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Bitcoin has soared by almost half this year, to more than
$10,000, for the first time since October. On Tuesday it hit its
highest in five months.
The cryptocurrency's 11-year history is replete with fast
ascents and equally rapid plunges. In late 2017, it rose three
and a half times in just 35 days to reach almost $20,000. It
then slumped 70% in seven weeks.
Such wild and often inexplicable swings are why bitcoin faces a
struggle to become a functioning currency.
This time around, some market players point to a confluence of
drivers not seen before. Arcane tech factors, expectations for
mainstream acceptance and macroeconomic trends are leading
markets to look again at bitcoin's worth, they say.
"You can argue that there is a fresh valuation going on," said
Russ Mould, investment director at AJ Bell, a stockbroker that
oversees assets worth $71 billion.
Most fundamentally, many cite growing demand for bitcoin before
its latest "halving" -- a 50% cut in the production of the
cryptocurrency due in May that is one of the few observable
events known to materially impact price.
A rule written into bitcoin's underlying code slashes the number
of new coins awarded to the miners behind the global supply of
bitcoin.
In the year after the two previous halvings, in November 2012
and July 2016, bitcoin rose around by 80 times and four times
respectively. The exact proportion of the gains caused by the
halving is unclear.
"It's a rare observable factor - if you look at previous events,
in each case there has been a quite clear and discernable spike
in the value of bitcoin," said Windsor Holden, a payments
consultant who tracks crypto and blockchain.
GRAPHIC - Bitcoin's Halving:
https://fingfx.thomsonreuters.com/
gfx/mkt/13/2066/2034/Halving%20Graphic.png
"HYPE CYCLE"
But others doubt bitcoin's latest rally is underpinned by
anything more substantial than the previous booms.
"The recent rally has been driven by the usual hype cycle that
we have very reliably seen every two to three years," said
Michel Rauchs, author of several Cambridge university studies on
cryptocurrencies and blockchain tech.
"We have these mini-bubbles, and the momentum that it creates -
bitcoin first, then these other coins. It's a self-fulfilling
prophecy."
Major cryptocurrencies that tend to move in correlation with
bitcoin have also gained this year. Ethereum has more than
doubled; Ripple's XRP token is up over 75%.
Other factors cited for the rally, such as greater demand for
assets uncorrelated to mainstream markets following the U.S.
killing of an Iranian military commander last month, are also
questionable.
Bitcoin's "safety" characteristic is unclear. It has regularly
fallen in times of geopolitical stress in recent years.
Looser central bank policy is also given as a reason bets on
riskier assets. But that link is hard to prove, too. Bitcoin has
fallen during previous spells of easy money.
DIGITAL DOLLAR?
Also widely cited are expectations that cryptocurrencies will go
mainstream, as central banks step up their research into digital
currencies after Facebook's push to offer its Libra coin. Some,
such as China's, are getting closer to issuing their own coins.
And in comments that traders said stoked buying in bitcoin, U.S.
Federal Reserve Chairman Jerome Powell told U.S. lawmakers on
Tuesday that the Fed was "working hard" on the issue, while it
remained undecided on any digital dollar.
Central bank interest is also problematic as a reason for
bitcoin's rise, Rauchs said.
"People tend to mix up and conflate these different concepts
that are actually fundamentally different from one another," he
said. "This creates a bubble where you conflate everything
together and everything appreciates."
Still, in the short term, crypto traders interviewed by Reuters
said, the cut to the supply of bitcoin was likely to loom
largest for investors.
"Things are aligning," said Jamie Farquhar, portfolio manager at
crypto firm NKB Group. "But the real thing that people are
looking at is the halving."
($1 = 0.7713 pounds)
(Reporting by Tom Wilson, editing by Larry King)
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