Forget the Dow’s big rally or booming tech stocks, there’s a much wilder investment story happening.
Bitcoin started the year worth less than $1,000. It’s now stormed past $10,000 — a staggering 950% jump.
So how does the virtual digital currency work — and what’s behind its meteoric rise?
What is bitcoin?
Bitcoin was created in 2009 by an unknown person using the pseudonym Satoshi Nakamoto. Many of its backers saw it as a simple global payment system for anyone to use.
Unlike the U.S. dollar or Japanese yen, digital currencies such as bitcoin aren’t issued by central banks like the Federal Reserve. Instead, they are “mined” by computers using complex algorithms.
Payments in bitcoin can be made without traditional middlemen such as banks and without the need to give your name.
That made bitcoin popular with criminals and others who wanted to move money anonymously. But its price has taken off this year as mainstream investors have become interested.
Why have prices gone crazy?
Some experts say the biggest force pushing bitcoin prices higher this year has been … higher prices.
Investors have been buying as they fear “they’re missing the party” or “losing out on a quick profit,” said Stephen Innes, head of Asia trading at online broker Oanda. “Intense media coverage” in recent months has also convinced more investors to pile in, he added.
Arthur Hayes, CEO of Hong Kong’s Bitmex, an exchange for trading financial instruments based on bitcoin, said the digital currency is in a “positive feedback loop.”
In other words, investors see the price is increasing and want a piece of the action, moving prices higher still.
The sentiment has been backed up by indications that bitcoin is getting greater mainstream acceptance. Next month, investors should be able to start trading bitcoin futures via the Chicago Mercantile Exchange.
That would give the virtual currency more legitimacy among professional investors.
But some finance industry veterans are wary.
Oanda’s Innes, who has worked in currency trading for decades, referenced a famous piece of investment advice from Buffett: “Be fearful when others are greedy.”
“Following the herd rarely produces large-scale gains,” Innes said.