While Still Volatile, Bitcoin’s Price Generally Moves Upward As Blockchain Interest Rises

While the payments industry has been buzzing lately with talk about the blockchain, Bitcoin has been reaching pricing levels it hasn’t seen in more than a year. The rally comes amid fresh optimism for a solution to a vexing capacity problem and for the blockchain itself, the distributed ledger that underpins Bitcoin and other digital applications.

Bitcoin was trading at nearly $442 early Monday afternoon after flirting last week with the $470 level. The $468 value the cryptocurrency reached last Tuesday was last seen in mid-September 2014, before a big swoon brought it as low as $176 and kept it in the $200s until the fourth quarter of last year.

To be sure, Bitcoin remains subject to sometimes wild price swings. “Bitcoin has been a volatile currency from the start, with lots of speculation and in many senses unfounded value,” warns Ben Knieff, a senior analyst at Aite Group, Boston, in an email message. But despite that volatility, it has climbed steadily upward, in part because of increasing interest in its underlying technology, the blockchain.

IBM Corp., for example, announced Friday it has created what it calls a “new framework” to run the blockchain securely in a cloud configuration. The computing giant figures the development will accelerate adoption of the distributed ledger in health care and other businesses.

Announcements like that lend further credibility to the blockchain, and by extension to Bitcoin, probably the first application supported by the blockchain. And two credit union organizations, The Members Group and Co-Op Financial Services, said Monday they have commissioned consulting firm Mercator Advisory Services to study the blockchain to help credit unions figure out whether, and when, to deploy it.

“IBM’s getting into the blockchain business might be serving to legitimize the concept,” says George Warfel, principal at Wespay Advisors, San Francisco, in an email message. “Serious consideration of blockchain as a method to transmit value could be an upward force on [Bitcoin’s] market price.” He cautions, though, that Bitcoin prices could tumble if it turns out this increased market interest is focused not so much on Bitcoin as on the blockchain itself.

Experts are less sure of the impact of a proposed capacity solution. Last month, developers introduced Segregated Witness, software that expands processing capacity for Bitcoin. Bitcoin’s developers have been concerned for some time that the digital currency’s growth could be stunted as more merchants and users adopt it. That problem could become acute if usage pushes toward Bitcoin’s seven-transactions-per-second limit.

While some observers attribute the recent pricing rally in part to this development, others point out the limit is part of Bitcoin’s design, not a blockchain issue. “It is really important to note that Bitcoin is a pretty small fraction of the overall blockchain ecosystem,” says Knieff. “It just happens to be the more exposed and well-known application of the blockchain technology.”

Indeed, Knieff argues the impending problem could linger for some time. “The capacity problem with Bitcoin has not been resolved, it is an ongoing issue,” he argues.

At any rate, he and others point out Bitcoin’s well-known volatility tends to mask underlying forces working to push prices up or down.

One thing is for sure. Whatever is driving Bitcoin’s price lately, the currency is unlikely to approach its record high any time soon. Late in November 2013, Bitcoin breached the $1,000 level and hit its high on Dec. 5, at $1,151.