• Bitcoin hits $2,700, a 500 fold increase in five years and doubling in price since May 1st.
  • Previous surges in 2011 and 2013 have been followed by dramatic crashes
  • Significant premiums seen in Asia, over USD price
  • Total cryptocurrency market cap reached over $90bn, last week
  • Market remains small and volatile
  • Comparisons between bitcoin and gold are old, invalid and misleading
  • Both bitcoin and gold offer opportunities to diversify away from corrupt financial system

What’s going on with bitcoin?

Introduction

Last week the bitcoin price hit $2,700. A 500-fold increase in five years and a doubling in price since the start of the month.

Most people are aware of bitcoin tangentially, few are really conscious of it day-to-day and even fewer people are actually in bitcoin. Other significant cryptocurrencies, such as Ether and Ripple have also been going great guns and these are even less prominent in the public domain.

If something such as bitcoin with such a small market cap and very little public awareness is doubling in price in less than a month, what does it mean? Why is it behaving like this? Is it in a bubble? Is it a scam? Does it means that you should be getting in on the act? And what does it mean for its contemporaries, such as gold?

We take a brief look at why the price has been climbing, what this means for the future of cryptocurrencies and, most importantly, what this says about gold.

Why the spike in the bitcoin price?

I was asked this question recently on question-and-answer site Quora. I include the answer below, with some edits and further information. It does not focus on specific events but instead on both the short and long-term drivers of the bitcoin price. It should be noted that whilst the price of bitcoin has fallen back from it’s highs of last week, it has not taken the same tumble it has done previously following price-spikes.

  1. FOMO (aka Fear of Missing Out) and hype there are some who are worried that they missed getting in on bitcoin every time it has climbed like this and they want in, in order to profit from what could be a bubble or to profit from further climbs. Like most investment opportunities or just trends elsewhere, people are always searching for the next big thing. Inevitably this leads to speculation and a feedback loop
  2. This leads to the increased number of trades, which economics tells us will drive up the price. In early 2013 the number of bitcoin trades was around 40k, today it is closer to 330k. According to the Cambridge Center for Alternative Finance, speculation is the biggest driver for the recent price climb.
  3. Acceptance as the currency is accepted in more places, this is further sign of validation. This is not good for the price just because there will be more transactions, but it is good for the price as it means more key stakeholders in the financial, banking, legal and regulatory industries will be paying attention.
  4. Policy changes with each policy change that is in favour of bitcoin this brings validation to the currency and the overall blockchain network. One of the biggest examples of policy change recently has been in Japan, where the government formally recognised the currency.
  5. Following on from above, future expectations: The more the currency is accepted, the harder it is to control and for governments to ignore. This gives more faith in the future of the currency, which drives demand based on future expectations not just the current environment.
  6. Economies of scale as we see more policy changes, more payment processors accepting bitcoin, more news stories etc covering the rising price then the overall market for bitcoin becomes more stable. Each time we have a price climb like this (I can think of two earlier ones) the marketplace is increasingly stable (n.b. I say marketplace and not price) this gives consumers more confidence that bitcoin isn’t going to just disappear
  7. First mover advantage this isn’t news, in the same way 21 million bitcoins isn’t news, but the fact that bitcoin was the first currency does give it an increasing advantage as early adopters have sought to ensure and protect the strong community, ecosystem and industry that supports bitcoin activity. Again, this is gives new adopters confidence.
  8. Hackers We’re all aware now of the horrendous attacks that have happened around the world. The most recent of which demanded payment in bitcoins. Many may see this as bad press for the cryptocurrency but in response to this (there are rumours that) large organisations are buying up bitcoin in preparation for future attacks.
  9. Obstacles for arbitrage usually when there is a big spread between currency markets traders capitalise on the arbitrage opportunity. In bitcoin where there are major premiums on the bitcoin price i