Bitcoin analysts and brokers say capital flight out of China and increased consumer confidence are responsible for the crypto currency’s sudden spectacular price increase, but some enthusiasts worry the rally is for the wrong reasons — Ponzi schemes, IBTimes reports.
Over the last month, the digital currency’s price against the dollar almost doubled. On Wednesday, bitcoin climbed above $500 before settling back to $456 — a 14 percent increase in a day.
By this morning, it was back below $400, Fortune reported.
The bitcoin volatility could mean quick profits, just as a sudden economic drop (like the one in early 2014) could spell big losses. However, institutional interest in the digital currency is unlikely to change, IBTimes reports.
Fortune credits Chinese demand for a Russian pyramid scheme as part of the reason for bitcoin’s sudden upward surge. The Chinese have been posting testimonials about a “social financial network” called MMM, according to the Financial Times, Fortune reports. Participants are promised a 30 percent return for buying bitcoins plus more money for referrals.
The program was devised by Sergey Mavrodi, a former Russian member of parliament charged with fraud in Russia for allegedly running a pyramid scheme, Fortune reports.
Bitcoin reached an all-time high above $1,100 in November 2013 before the price collapsed in February 2014. The currency has yet to regain the heights reached in that period.
The price has swung violently over the past few years with little rhyme or reason, CNNMoney reports. “The surge in Bitcoin prices back then was a classic speculative mania, just like Internet stocks in the late 1990s and houses in the mid-2000s.”
Venture capitalist Marc Andreessen has invested in Bitcoin wallet startup Coinbase. Here are some of Andreessen’s arguments in defense of bitcoin.
“Attacking Bitcoin for having speculative levels of volatility is missing the point of how the system was designed for this point in time,” he wrote in a tweet.
“In the short run, Bitcoin is still highly useful as a transaction and trust network in many uses cases even with high volatility,” he said.
There is a reason why several big companies such as Microsoft, Dell and online retailer Overstock accept Bitcoins as payment, says CNNMoney.
You can also use Bitcoins to purchase gift cards from retailers such as Target and Amazon. And a growing number of local small businesses accept Bitcoin.
Here are some viewer comments about bitcoin from CNNMoney:
“You mistakenly are looking at bitcoin as a currency. It is not. It is a commodity that revolutionizes electronic financial transactions. Big difference.”
“You can’t eat it. You can’t drink it. You can’t derive energy from it. You can’t build anything with it. A computer says you have it, and if people believe it has value, it has value. Bitcoin is backed by faith.”
“This concept will be the future in the movement of asset values anywhere in the world fast and free. The main question is whether it will be called ‘bitcoin’ or something else.”
“It is pure hyper fantasy … an ingenious scam.”
“…the whole point of currency is to be a stable store of value, so yes, extreme volatility in the price is not only fair, it is one of the most sensible ways to measure its failure or success. ”
“What is so amazing regarding bitcoin (is) that it has been widely accepted and its transactions and infrastructure investment continues to grow significantly.
“I have Bitcoins for sale.”
“I’ll give you $100 for each and every one of them.”
Here are five contributing factors to bitcoin’s recent surge, according to IBTimes.
Ponzi Schemes
Even as bitcoin’s star has risen on Wall Street, some old bugaboos still haunt the currency. After the first bitcoin bubble of late 2013 burst, a slew of Ponzi schemers and scam artists came to light. Some were convicted. Others escaped charges.
Now, bitcoin exchanges are sounding the alarm about an apparent global pyramid scheme masterminded by Sergei Mavrodi, a former Russian politician who was convicted in 2007 for defrauding investors out of $4.3 million.
MMM Global asks people in emerging economies like South Africa and Indonesia to “donate” money to others in the form of bitcoins. These payments are converted to a proprietary currency known as ‘mavros’, named for founder Mavrodi, which accumulate interest at extremely high monthly rates, sometimes up to 100 percent. Members are incentivized to recruit others and share profits.
