Bitcoin has bounced back above $10,000 (£7,731), fuelled by investors seeking a safe haven amid fears over the economic impact of the coronavirus.
On Sunday, bitcoin rose above $10,000 for the first time since September and by Wednesday was trading at $10,335 on the Luxembourg-based bitcoin and cryptocurrency exchange Bitstamp. It marks a significant shift in fortunes for the 10-year-old cryptocurrency, which hit a low of $3,196 in December 2018.
Bitcoin and other cryptocurrencies have joined gold as a safe-haven asset at times of economic or political uncertainty.
Bitcoin is a 'cryptocurrency' – a decentralised tradeable digital asset. Invented in 2008, you store your bitcoins in a digital wallet, and transactions are stored in a public ledger known as the bitcoin blockchain, which prevents the digital currency being double-spent.
Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. The lack of any central authority oversight is one of the attractions.
This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person.
The exchange rate has been volatile, with some deeming it a risky investment. In January 2021 the UK's Financial Conduct Authority warned consumers they should be prepared to lose all their money if they invest in schemes promising high returns from digital currencies such as bitcoin.
In practice it has been far more important for the dark economy than it has for most legitimate uses. In November 2021 it hit a record high of more than $68,000, as a growing number of investors backed it as an alternative to other assets during the Covid crisis.
Bitcoin has been criticised for the vast energy reserves and associated carbon footprint of the system. New bitcoins are created by “mining” coins, which is done by using computers to carry out complex calculations. The more bitcoins that have been "mined", the longer it takes to mine new coin, and the more electricity is used in the process.
Trading in the cryptocurrency has been highly volatile and even after its latest bull run it remains well below its all-time high in late 2017, which was just short of $20,000.
While the coronavirus, which has been officially named Covid-19, is considered a factor in its latest surge, the main driver in the short-term is mostly attributed to the upcoming bitcoin “halving event” in May. This will result in the number of bitcoins available to so-called “miners” being cut by half. The last time the supply was cut in 2016, bitcoin prices doubled and then surged to a record high the following year.
“If bitcoin keeps going, this could well rekindle the debates as to whether bitcoin is money,” said Russ Mould, the investment director at AJ Bell. “That in turn fuels discussion over whether it is worthy of consideration as investment as part of a balanced portfolio.”
The potential for cryptocurrencies to enter the mainstream as a widely accepted alternative to traditional payment methods, such as credit cards, has been hindered by its use for criminal purposes.
There is also a lack of official regulation and last year the Financial Conduct Authority proposed a ban on financial instruments linked to cryptocurrencies such as bitcoin, warning there could be huge losses for consumers unlikely to understand their risks or value.
“The case for considering bitcoin to be money is that cryptocurrencies are money as they facilitate transactions over time and distance and represent a trusted medium (at least by some), just as cowrie shells, cows, metal, slips of paper and plastic cards have since time immemorial,” Mould said. “[But] unless bitcoin can be used to buy groceries or pay taxes, they have limited use and thus value, no matter how many you have, goes the argument.”
