2017 will be remembered by some as the year of Bitcoin. A spectacular last 12 months has seen the cryptocurrency increase in value twentyfold. In January, Bitcoin was worth just $1,000. Last week, the price of Bitcoin rose above $20,000. Now worth $300 billion, the Bitcoin market is now double the value of all Goldman Sachs’ shares combined.
One of the key factors behind Bitcoin’s phenomenal rise has been large institutional investors, such as hedge funds and big Wall Street firms joining the Bitcoin party. The options exchange is to begin trading Bitcoin futures contracts on Sunday, while the Chicago Board Options Exchange and Chicago Mercantile Exchange have introduced Bitcoin futures with many banks already able to trade the contracts.
Through futures contracts, banks will be able to bet on the price of Bitcoin and financial speculators will have the chance to make money out of Bitcoin, without actually holding the currency. But on the flip side, it means investors will be able to bet on the value of Bitcoin falling, and this could put negative downward pressure on the price. Bitcoin futures could also expose the financial system to the risks associated with the currency.
Small investors have also been instrumental in driving the Bitcoin boom. The virtual currency has been popular in South Korea and in Japan, where changes in the law have made Bitcoin legal tender and also allowed Bitcoin exchanges to attain regulatory licences. In the US, small investors have used the San Francisco based company Coinbase’s brokerage service to trade Bitcoin.
Although Bitcoin was intended to be used as a form of electronic cash, it has become more popular as a scarce commodity than as a payment method – like a type of digital gold, allowing people to put their wealth into Bitcoin, and beyond the reaches of government and companies.
The rise of Bitcoin has been a perfect example of a perfect storm: a set of diverse factors and conditions all combining to make something possible. But how long will this perfect storm last? Only time will tell.
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