The price of bitcoin has surged above $11,000 (£8,600), its highest level in 15 months, amid renewed hype over cryptocurrencies after Facebook said it was planning to launch a digital currency next year.
Bitcoin has risen in value by almost $2,000 in the week since the US technology firm revealed plans to create a cryptocurrency called Libra, in a move that could radically reshape the financial landscape with far-reaching implications for governments and central banks around the world.
The original cryptocurrency had languished below $6,000 for much of this year and was falling out of the headlines as investors around the world gradually lost interest in the fad for digital assets.
Some investors had been severely burned by bitcoin when its meteoric rise to almost $20,000 in late 2017 – which drew comparisons to the tulip mania of the 17th century – was followed by a spectacular collapse last year.
Stoking fresh fears of the reinflation of the bubble, bitcoin hit $11,116.65 over the weekend, up from $8,539.81 at the start of June, before dropping back slightly to trade at about $10,800 on Monday afternoon.
Analysts said the news of Facebook’s work on Libra was the prime driver behind the surge, as traders bet the adoption of cryptocurrency technology by a major global corporation would help legitimise the industry.
Craig Erlam, a senior market analyst at the financial trading firm Oanda, said: “Bitcoin has slowly – by its own standards – been rising in recent months but the launch of Facebook’s Libra has clearly been a catalyst for the recent surge.
What is Libra?
Facebook says Libra is a 'global currency and financial infrastructure' - a digital asset built by Facebook and powered by a new Facebook-created version of blockchain, the encrypted technology used by bitcoin and other cryptocurrencies. The name Libra comes from the basic Roman measurement of weight. The abbreviation lb for pound is derived from Libra, and the £ symbol originally comes from an ornate L in Libra.
Why is Facebook launching a cryptocurrency?
Facebook claims it wants to reach the 1.7 billion people around the world who do not have access to a bank account.
Who is in charge of Libra?
Facebook is likely to run into regulatory hurdles and antitrust concerns. The currency will be serviced by a collective of companies called the 'Libra Association'. It functions as what is known as a 'stablecoin', pegged to existing assets like the dollar or euro, in the aim of making it less subject to the volatility that many cryptocurrencies experience.
The Libra Association is described by Facebook as an independent, not-for-profit organisation based in Switzerland. Within the Libra Association will be a governing body called the Libra Association Council, comprised of a representative of each member of the association, which will vote on policy and operating decisions.
Facebook claims that although it created the Libra Association and the Libra Blockchain, once the currency is launched in 2020 the company will withdraw from a leadership role and all members of the association will have equal votes in governance of Libra. The companies who contributed a minimum of $10m(£8m) to be listed as founding members of the Libra Association include tech companies such as PayPal, Ebay, Spotify, Uber and Lyft, as well as financial and venture capital firms such as Andreessen Horowitz, Thrive Capital, Visa and Mastercard.
However in October 2019 several of the companies that had been backing the initiative announced that they were pulling out, including Visa, Mastercard, PayPal and Stripe.
How and when can I use it?
With regulators asking questions and backing companies dropping out, it is unclear now if Libra is still viable. Facebook's original plans were that users could download Calibra, a digital wallet, that would allow them to send the currency to anyone with a smartphone. It is no longer clear which countries the coin will launch in first, if at all, though Facebook had said 'almost anybody' in the world with a smartphone would be able to download the app.
Kari Paul in San Francisco
“The publicity that the launch has once again brought to the space, combined with the legitimacy it offers, has understandably excited the community.”
Rising tensions in the Middle East and mounting fears about the world economy have also stoked renewed interest among investors in bitcoin, which is sometimes viewed as a safe-haven asset similar to gold. The digital currency does not typically mirror the movements in wider financial markets during periods of turmoil.
Gold prices have risen in recent weeks to the highest levels since 2013, as the US Federal Reserve could be forced into interest rate cuts to stave off a slowdown in the US economy. The European Central Bank has also said it could cut interest rates as growth falters in the eurozone.
Unlike its run in 2017, which came largely from media hype stoking retail investors’ interest in cryptocurrencies, bitcoin’s tripling in value this year could have been the result of increased demand from professional investors such as fund managers and hedge funds.
The Chicago Mercantile Exchange last week recorded an all-time high volume of trading in bitcoin derivatives contracts – sophisticated investments tracking the price of the digital currency only available to City banks and fund managers – with more than 5,000 contracts worth $250m.
However regulators around the world have warned that Facebook’s entry into the world of cryptocurrencies could lead to greater controls and tougher regulations to protect consumers.
Mark Carney, the governor of the Bank of England, gave a cautious welcome to Libra last week. He said the central bank would support new entrants into the UK financial system, but warned that Facebook would need to meet the highest regulatory standards.
“The Bank of England approaches Libra with an open mind but not an open door,” he said.
At the weekend the Bank for International Settlements warned that big tech firms using digital currencies could undermine the stability of a banking system that had only just recovered from the crash of 2008.
Analysts at the Swiss bank UBS said: “We continue to view speculation in specific cryptocurrencies as a gamble and not an investment. Investors interested in next-generation payment systems should consider [other] emerging opportunities.”
