Volatility Works in Bitcoin’s Favor As the Digital Currency’s Value Surges to a Two-Year High

Long-time payments players who like to scoff at Bitcoin as an unproven payments instrument will have to reckon with the robust vote of confidence buyers and sellers of the 7-year-old digital currency have given it over the past few days.

Bitcoin’s U.S. dollar value breached the $700 level late Sunday and early Monday, settling in the $680s by Tuesday afternoon, according to data from Coindesk, a digital-currency information service. The surge came after a span of about 10 days in which the currency seemed to have settled in a trading band between $550 and $600.

The current price represents Bitcoin’s highest value since February 2014, though it’s still a long way off from its all-time high of $1,151 on Dec. 4, 2013, according to data from Blockchain.info.

There appears to be no single reason for the rapid runup. Experts point to factors as diverse as blockchain enthusiasm and an impending halving of the Bitcoin compensation so-called miners receive for cracking the mathematical puzzles that yield new currency. Cutting the reward in half, from 25 to 12.5 bitcoin, may well dampen production, an event some traders could be anticipating by buying up the currency now. The halving of the reward is expected to occur next month.

But other factors loom, as well, including overseas influences. “In recent months, I’ve been hearing a lot about Bitcoin being used to evade currency controls in places like China, and it is certainly an effective method,” Ben Knieff, a senior analyst at Aite Group who follows Bitcoin, tells Digital Transactions News in an email message. “I’ve heard, though unconfirmed, that over 60% of income is held by Chinese doing just this, which will certainly drive prices up.”

In cases like this, Bitcoin could prove a useful tool to protect assets or hedge against rising prices, experts say, and that could be driving demand. “There are other markets where [Bitcoin] could be attractive, for example places with high inflation and/or currency controls, or a high risk of either,” says Knieff. “[Bitcoin] allows conversion into what is viewed as a relatively ‘hard’ asset without substantial oversight from the government/regulators, and some view this worth it despite the volatility.”

That volatility, though, is something buyers must reckon with. It might be viewed by many as a hard asset, but Bitcoin was created as an instant, irrevocable, digital instrument to be traded for goods and services, just like fiat currency only better, as enthusiasts claim. Instead, the currency has come to be regarded by some as an investment vehicle to be hoarded, then sold at opportune moments.

At the start of the year, Bitcoin’s price was $432, according to blockchain.info’s data, and as recently as last October it was trading in the low $200s. “Bitcoin has been inherently volatile for a long time, and there are many reasons for this volatility from regulatory and legal concerns to fraud and [anti-money-laundering] to general acceptance,” says Knieff.