The world’s most high-profile digital currency, bitcoin, hit a three-year high this week, rising above US$1,000 on Monday in a strong surge that saw it stand out as the best-performing currency of 2016.
Bitcoin, which shot up 125 percent in value last year alone, is now fast approaching its all-time high of $1,163 in late 2013, and stands at $1,027.53 at time of writing per price index CoinDesk.
While the extreme gains – which many expect to continue – make bitcoin look like an attractive bet, some investors are wary of the currency’s history of extreme volatility.
In 2013, the cryptocurrency – which relies on encrypted peer-to-peer transactions between users – saw a rapid ten-fold increase in its value in the space of two months, and then lost much of it in a series of crashes, reaching as low as $200–300 during early 2015, before making its way back up again.
In more recent times, bitcoin has been much more stable, and commentators say its 2016 gains could be a result of a weakening Chinese yuan – which fell 7 percent in value last year, its weakest performance in more than two decades.
Unlike traditional currencies such as the US dollar that are sponsored by a nation’s central bank, bitcoin is completely decentralised – and its anonymity means it’s easier to move it between countries than conventional, regulated currencies.
This also means it’s popular for making payments on the dark web, where it helps make transactions possible for all kinds of illicit products and services – including illegal drugs, weaponry, and much more.
But despite this infamy by association – and bitcoin’s historic ups and downs – the digital currency’s strong gains in 2016 show that there’s huge demand for it and its flexibility in the mainstream too.
Especially in an uncertain world, the fact that bitcoin isn’t tied to a particular government or country might make it more lucrative.
Events in 2016 showed that international markets were extremely sensitive to political happenings – such as Brexit and the Trump victory, both of which were unexpected by many investors (and pollsters).
And then there’s direct restrictions on cash – like Indian prime minister Narendra Modi’s controversial move to remove high-denomination banknotes from circulation in November – which is estimated to have impacted some $183 billion worth of rupees.
In light of developments such as these, bitcoin could be seen by some as a kind of virtual safe haven, like gold, when markets are uncertain, AFP suggests.
“The growing war on cash, and capital controls, is making bitcoin look like a viable, if high risk, alternative,” Paul Gordon, a board member of the UK Digital Currency Association, told Jemima Kelly at Reuters.
While some analysts are bullish that bitcoin will rise further in value in 2017, cryptocurrencies are still a new thing, and not many people actually understand how they work, leading to fears that too much speculation over the prospects of bitcoin could create a bubble.
But as people become more familiar, it may well be that digital currencies like bitcoin will become increasingly less volatile, while continuing to offer advantages over central-bank-issued currencies.
“[B]itcoin is a healthy reminder that we don’t have to hold on to dollars or [yuan], which is subject to capital controls and loss of purchasing power. Rather, it’s a new asset class,” Bobby Lee, CEO of bitcoin exchange BTC China told Arjun Kharpal at CNBC.
“The value of Uber in any city is directly dependent on the number of drivers and number of users, it’s not linear it’s exponential. The same is true of the value of bitcoin.”