Bitcoin is back. Again.
Almost three years after surging dramatically to a record high of $ 19,783, the price of a single Bitcoin exceeded that figure for the first time on Monday, according to data and information provider CoinDesk. The cryptocurrency has skyrocketed since March, after dropping below $ 4,000 at the start of the coronavirus pandemic.
Bitcoin’s latest rise is different from its last peak in 2017, which was largely driven by investors in Asia who had just learned about cryptocurrencies. At the time, the digital token quickly lost its momentum as people wondered what it could do other than allow easy online speculation and drug and ransom payments.
While these questions remain, Bitcoin is now fueled by a less speculative fever. The buyers – led by U.S. investors, including businesses and other traditional investors – treat Bitcoin as an alternative asset, much like gold, according to an analysis by data firm Chainalysis. Rather than quickly trading in and out, more and more investors are using Bitcoin as a place to park part of their investment portfolios outside of the influence of governments and the traditional financial system, Chainalysis said and other companies in the sector.
“It’s a very different set of people buying Bitcoin recently,” said Philip Gradwell, chief economist at Chainalysis, who analyzes the movement of cryptocurrencies. “They do it on a more regular basis over extended periods of time, and they take it off the trade and keep it as an investment.”
The craze has been supported by regulators and major financial firms trying to make cryptocurrencies safer and more accessible. The Office of the Comptroller of the Currency, a U.S. regulator, said this summer that banks would be allowed to hold cryptocurrencies for their customers. And PayPal announced last month that it would follow rival Square and allow people to buy and hold Bitcoin and a few other cryptocurrencies.
“Our decision came following conversations with government officials and then seeing the drastic shift to digital payments in the wake of the pandemic,” Dan Schulman, CEO of PayPal, said in an interview. More than a million people – three to four times what the company expected – joined a waiting list to use cryptocurrencies ahead of the feature’s launch, he said.
The rise of Bitcoin is part of a larger exuberance in cryptocurrencies and stock markets, which is defying the gloom of a pandemic-induced recession. The Dow, S&P 500 and Nasdaq hit all-time highs this month, with Wall Street buoyed by the presidential election and news of potential coronavirus vaccines.
Bitcoin is a digital currency with software and rules that were released in early 2009 by an obscure creator under the pseudonym Satoshi Nakamoto. The computer code established that the total supply of Bitcoin would be limited. Only 21 million tokens will be created, distributed in small blocks each day – through a process called mining – to some of the computers that maintain the currency’s online infrastructure.
Like gold, Bitcoin can be created, moved, and stored outside the jurisdiction of any government or financial institution. Bitcoins exist on a financial ledger, known as the blockchain, which is maintained and updated by a network of volunteers that manages thousands of computers around the world – a system meant to ensure that no computer or institution cannot change rules or control the network.
The open nature of the system – and the fact that anyone can join and build a wallet without providing as much as a name or phone number – has made it popular for those who want to bypass the traditional financial system. They have included terrorists, drug traffickers, and countries, like North Korea, Venezuela and Iran, that want to evade US financial sanctions.
“This technology is already playing a role in many of the most significant criminal and national security threats facing our country,” the Department of Justice said in a report last month. The report described how deeply Bitcoin had been integrated into the infrastructure of the criminal world.
But the stateless nature of Bitcoin has also convinced investors interested in the legitimate uses of the technology. Some were motivated by a libertarian mistrust of governments. Others less ideological have turned to Bitcoin as an alternative to the financial system.
Yet Bitcoin is backed by nothing but its computer network and the faith of the people who buy it and value it on exchanges. Many of these people bet that someone else will be willing to pay them more for their Bitcoin in the future.
This has made Bitcoin prices volatile. It fell to its most recent low in March when fear of the pandemic hit global markets. Soon after, however, investors began to talk about Bitcoin as the beneficiary of the global recession.
In May, Paul Tudor Jones, one of Wall Street’s best-known hedge fund managers, said he had placed almost 2% of his portfolio in Bitcoin. He said that Bitcoin’s production cap made it an attractive alternative to the decline in the value of traditional currencies, which he believed was inevitable, as central banks were printing more money to encourage an economic recovery.
“With each passing day that Bitcoin survives, confidence in it will increase,” Mr. Jones told CNBC at the time. He did not respond to a request for comment for this article.
Some state-owned companies have also plunged into Bitcoin due to concerns about the value of the dollar. In August, MicroStrategy, a Virginia software company, said it bought $ 250 million worth of Bitcoin to store some of the money it had in the company’s treasury.
Michael Saylor, chief executive of MicroStrategy, said in an interview that after not knowing anything about Bitcoin earlier this year, he became convinced of how the hard-coded limit on the number of tokens would help him keep his money. value over time. . He got so enthusiastic that he put $ 175 million of his own money in the coin. MicroStrategy then bought an additional $ 175 million worth of Bitcoin.
“For anything that anyone who has invested in as a store of value, it seems like it’s best to move it into Bitcoin,” Mr. Saylor said.
In October, Square said it was putting $ 50 million of its corporate treasury into Bitcoin. In 2018, Square also began offering digital currency on the Cash app, its phone app that people use to send money to friends and family. This month the company, led by Jack Dorsey, who is also chief executive of Twitter, said its customers held $ 1.8 billion worth of Bitcoin, up 180% from a year ago.
Last month, analysts at JPMorgan Chase wrote a widely circulated note on how the use of Bitcoin as an alternative to gold – especially by young investors – was creating a significant market for tokens. Since the total value of all Bitcoin in circulation, around $ 350 billion, is only a small fraction of all the gold in the world, analysts said they could see Bitcoin’s value rise much more. .
The Bitcoin rally has been accompanied by a larger cryptocurrency bull market, just like in 2017. While much of the fervor of three years ago was centered on fraudulent new coins , the so-called initial coin offerings, interest has shifted to coins trying to participate in what is known as decentralized finance or DeFi. These systems, which remain buggy and untested, aim to make it possible to take out loans and insurance or to collect interest without involving any financial institution.
Central banks in countries like Singapore, Sweden and the Bahamas are also considering creating national digital currencies, inspired in part by Bitcoin. The biggest project, from the Chinese central bank, seems to be the most advanced.
National coins, which would leave the volatility of Bitcoin behind, could render cryptocurrencies obsolete. But they could also facilitate the entry and exit of digital currencies of all kinds.
Given the uncertainty surrounding Bitcoin’s value, any excitement is likely to be followed by another contraction. But the number of crashes Bitcoin has survived is changing the conversation around technology.
“Now it’s LeBron James who plays at 21 and is starting to dominate the field,” said Mr. Saylor. “It’s not 13-year-old LeBron James having a tantrum. You have a hardening and maturation of the active. “
