Bitcoin neared its all-time high yesterday, 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 US$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 last year.
Analysts said bitcoin’s 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 US dollar have stoked demand, analysts said. Exacerbating the rocketing demand is a tightening supply of fresh bitcoins.
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, said 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 US$3,000 by the end of this year.
“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 US dollar and Beijing’s tightening controls on individuals’ foreign currency purchases to curb massive capital flight is cited as driving bitcoin demand.
“It’s not only China, it’s a global phenomenon,” said Bobby Lee (李啟元), founder and CEO of Chinese bitcoin exchange BTC China (比特幣中國). “There are a lot of demonetizing examples. In India they [are] canceling some rupee notes, in Argentina they canceled 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.
“There is already a limit on foreign exchange conversion... but so far, capital outflows restrictions don’t hit the bitcoin,” he said
Dickie Wong (黃德几), Hong Kong-based research director for Kingston Securities Ltd (金利豐證券), said it was likely Chinese investors were moving money into bitcoin as the yuan sinks to circumvent the US$50,000 annual limit on foreign currency purchases.
Bitcoin now has a total market capitalization of more than US$18 billion — far more than rival so-called “crypto-currencies,” although a fraction of the value of other globally traded currencies.
Ajay Sunder, vice president of digital transformation for Asia-Pacific at consultants Frost & Sullivan in Singapore, said wider trends such as the rise in digital payments would strengthen the currency.
“Generally people are much more comfortable now using digital payment, digital transactions,” he said. “But bitcoins are still very marginal. It’s still to be seen if it will go mainstream.”
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