What’s Behind Bitcoin’s All Time High?

Money doesn’t grow on trees, but it does however grow in the virtual world of the bitcoin. The mysterious decentralized currency that the majority of consumers are still trying to understand recently spiked at a value of $105 US dollars. The bitcoin is the rebel currency, with no central bank, organization or government affiliation. In the beginning years, a small community that traded currency on forums commissioned the price of bitcoin. Today, as demand grows, the value of the bitcoin is influenced by what consumers are willing to pay.

Users can acquire bitcoins with real-world currencies on real-time exchanges in two ways: To buy them online or mine for them. Mining for bitcoin is a complicated process (see a more detailed explanation of the mining proess here), but on a basic level can actually be compared to the physical process of mining where bitcoins, like gold, are meant to be deflationary as it is supplied slowly. The concept seems logical, but let’s not forget that the bitcoin has no physical manifestation. With nothing in our palms to grasp and trade, how has this virtual currency become so valuable in such short time?

There have been speculated confluences of factors that may be in direct correlation of the rise in value, three to be specific, as highlighted by The Verge and several other news sources. The first factor is the crisis of the Cyprus banking system and subsequent bailout. The failure to stabilize the euro and loss of trust in banking systems may have led Europeans to panic. It is possible they may be turning to the bitcoin for an alternative banking system, though there is not specific evidence the two events are linked at this time, The Verge reported.

Second possible factor for increasing value are the recent acceptance of high-profile businesses accepting bitcoin for payment services. These companies include WordPress, Reddit, Namecheap and Mega. These businesses joining the bitcoin bandwagon can only lead to positive improvements in infrastructure and network. In addition, there are bitcoin-only casinos and a bitcoin-based prediction market called Bets of Bitcoin. Even the market for storage and exchange of bitcoins is growing, The New Yorker pointed out:

“The infrastructure for implementing the storage and exchange of bitcoins, too, is exploding: vendors, exchanges, facilitators of in-hand trades, dealers in bitcoin debit cards. There are systems for producing ‘paper wallets’ that you can print out for the safe storage of bitcoins, and secure e-wallets for those with a tendency to misplace papers.”

And lastly, a third factor that occurred recently was the US Treasury’s Financial Crimes Enforcement Network enforcing the bitcoin-supporting businesses to register with the government to ensure security and ethical. While this enraged some (including the bitcoin Foundation that serves as the closest thing to a trade association), if we start to see more bitcoin (or virtual currency in general) regulation, this will definitely help legitimize it in the eyes of consumers.

So while bitcoin remains a decentralized currency, trading facilities still need a trustworthy middleman to help operations running productively, or in this case perhaps give human element. Mt. Gox, a Tokyo-based trading site, is the leading middleman for bitcoin, handling 76 percent of global bitcoin trading, according to The Verge.

Mark Karpeles, CEO at Mt. Gox, told The Verge, “Bitcoin is a large economy, and even though people want to buy foreign exchange, it’s hard to directly find someone who has got whatever you want. If you want to buy bitcoins, you need to find someone you can trust.”

Karpeles, an ambitious Frenchman who moved to Japan in 2009, bought Mt. Gox from founder Jed McCaleb in 2011. Under Karpeles reign, Mt. Gox did hit a few bumps in the road, as many businesses experience in infancy years. The victim of high profile heists, Mt. Gox lost bitcoins worth millions. Despite the debacle, Mt. Gox rebounded and the bitcoin has quickly become one of the most coveted investments.

Before we all decide to invest in our share of bitcoins, keep in mind that bitcoin is still a reasonably new business, and until it becomes more stable it is likely it will run into its share of company hiccups and losses. No matter the future, bitcoin and Mt. Gox are certainly interesting phenomenon to watch grow.

As Gavin Andresen, Principal of the Bitcoin Virtual Currency Project, said to The New Yorker, “I still tell people that bitcoin is an experiment: only invest time or money you can afford to lose, because bitcoin is still an experiment. The longer it keeps going in the face of volatility and technical glitches happening, the more we’ll know.”

Check out The Verge’s full story here, and the full New Yorker piece here.