Bitcoin neared its all-time high on Thursday, with the surging digital currency tipped to become a new safe haven asset as the world grapples with growing economic uncertainty.
The unit broke the USD 1,100 barrier on the Bitcoin Price Index, an average of major exchanges, to continue a dizzying rise that made it the best performing currency of 2016.
It has fluctuated wildly since it was created in 2009 and lost three quarters of its value when it plummeted from its previous BPI high of USD 1,165.89 in 2013.
And news of a major bitcoin theft by hackers in August sent its price plunging by more than 20 percent.
But analysts say its volatility will ease as volumes grow and point to a strengthening US dollar and tightening currency and capital controls, as well as the rise of the digital economy, as major factors behind its appreciation.
In particular, the chaotic withdrawal of high value bills in India and restrictions on buying foreign currency in China as the yuan slides against the dollar have stoked demand, analysts say.
Exacerbating the rocketing demand is a tightening supply of fresh bitcoins.The currency was always meant to be finite, and more than three quarters of the planned 21 million bitcoins have already been ‘mined’.
Encrypted digital coins are created by supercomputers and then traded online or exchanged for goods and services.
Vinny Lingham, a bitcoin expert and CEO of US digital identity protection startup Civic, told AFP the dwindling supply of new bitcoins, and regular currencies sliding against the US dollar as the Federal Reserve ratchets up interest rates, were pushing up the unit’s value.
“There are fewer bitcoins coming out and people are seeing bitcoin as a good hedge against currency devaluation in their countries, and instead of buying the US dollar, people are buying bitcoins,” he said.
Lingham highlighted the impact of wider geopolitical uncertainty, such as US President-elect Donald Trump’s potential threat to emerging markets. He has predicted bitcoin will be worth about USD 3,000 by the end of 2017.
“Bitcoin is reacting as a safe haven,” he said. “Millennials do not believe in gold as their parents did.
Bitcoin is becoming the go-to asset if you live in a foreign market and are concerned about your government.”
The price of bitcoins in many emerging market currencies has risen even more steeply than in dollars, Lingham said.
In China, the yuan is at its lowest level in eight years against the dollar and Beijing’s tightening controls on individuals’ foreign currency purchases to curb massive capital flight is cited as driving bitcoin demand.
Indian Prime Minister Narendra Modi’s shock decision to withdraw high-denomination 500 (USD 7.50) and 1,000 rupee notes from circulation is also thought to have boosted the currency.
“It’s not only China, it’s a global phenomenon,” Bobby Lee, founder and CEO of Chinese bitcoin exchange BTC China, told AFP.
“There are a lot of demonetising examples. In India they (are) cancelling some rupee notes, in Argentina they cancelled some notes as well ... it makes bitcoin more attractive, it is a real new asset class”.”
Lee said there would be more regulation of digital assets worldwide in future.