Bitcoin is the virtual currency that was invented in 2008 by an unknown programmer (or programmers) as a kind of joke/experiment, but it has certainly captured the imagination of lots of investors. The cryptocurrency (whose symbol is Ƀ) is back in the news today because the price of a single Bitcoin recently topped $1,000, which represents a 140% appreciation from its price at the start of 2016.
Analysts have been trying to figure out why there has been a spike in Bitcoin values, and opinions differ quite a lot. Some analysts think that rich Chinese are behind the rise, as electronically traded Bitcoins can be used to move wealth out of China and evade restrictions on currency movements out of the country and to hedge against the steadily declining value of the Chinese yuan.
Another school of thought on Bitcoin holds that the recent interest is simply speculation. The Chinese yuan has been losing value, the Venezuelan Bolivar is being eroded by inflation, and the Indian government has recently withdrawn its largest currency notes from circulation. And in such an unsettled global currency environment, any exchange medium that isn’t losing value looks attractive. Since the number of Bitcoins produced is limited to 21 million, a level that will be reached in 2040, there’s a built-in scarcity. And any tradable commodity that is in limited supply will tend to appreciate in price.
National currency authorities (like the U.S. Treasury) have been skeptical about Bitcoin, as it’s not issued by any government or business and isn’t backed by any tangible asset like gold. Bitcoins are valuable because people are willing to accept them as valuable and use them in transactions.
When Bitcoins were first introduced, there were some efforts to stamp them out of existence, but that was difficult because there was no centralized issuing agency to put pressure on; the Bitcoin community itself does the banking and transaction tracking.
There’s also a touch of the pirate in using Bitcoin. A few sophisticated criminals have demanded ransoms in Bitcoins and certain sites that sell banned substances will only accept payment in Bitcoins, which are untraceable.
There is one final wrinkle in the Bitcoin story, which is that you may soon be able to trade the currency indirectly via an exchange traded fund (ETF). The Winklevoss brothers—yes, the same ones who lost out on their claim to higher compensation as co-founders of Facebook (FB)—have filed an application to run the Winklevoss Bitcoin Trust ETF.
And they’re not alone. Pantera Bitcoin Fund is a $160 million hedge fund that’s available to institutions and individuals who can put up $50,000 or more.
So, even though there’s nothing behind Bitcoin but a bunch of people who want it to exist and are willing to lend their computing power to generate it, it’s a real (virtual) thing. Stay tuned.