MMM casts the entire operation as a “community of people providing each other financial help” through direct transactions. Members who post video testimonials attesting that “MMM pays” get higher payouts — a Youtube search yields more than 15,000 of these videos.
Though it’s impossible to tell to what extent the rapidly expanding network has contributed to global demand, increasing bitcoin trading volumes in countries like South Africa align closely with local Google searches for “MMM”.
Two of China’s major bitcoin exchanges have issued warnings over MMM.
Speculation
As is always the case with bitcoin — and any other tradable asset — rallies invite new investors eager to get a piece of the action. Rallies can sustain themselves on optimism that turns into a feeding frenzy.
For traders, the ease of buying and selling bitcoin puts it in league beyond assets like stocks, which must be traded in legal, regulated exchanges. That allows for more extreme movements than one might see in other assets.
China Unleashed
The price of bitcoin has soared since the Monday announcement that BTCC, a major bitcoin exchange in China, will be accepting direct deposits from banks. BTCC plans to halt deposits via agents on Nov. 15, profoundly simplifying the bitcoin exchange process.
“Recent bitcoin price increases have reignited enthusiasm in buying bitcoin. BTCC is confident this trend will continue. As such, we are pleased to announce that we now accept direct deposits,” the BTCC announced Monday.
In the days leading up to the announcement, bitcoin’s price was making small, single-digit increases on the CoinDesk Bitcoin Price Index (BPI). Following the announcement, bitcoin soared, increasing 10.54 percent at Monday’s close, then increasing a further 11.51 percent the following day.
Bitcoin is a useful way for consumers and small businesses to sidestep the country’s capital controls, which stop individuals from moving more than $50,000 out of the country in a single year. Gil Luria, a leading digital currencies analyst at Wedbush Securities, said that this could be a factor in the rising price.
“Part of it is Chinese citizens that have capital they want to get out of the country are using bitcoin,” said Luria. BTCC’s announcement makes it easier than ever to do so. “Those types of changes do seem to have an impact on the price of bitcoin,” he said.
China is no stranger to virtual currencies. Tencent’s Q-Coin, which was used to buy virtual items for avatars on the instant messaging service, developed into something of a precursor to bitcoin as users began trading coins between themselves. The party didn’t last long. In 2007, the Chinese central bank announced a crackdown on virtual currencies like Q-Coin. It remains to be seen what restrictions, if any, the Chinese Communist Party imposes on bitcoin trading. For now, however, BTCC is open about its activities.
Investor Confidence On The Rise
The blockchain, which governs the way bitcoin is exchanged, is developing a reputation as a secure method of managing transactions through a decentralized network. It works as a “distributed ledger” to track transactions in the network.
There is a new confidence in the power of the blockchain, highlighted by a frontpage story in the Economist last week, as organizations seek to use the distributed ledger technology in a variety of ways. NASDAQ has plans to record trades with a similar system, while Barclays has signed contracts with two blockchain startups called Chainalysis and Wave. Honduras is even looking at using distributed ledgers for its land registry.
Luria said that an interest in bitcoin has been sparked by these companies exploring blockchain potential. “The coverage (of bitcoin) has become a lot more favorable,” he said.
The End Of Silk Road
Recent trading volume may also have to do with the impending sale of 44,341 bitcoins seized in 2013 as part of the U.S. government’s investigation into bitcoin-based black market Silk Road.
The auction, which at current prices would bring in $21 million, marks the end of the U.S. Marshals’ bitcoin hoard, which once totaled more than 144,000 BTC. Much of that bounty came from the stash of Ross Ulbricht, aka Dread Pirate Roberts, who was convicted in February of money laundering and other serious charges in connection with his involvement in Silk Road.
Apart from heralding the end of Silk Road’s riches, the big sale means a bump in activity for bitcoin exchanges. “Anytime in the past where one of the auctions is coming up, you see increased trading activity, both positive and negative,” said O’Connor.
