation that has yet to discover its fair value.