Bitcoin, the world’s best known cryptocurrency, jumped above $17,000 to a three-year high on Tuesday as a growing number of investors backed it as an alternative to other assets.
The currency climbed more than 4% to $17,492, its highest level since December 2017 and more than four times higher than the price in March when heavy selling sent its value below $4,000.
Analysts said the pandemic had encouraged investors to review the long-term outlook for bitcoin and other cryptocurrencies such as Ethereum, Litecoin and XRP, which have all increased in value in recent months.
Concerns about fraudulent trading in cryptocurrencies and a succession of hacks that prompted cryptocurrency exchanges to lose millions of dollars worth of coins, appear to have waned, giving investors a greater sense of security.
“The virus crisis is propagating the reassessment of bitcoin,” said Nikolaos Panigirtzoglou, an analyst at JPMorgan. “There is a reassessment about its value here as an alternative currency; as an alternative to gold.”
Gold set an all-time high in August of $2,072 per ounce, but has since waned to $1,885.
While some investors have sought a safe haven, others have seen bitcoin as a growth asset that can perform strongly in an era of low returns from government bonds.
Central bank stimulus measures to combat the Covid-19 pandemic have cut interest rates to below zero in many parts of the world, leaving only minimal returns on lending to governments.
Bitcoin’s supply is capped at 21m. Proponents say its scarcity provides an innate value and shields it from central bank or government policies that stoke inflation.
Some investors have become concerned that inflation will spiral next year following a rush of new Covid-19 vaccines that allow governments to boost their economies.
Also supporting prices, investors said, were expectations that bitcoin was being embraced by mainstream companies and moving towards widespread use as means of payment.
What is bitcoin?
Bitcoin is the first, and the biggest, ‘cryptocurrency’ – a decentralised tradeable digital asset. The lack of any central authority oversight is one of the attraction.
Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions – as well as the oversight and regulation that entails.
This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person.
The exchange rate has been volatile, making it a risky investment. Whether it is a bad investment is yet to be seen. In practice it has been far more important for the dark economy than it has for most legitimate uses, but with Facebook’s announcement that it is launching a new digital currency – Libra – mainstream interest in bitcoin has surged.
Last month, PayPal said it would open its network to bitcoin and other cryptocurrencies. Bitcoin has risen by nearly half since PayPal’s move.
“The ultimate endorsement of crypto is whether you can buy your groceries with it and pay taxes with it,” said Russ Mould, investment director at AJ Bell. “That would be the ultimate acceptance.”
Simon Peters, an analyst at multi-asset investment platform eToro, said bitcoin’s value was likely to increase over the rest of the year.
“It has broken through the critical price milestone of $17,000 and looks set to move higher.”
He added: “It is not out of the question for the crypto to hit its all-time high of $20,000 this side of Christmas.”
The last time bitcoin was valued at nearly $20,000 a coin was in December 2017, at the height of the currency’s last bull run.
“Three years on, the crypto industry has consolidated, matured and is seeing real traction with institutional investors. Investors are using bitcoin as an inflationary hedge to combat the prospect of continued government stimulus,” Peters said.
“Will it be a merry Christmas for bitcoin holders? We’ll have to wait and see, but the signs look promising.”
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