Demand for Bitcoin Resurgent after Cyprus Crisis

The first days of April have been marked by volatility in the price of online currency the Bitcoin (BTC), which touched a record high of $147 earlier this week.

The virtual currency, which has no bank or government backing, has seen its price accelerate since the
crisis in Cyprus
and increased perceptions of the BTC as a ‘safe haven’, tripling its value in the past month. As recently as last November, BTCs were changing hands at little more than $10.

The maximum possible number of BTCs that can exist is 21 million, meaning that at present prices the currency is estimated as worth anywhere between US$1.4bn to US$3bn. Trades can be made with fractions of BTCs, providing flexibility that enables transactions.

BTC was established in 2009 by an anonymous developer. The concept was that users could employ it as a means of payment that bypassed the banks through a “purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution”. Its popularity increased rapidly in the first half of 2011, but crashed in June that year when a cyber-attack resulted in US$500,000 of the currency being stolen.

Last month’s near-meltdown of the banking system in Cyprus has seen a renewed surge in the volumes being traded and the price being paid for BTCs. Its popularity is based partly on the lack of any need for a central bank. The peer-to-peer network backing the currency enables transactions to continue as long as there are people willing to exchange the coins for something of value, or to donate them.

For Europeans worried about the possibility that their banks might shut, trapping their savings inside and not open until they have been forced to accept a ‘haircut’ – as has happened to those with substantial deposits in Cypriot banks – the alternative of the BTC is increasingly attractive.

A growing number of sites online accept BTCs as payments for items, including some electronics sites and other, less legal, sites. The new currency has developed from being an internet curiosity and is attracting the attention of market watchers, who say that the threat of a bubble developing could be followed by long-term stability.

“As with all bubbles there is a good story behind it; the trick would be to measure both the supply side and more importantly demand side value of BTCs,” said Sebastien Galy, a currency strategist at Société Générale (SG).

“With confidence in the BTC potentially increasing, the market actually starts building up its intrinsic value as a means of exchange, which might eventually make it potentially more stable in the long-term. Some professional investors believe the BTC thing is going to rise, although through a very bumpy road in the next few months.”

Others believe that the rapid rise in BTCs’ value may mean that it will become less useful as a currency, as it becomes more attractive to hoard it than to spend it – because exchanging it for any other item or service risks losing out on the rising value.

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