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Bitcoin is back. Yet.
Almost three years after it soared and peaked at $ 19,783, the price of a single Bitcoin rose for the first time on Monday, according to data and news provider CoinDesk. The cryptocurrency has soared since March, after dipping below $ 4,000 at the start of the coronavirus pandemic.
Bitcoin’s latest climb 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 soon lost momentum as people wondered what it could do beyond allowing easy online speculation and drug and ransom payments.
While these questions remain, Bitcoin is now fueled by a less speculative fever. According to an analysis by data firm Chainalysis, buyers – led by American investors, including corporations and other traditional investors – are treating Bitcoin as an alternative asset, a bit like gold. Rather than swapping it quickly, more investors are using Bitcoin as a place to park part of their investment portfolios outside the influence of governments and the traditional financial system, said Chainalysis and other companies in the industry.
“It’s a very different group of people who have been buying Bitcoin recently,” said Philip Gradwell, chief economist at Chainalysis, which analyzes the cryptocurrency movement. “They are doing it in more constant quantities for extended periods of time and taking it off the stock exchanges and keeping it as an investment.”
The enthusiasm has been bolstered by regulators and major financial firms who are looking to make cryptocurrencies safer and more accessible. The Office of the Comptroller of the Currency, an American regulator, said this summer that banks would be allowed to hold cryptocurrencies for customers. And PayPal announced last month that it would follow its rival Square and allow people to buy and hold Bitcoin and some other cryptocurrencies.
“Our move was the result of conversations with government officials and then of seeing the dramatic shift to digital payments following 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 before the feature was launched, he said.
The rise of Bitcoin is part of a broader exuberance in cryptocurrencies and equity markets, which are braving the darkness of a pandemic-induced recession. The Dow, S&P 500 and Nasdaq hit record highs this month, with Wall Street buoyed by presidential elections 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 of Satoshi Nakamoto. The computer code stated that the total supply of Bitcoin would be limited. Only 21 million tokens will ever be created, distributed in small chunks each day – through a process known as mining – to some of the computers that maintain the currency’s online infrastructure.
Like gold, Bitcoin can be created, moved and stored outside the purview of any financial or government institution. Bitcoins exist on a financial ledger, known as a blockchain, which is maintained and updated by a volunteer network of people who manage thousands of computers around the world, a system intended to ensure that no computer or institution can change the rules or control. the network.
The open nature of the system – and the fact that anyone can join it and create a wallet without even providing a name or phone number – has made it popular with those looking to bypass the traditional financial system. They have included terrorists, drug dealers and countries, such as North Korea, Venezuela, and Iran, who want to evade US financial sanctions.
“This technology already plays a role in many of the most significant criminal and national security threats our nation faces,” the Justice Department said in a report last month. The report described how deeply Bitcoin had been woven into the infrastructure of the criminal world.
But Bitcoin’s stateless nature has also won over investors interested in legitimate uses of the technology. Some were motivated by a libertarian distrust of governments. Others less ideological have gravitated to Bitcoin as an alternative to the financial system.
However, Bitcoin is not backed by anything other than its computer network and the faith of the people who buy it and value it in exchanges. Many of these people are betting 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 as pandemic fear hit global markets. Soon after, however, investors started talking about Bitcoin as a beneficiary of the global recession.
In May, Paul Tudor Jones, one of Wall Street’s best-known hedge fund managers, said he had invested nearly 2% of his portfolio in Bitcoin. He said the cap on Bitcoin’s production made it an attractive alternative to the falling value of traditional currencies, which he thought was inevitable as central banks printed more money to encourage an economic recovery.
“Every day 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 public companies have also dived into Bitcoin due to concerns about the dollar’s value. In August, MicroStrategy, a software company in Virginia, said it bought $ 250 million worth of Bitcoin to store some of the money it had in the company’s treasury.
Michael Saylor, CEO of MicroStrategy, said in an interview that after learning almost nothing about Bitcoin earlier this year, he had become a believer in how hard-coded token limit would help keep its value over time. He got so excited that he put $ 175 million of his own money into the currency. MicroStrategy later bought another $ 175 million in Bitcoin.
“For everything someone has invested in as a store of value, it starts to seem like it’s best to move it into Bitcoin,” Saylor said.
In October, Square said it was investing $ 50 million of its corporate money in Bitcoin. In 2018, Square also began offering digital currency on the Cash app, its phone app that people use to send money between friends and family. This month, the company, led by Jack Dorsey, who is also CEO of Twitter, said its customers hold $ 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 using Bitcoin as an alternative to gold, especially by younger investors, was creating a significant market for tokens. Given that the total value of all Bitcoin in circulation, around $ 350 billion, was a small fraction of all the gold in the world, analysts said they could see Bitcoin’s value go much higher.
Bitcoin’s rally was accompanied by a broader bull market than cryptocurrencies, just like in 2017. While much of the fervor three years ago was centered on new coins from so-called initial coin offerings, interest has shifted to coins that they were trying to take part in what is known as decentralized finance or DeFi. These systems, which remain flawed and unproven, aim to make it possible to borrow and insurance or collect interest without involving any financial institution.
Central banks in countries like Singapore, Sweden and the Bahamas are also trying to create national digital currencies, inspired in part by Bitcoin. The largest project by the Chinese central bank appears to be the furthest away.
National currencies, which would leave Bitcoin’s volatility behind, could make cryptocurrencies obsolete. But they could also make it easier to get in and out of digital currencies of all kinds.
Given the uncertainty about Bitcoin’s value, any excitement is likely to be followed by another contraction. But the number of crashes that Bitcoin has survived is changing the conversation about technology.
“Now it’s LeBron James playing at the age of 21 and starting to dominate the field,” said Saylor. “It’s not LeBron James, 13, who throws a tantrum. You have a hardening and a maturation of the asset “.
