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.
The New York Times Explains...
- What Bitcoin is and how it works: click here »
- What Ethereum is and how it works: click here »
- What an initial coin offering is and how it works: click here »
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.
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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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