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Value of Bitcoin Surges, Emerging From a Lull in Interest

Value of Bitcoin Surges, Emerging From a Lull in Interest

By Nathaniel Popper, The New York Times | Updated: 5 November 2015 18:21 IST

After a long period of quiet, the price of the virtual currency Bitcoin is surging again as signs of interest from China and Wall Street have helped kick off a new speculative frenzy.

The price of a single Bitcoin has been steadily rising in recent weeks. On Wednesday, it spiked particularly sharply, rising above $500 (roughly Rs. 33,000) on some exchanges, and bringing the value of a single coin up over 100 percent from a month ago. By the end of Wednesday, the price had fallen back closer to $400 (roughly Rs. 26,000).

The recent rally has been the biggest since the currency entered a sustained decline after the collapse of what was once the biggest Bitcoin exchange, Mt. Gox, in early 2014. That incident - and the use of Bitcoin for drug sales - led many people to write off the virtual money as a passing fad.

Nonetheless, many banks and financial firms continued to study the technology behind the scenes and have recently been expressing their interest - and announcing new investments - in the technology underlying Bitcoin, which is being heralded as a new way to conduct a broad array of financial transactions.

There has also been a surge in demand for Bitcoin in China, where the new interest is being explained by a number of factors, including the drop in the stock market there, as well as the emergence of a new Ponzi scheme tied to Bitcoin. The price of Bitcoin has been rising faster on Chinese exchanges than elsewhere in the world.

Bobby Lee, the chief executive of one of China's biggest Bitcoin exchanges, BTCC, said that, as was the case in past price spikes, a critical mass of reports on Bitcoin was drawing a new wave of speculators, betting more on the future of the virtual currency than on its current use.

"There are a few tipping points in a row, and you get a tidal wave," Lee said. "It's classic bull market."

Volatile price swings are nothing new for Bitcoin, which has been through several sharp ups and downs since it was released into the world in early 2009 by a shadowy creator going by the name Satoshi Nakamoto. In late 2013, the price shot to a peak above $1,200 (roughly Rs. 79,000) in intraday trading.

Past price rallies have generally been followed quickly by collapses, usually set off by some sign of weakness in the infrastructure of the Bitcoin industry.

All along there has been skepticism when investor interest in Bitcoin has raced ahead of the real-world use of the virtual currency. While Bitcoin has been described as a faster and cheaper way to send money online, ordinary people have been slow to use the virtual currency for everyday transactions and there are no major signs that is changing.

But the companies that currently handle most Bitcoin transactions seem to be far stronger than those that did in the past.

New York's top financial regulator has granted trust company charters to two Bitcoin exchanges over the last year and both are now in operation, along with a California exchange, Coinbase, which is the largest in the country. On Wednesday, Coinbase reported trading volume four times as high as its recent average.

So far, big banks have not traded Bitcoin on these exchanges or invested in the virtual currency directly. But financial firms of all sorts have shown significant interest in the decentralized way in which Bitcoin transactions are handled and the new type of ledger on which all Bitcoins and Bitcoin transactions are recorded, known as the blockchain.

Last week, Nasdaq introduced a new system, Linq, that will allow shares in startups to be recorded and traded on a ledger like the blockchain, which is expected to manage trades more quickly than existing systems. Over a dozen banks, including most of the global giants, have recently signed up with a start-up, R3, that is working on defining standards for new decentralized ledgers.

Most financial firms insist that they want to use blockchains that are not tied to Bitcoin. But financial firms have also been making bets in Bitcoin-related companies like the Digital Currency Group, a trading and investment company that announced funding from MasterCard and CIBC last week.

Brendan M. O'Connor, chief executive of Genesis Global Trading, a division of the Digital Currency Group, said that after every big funding announcement, he saw a spike from big institutional investors.

"That is nudging people to get off the sidelines and invest in the asset class," O'Connor said.

Investors have also been comforted by decisions like one last month by the European Union, which said that basic Bitcoin transactions would not be taxed, but would instead be treated like currency transactions.

But as was the case during the big Bitcoin run-up in late 2013, most of the trading activity now is taking place in China. Exchanges there have encouraged speculation in Bitcoin by offering free trading and leveraged accounts.

There has been discussion recently that some Chinese investors are seeking out Bitcoin as China's currency, the renminbi, has struggled and the government has made it harder to move money out of the country.

Lee of BTCC said he was not seeing much of those sorts of transactions. But he said he had seen signs that Chinese investors were using Bitcoin to move money into an international investment scheme, MMM. Its managers claim it was created by a man who did prison time in Russia after a previous Ponzi scheme collapsed.

Bitcoin also continues to be used for illegal purposes. After the Silk Road online drug bazaar was taken down, imitators quickly popped up to take its place.

Bitcoin has also become the currency of choice for online ransom payments because Bitcoin addresses can be created without providing any personal information. The Cyber Threat Alliance released a report last week estimating that hackers had collected $325 million (roughly Rs. 2,137 crores)from CryptoWall, a virus that can freeze a computer's files until an electronic ransom payment is made.

Exchange operators, though, say that the new users rushing in in recent weeks have been making a bet that Bitcoin will go mainstream and rise in value as it does.

"The main tangible driver of the recent price surge is the accumulation of all the investments and positive media about blockchain," said Gil Luria, an analyst with Wedbush Securities who has followed the market.

© 2015 New York Times News Service

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