Bitcoin prices jumped on Tuesday, advancing strongly for the second successive day and reaching their highest levels against the dollar since November last year.
By late morning in London, the bitcoin was quoted at $375.22, up 3.7% from Monday although still far below the $1,100 quoted two years ago; a period that is now widely regarded as a time when bitcoin prices were in bubble territory. The bubble burst, analysts say, when the Mt. Gox exchange collapsed.
One theory behind the current demand for bitcoins is that affluent Chinese may be moving more of their wealth into cryptocurrencies as their government tightens capital controls. This contrasts with the latest investment by the US financial services industry, which has been largely in the blockchain technology that powers bitcoin rather than the currency itself.
Nonetheless, investment in bitcoin-related tech startups – estimated at $1 billion so far this year – seems to have made putting money into bitcoin firms respectable. The involvement of major US banks has also made clear that they see blockchain technology as an important future component of the delivery of financial services.
This, in turn, has led to suggestions that the bitcoin is now a more stable currency that is presently both respectable and undervalued.
Currency not commodity
Bitcoin prices may have been helped too by a ruling last month in the EU’s top court that for tax purposes the bitcoin should be considered as a currency not a commodity.
However, the bitcoin path remains bumpy. Australia-based startup Bitcoin Group has had to delay its listing on the Australian Securities Exchange and the bitcoin has been declared illegal in Taiwan.
Still, the bitcoin price is on course for posting its eighth consecutive weekly gain, its longest series of advances since late 2013, and is up 113% from its January lows, notes analyst Ashraf Laidi on his website. “The recent break out in momentum emerged from last week’s decision from the European Court of Justice to classify bitcoin as a currency rather than a commodity, which means it will be exempt from VAT, thereby improving its chances of being traded in an exchange,” he writes.
The ruling boosts bitcoin’s credibility as an alternative asset/investment at a time of central bank currency devaluations (direct and indirect) as well as gold’s directionless behaviour over the last two years despite falling inflation. “Similarly, we could see banks and brokerages continue investing in cryptocurrencies as they market them as investable vehicles,” Laidi adds.
He reckons that there have been periods when the bitcoin has replaced gold as a haven asset for the markets and believes last week’s court ruling “should push exchanges, brokerages and banks to launch bitcoin-related instruments such as ETFS [exchange-traded funds], aimed at trading, hedging and speculation”.
