As Bitcoin’s Value Soars, Experts Trace the Cause to a Tumultuous Year of Changes

It’s still far from a mainstream currency, but Bitcoin is closing out a tumultuous year with a raging run-up in value. The digital currency breached the $800 level on Tuesday, and as of Wednesday afternoon was trading just shy of $822. These are heights Bitcoin hasn’t seen in nearly three years.

But the big run-up in price has played out over the course of 2016. Investors who bought their Bitcoin on Jan. 1 and held it since have enjoyed a 90% increase in the value of their holdings. That run-up has touched off, and benefited from, what some see as a speculative boom. “It’s not intrinsic value,” says Steve Mott, principal at Stamford, Conn.-based payments consultancy BetterBuyDesign. “It’s a speculative vehicle.”

Much of this investing fervor has come from China, where the devaluation of the yuan has made Bitcoin look attractive, say some observers. “It’s not about using Bitcoin as a way to skirt currency controls, it’s just about using Bitcoin itself as a hedge,” George Peabody, who follows the digital currency at San Francisco-based Glenbrook Partners, tells Digital Transactions Newsby email.

Of course, Bitcoin, like any other currency, is meant to be traded for goods and services. But its limited acceptance so far online and in stores, coupled with its dramatic appreciation this year, has made it more useful as a store of value that can be traded for dollars. Indeed, Mott and other skeptics figure Bitcoin really prefigures a future digital currency that will win wider acceptance. “Bitcoin may have opened the door,” Mott says.

Still, Peabody points to other factors driving Bitcoin’s surging value. A so-called halving event last summer literally chopped the incentive Bitcoin miners receive for creating new coins. Observers at the time predicted this move would drive up the currency’s price as miners pulled out of the business, and Peabody says that has turned out to be the case. “The bitcoin reward to miners was cut in half last July, and that, of course, impacts supply,” he says.

Another event that shook the Bitcoin world this year was a move to increase the capacity of the Bitcoin blockchain amid fears that transaction volume was beginning to outrun capacity. Developers were divided on the move, but ultimately the network settled on a technique called Segregated Witness. SegWit, as it’s called, was proposed a year ago, and so far at least 20% of the Bitcoin blockchain has adopted it.

This, too, could be another factor increasing buyers’ confidence in Bitcoin and hence spurring the price run-up. “Another contributor appears to be the system’s overall stability and what may be a technical rapprochement between the Bitcoin developer camps in the form of the Segregated Witness technique that doubles the number of transactions that fits into a bitcoin block,” says Peabody.

Overall, it may just be that buying Bitcoin isn’t quite the exotic. stab-in-the dark move it once seemed to be. The digital currency is nearing a decade old now, and “people [may be] more comfortable with what was once a strange, even threatening, idea,” says Peabody.