Bitcoin’s gaining validity fuels virtual currency rally

‘FRENZIED BUYING’::US government acceptance is legitimizing the software currency, which has quadrupled in value in the past two months on booming demand in China

Bloomberg

Wed, Nov 20, 2013 - Page 15

Bitcoin’s rally is accelerating as the US Department of Justice’s description of the digital currency as a “legal means of exchange” bolsters the prospect of wider acceptance as an alternative payment system.

Bitcoins, which exist as software and are not regulated by any country or banking authority, surged to a record US$744 on Bitstamp, an active Web-based exchange where they trade for dollars, euros and other currencies, after the remarks at a hearing by the US Senate’s Homeland Security and Governmental Affairs Committee. The gains extended an advance that has seen the price of Bitcoins quadruple in the past two months and climb 45-fold so far this year.

Growing interest from investors in China and a limited supply of Bitcoins have also been fueling the increase in price, while last month’s closing of the Silk Road hidden Web site — where people could obtain drugs, guns and other illicit goods using Bitcoins — was already spurring speculators to bet Bitcoins would gain more mainstream acceptance. Now, government agencies from the US Secret Service to the Financial Crimes Enforcement Network have weighed in to say that the virtual currency that is designed to be difficult to trace has potential benefits, as well as risks.

“These hearings mean Bitcoin is finally coming into its own; it’s a real thing and it’s not going anywhere and these hearings highlight that,” said Jerry Brito, senior research fellow at the Mercatus Center at George Mason University.

Introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoin is being used to pay for everything from Gummi bears to smartphones on the Internet. There are 12 million Bitcoins in circulation, according to Bitcoincharts, a Web site that tracks activity across various exchanges. Bitcoins can potentially reduce banking-transaction fees, making it an attractive tender for those seeking to trade via the Web or in stores.

US Senator Tom Carper, who is chairman of the Senate committee, said that while “knowledge and expectation gaps are wide,” the government should establish rules to ensure legitimate use.

“We all recognize that virtual currencies, in and of themselves, are not illegal,” Mythili Raman, acting assistant attorney general at the Justice Department’s criminal division, said at the hearing. “We are nimble enough and aggressive enough to be able to combat the threat. We are up to the challenge.”

Demand for Bitcoins, which are governed by rules embedded in the software of the virtual currency, is outstripping supply, fueling the price surge. That also makes it difficult for people to use the digital money to buy goods and services, since the value of items priced in Bitcoins is difficult to pin down.

Bitcoin Foundation general counsel Patrick Murck said that there remain “consumer-protection issues” around the use of Bitcoins.

“It’s very much an experimental currency, and should be considered a high-risk environment,” Murck said. “It’s not quite ready for mass consumer adoption today.”

There are about 30 transactions per minute, at an average amount of 16 Bitcoins, Federal Reserve Bank of Chicago senior economist Francois Velde estimated in a report published earlier this month.

“Bitcoin seems to be primarily a speculative investment for now,” Velde said in an interview.

While demand continues to climb, with trading volumes up more than 400-fold in the past 12 months, supply is increasing at a predictable rate, thanks to the way the virtual money is designed. Those seeking to create new Bitcoins must use powerful computers to solve complex software problems embedded in the currency, which exists as software.

Bitcoin also gained further legitimacy and attention when a subsidiary of Baidu Inc (百度), China’s top search engine, started accepting Bitcoins on Oct. 15. Chinese Bitcoin activity has exploded, with the number of yuan-based trades jumping 30-fold in the past two months and making BTC China (比特幣中國) the top online-exchange by volume.

After Baidu’s decision and a documentary on Chinese television on Bitcoins earlier this year, interest in the virtual currency in China took off. BTC China surpassed Mt.Gox and Bitstamp earlier this month as the top market for exchanging Bitcoins with other currencies.

While BTC China’s average daily trading volume was about 1,100 Bitcoins during the month of January, transactions have been at about 90,000 per day so far this month, according to Bitcoincharts.

“I am very, very bullish on the price of Bitcoin,” Bobby Lee (李啟元), BTC China’s chief executive officer, said in an interview. “We’ve become the world’s largest Bitcoin exchange. We have the most liquidity. We’ll bring stability to the market in terms of price eventually. Until then, there’s going to be frenzied buying.”