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Bitcoin at $2,000: The Digital Currency’s Heady Ascent Obscures Its Payment Function
May 22, 2017

By John Stewart

Like it or not, Bitcoin has momentum behind it. On Saturday, the digital currency breached the $2,000 level for the first time ever, and by Monday morning it was trading just shy of $2,200, according to CoinDesk, an online service that tracks cryptocurrency.

That represents a quintupling in value since this time last year and follows months in which the currency marched steadily upward, with little of the backsliding that had marked it as a highly volatile investment. But it is as an increasingly valuable investment, rather than as a digital means of exchange, that it seems to be viewed in recent months. “This remains first and foremost an alternative investment story,” George Peabody, a partner at San Francisco-based payments consultancy Glenbrook Partners, tells Digital Transactions News by email.

That’s no surprise, given what for the historically volatile Bitcoin has been a fairly steady and long-term runup. Only a year ago, on May 22, 2016, it traded at $438, according to Blockchain.info, a U.K.-based service that tracks Bitcoin and also offers a popular Bitcoin wallet, and had been stuck in the doldrums of the $300s and $400s for about six months. But a week later, it soared past $500 and hasn’t looked back since. On Jan. 3, it breached the $1,000 level for the first time in over three years, and hit $1,500 only early this month.

What’s driving Bitcoin? It’s a complex of factors, experts say, but a few stand out. China, a major market, continues to exert outsize influence following the devaluation of the yuan. “With concern about the yuan and limited alternatives in China, Bitcoin continues to function as an investment alternative,” says Peabody. Another factor, though hard to quantify, is a general feeling of anxiety worldwide in the wake of cyber attacks and other destabilizing events. “The general global nervousness is making fiat currencies less attractive” by comparison, Peabody notes.

An important factor has to do with the technical underpinnings of Bitcoin itself. Two years ago, as concern grew that the blockchain might be approaching a capacity limit for Bitcoin, the Bitcoin network split over how to increase that capacity. The blockchain is the global distributed ledger system that supports Bitcoin as well as other digital applications. A solution of sorts, called “Segregated Witness,” or SegWit for short, emerged last spring and involved doubling the volume of Bitcoin transactions a Bitcoin block could handle.

“There is a return of some optimism over Bitcoin's scaling issues via SegWit and several other approaches,” Peabody says, in view of “the potential for a technical resolution to Bitcoin's scaling impasse,” which “may improve confidence.”

While places where Bitcoin can be spent remain relatively scarce, consumers seem to be steadily warming to the cryptocurrency. The number of Bitcoin wallets on Blockchain.info’s system has nearly doubled in the past 12 months, to 13.9 million. Transactions, however, aren’t keeping pace. Transactions per wallet per day stand at 0.023, down slightly from 0.025 a year ago.

It appears the real story about Bitcoin will remain its asset value, at least for the foreseeable future. Traditionalists may shake their heads, but the Bitcoin boom is likely to have a self-reinforcing effect as buyers fear missing out. “As with every asset runup, there's the FOMO effect,” notes Peabody.

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