Bitcoin is back. Once again.
Almost three years after a surge in hair and a high of $ 19,783, the price of a single Bitcoin rose above it for the first time on Monday, according to data and news provider CoinDesk. The cryptocurrency has soared since March after falling below $ 4,000 at the start of the coronavirus pandemic.
Bitcoin's recent surge differs from its last surge in 2017, which was mainly driven by investors in Asia who had just learned about cryptocurrencies. Back then, the digital token soon lost momentum when people asked what it could do other than facilitate simple online speculation, as well as payments for drugs and ransom.
While those questions remain open, Bitcoin is now fueled by a less speculative fever. Buyers – led by American investors, including corporations and other traditional investors – treat Bitcoin as an alternative asset, similar to gold, according to analysis by data firm Chainalysis. Rather than getting in and out of the car quickly, more and more investors are using Bitcoin as a place to park part of their investment portfolio outside of the influence of governments and the traditional financial system, according to Chainalysis and other industry companies.
"It's a very different group of people who recently bought Bitcoin," said Philip Gradwell, chief economist at Chainalysis, who analyzes the movement of cryptocurrencies. "They do it in steadier amounts for longer periods of time, and they take it off the exchanges and keep it as an investment."
The excitement has been underpinned by regulators and established financial firms trying to make cryptocurrencies more secure and accessible. The Office of the Comptroller of the Currency, an American regulator, said this summer that banks are allowed to hold cryptocurrencies for customers. And PayPal announced in October that it would follow up on 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 the dramatic shift in digital payments as a result of the pandemic," said Dan Schulman, managing director of PayPal, 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 launched, he said.
Bitcoin's surge is part of a broader glut of cryptocurrencies and stock markets braving the darkness of a pandemic-triggered recession. The Dow, S&P 500 and Nasdaq all hit record highs last month. Wall Street was supported by the presidential election and news of possible coronavirus vaccines.
Bitcoin is a digital currency with software and rules released in early 2009 by a shady creator under the pseudonym Satoshi Nakamoto. The computer code stated that the total supply of bitcoin would be limited. Only 21 million tokens are ever created, which are distributed in small blocks every day. This is distributed to some of the computers that manage the currency's online infrastructure through a process called mining.
Like gold, Bitcoin can be created, moved, and stored outside of the purview of a government or financial institution. Bitcoins are in a financial book called blockchain, which is maintained and updated by a volunteer network of people who run thousands of computers worldwide – a system designed to ensure that no computer or institution changes the rules or the network can control.
The openness of the system – and the fact that anyone can participate and create a wallet without giving a name or phone number – has made it popular with those looking to bypass the traditional financial system. These included terrorists, drug traffickers and countries like North Korea, Venezuela and Iran that want to evade American financial sanctions.
"This technology already plays a role in many of the biggest criminal and national security threats our country faces," the Justice Department said in an October report. The report described how deeply Bitcoin was embedded in the infrastructure of the criminal world.
Bitcoin's statelessness has also convinced investors who are interested in legitimate use of the technology. Some were motivated by a libertarian distrust of governments. Others, who are less ideological, have chosen Bitcoin as an alternative to the financial system.
Still, Bitcoin is not backed by anything other than its computer network and the trust of the people who buy it and value it on exchanges. A lot of these people are betting that someone else will be willing to pay them more for their bitcoin in the future.
That made bitcoin prices volatile. It fell to its most recent low in March when pandemic fears hit global markets. Soon after, however, investors began to talk about Bitcoin as benefiting from the global downturn.
In May, Paul Tudor Jones, one of Wall Street's best-known hedge fund managers, announced that he had invested nearly 2 percent of his portfolio in Bitcoin. He said limiting bitcoin production made it an attractive alternative to the depreciation of traditional currencies, which he believed was inevitable as central banks printed more money to encourage economic recovery.
"With every day that Bitcoin survives, confidence in Bitcoin increases," Jones told CNBC at the time. He did not respond to a request for comment on this article.
Some publicly traded companies also dived into Bitcoin over concerns about the value of the dollar. In August, MicroStrategy, a software company in Virginia, announced that it had purchased $ 250 million in Bitcoin to keep some of the cash in the company's coffers.
Michael Saylor, CEO of MicroStrategy, said in an interview that after knowing almost nothing about Bitcoin earlier this year, he was convinced how the hard-coded limit on the number of tokens would help increase value over the course of the year Time to hold. 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 anything anyone has invested in as a store of value, it looks like it would be better to convert that into Bitcoin," Saylor said.
In October, Square announced it would be putting $ 50 million of its corporate money into Bitcoin. Since 2018, Square has also been offering digital currency in the Cash app, the phone app that people use to send money between friends and family. The company, which is led by Jack Dorsey, who is also the CEO of Twitter, announced in early November that its customers owned Bitcoin valued at $ 1.8 billion, up 180 percent year over year.
In October, analysts at JPMorgan Chase wrote a widespread note about how the use of Bitcoin as an alternative to gold – especially by younger investors – has created a significant market for the tokens. Given the total value of all outstanding Bitcoin amounts of around $ 350 billion, which is only a small fraction of all gold in the world, analysts could expect a significantly higher value from Bitcoin.
As in 2017, the Bitcoin rally was accompanied by a broader bull market for cryptocurrencies. While much of the passion three years ago was focused on new coins from fraudulent so-called coin initial offers, interest has shifted to coins attempting to participate in what is known as decentralized funding, or DeFi. These systems, which remain flawed and unproven, are designed to make it possible to take out loans and insurance or to collect interest without involving financial institutions.
Central banks from countries like Singapore, Sweden, and the Bahamas are also trying to create national digital currencies that are partially inspired by Bitcoin. The biggest project by the Chinese central bank seems to be the furthest advanced.
The national coins that would leave bitcoin's volatility 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 the value of Bitcoin, any excitement is likely to be followed by another contraction. But the number of crashes Bitcoin has survived is changing the conversation about the technology.
"Now LeBron James is playing at the age of 21 and starting to dominate the field," said Saylor. "It's not LeBron James, 13 years old, causing a tantrum. You have a hardening and a maturation of the asset."