There are few places in the world where you can buy things with digital currencies like bitcoin. But why would you want to?
Since the first of the year, bitcoin and other so-called cryptocurrencies have exploded in value, making them one of the hottest investments on the planet, and far too valuable to spend.
While the Standard & Poors index of 500 stocks has risen by about 7 percent since January, a unit of bitcoin has gained 130 percent, climbing from $961 to Friday’s price of about $2,225. The second-most-popular cryptocurrency, Ether, did even better, soaring nearly 1,900 percent in the same period, from about $8 to about $164. Other digital money types, with names like Ripple and Litecoin, are also on the rise.
Cryptocurrencies are a form of money created by computer networks instead of by government-sponsored banks. They enable people to make fast, anonymous transactions at virtually no cost, while using digital encryption to create an indelible record of every transaction. Cryptocurrencies eliminate the need for banks to act as middlemen, making transactions almost as fast and cheap as sending an e-mail.
Cryptocurrences have been around for several years. Bitcoin, the first and most famous, was launched in 2009. And this isn’t the first digital money boom. Bitcoin rose to about $1,000 in late 2013, only to collapse in value amid a massive theft of bitcoin from a major financial exchange called Mt. Gox.
Now bitcoin is back, and it’s brought its younger digital brethren along for the ride.
“The very fast runup in the past several weeks has been fueled by speculation,” said Jeremy Allaire, chief executive of the Boston cryptocurrency startup Circle Internet Financial Ltd., “but the underlying drivers I think are very real.”
What’s going on? For one answer, look to Asia.
“We’ve seen a lot of buying demand coming out of Japan and Korea, in particular,” said Spencer Bogart, managing director of Blockchain Capital LLC , a San Francisco firm that invests in cryptocurrency ventures.
Last month, Japan’s government made bitcoin a legal currency in that country. The move spawned a surge of cryptocurrency buying there and in South Korea, where a recent report from the country’s central bank suggests that digital currencies might make sense there, as well.
A Japanese creditor must accept bitcoin in payment of any debt. No cryptocurrency is regarded as legal tender in the United States, however.
Allaire also credits November’s presidential election. “There has been a major increase in uncertainly in the global political and economic environment since the inauguration of Donald Trump,” he said. “That leads to people wanting to invest in assets thought of as safe.”
Cryptocurrencies are viewed as secure havens in uncertain times, much as gold is. That’s because digital money can’t be directly devalued or easily confiscated by governments. Also, bitcoins or Ether can be shunted to another country easily and almost instantly. “Getting physical gold and moving that out of the country is very hard,” Allaire said.
Meanwhile, Ether’s growth is being driven in large part because of its underlying technology, called Ethereum. Like bitcoin, Ethereum uses software that generates a “blockchain,” a permanent and unalterable record of all transactions.
But Ethereum’s blockchain has been designed to do far more than generate a new kind of currency. It’s designed to run a variety of distributed applications, or “dapps,” which can handle all manner of highly secure transactions.
For instance, a startup called VirtuePoker is designing an Ethereum-based system to let people anywhere in the world play poker against each other, without risk of cheating. All bets and even the state of the cards will be encoded in a blockchain to guarantee all games are honest.
Ethereum dapps are also being developed for managing securities transactions, international trade, and real estate deals. In February, dozens of giant companies, including Microsoft, Intel, and JP Morgan, formed a consortium to develop Ethereum applications for big business. This corporate embrace of a once-obscure technology is yet another reason why investors are snapping up cryptocurrencies. “That, I think, is giving people confidence,” Allaire said.
Last Tuesday, Abigail Johnson, chief executive of Boston-based Fidelity Investments, said the giant investment company will soon let customers track their cryptocurrency investments on the Fidelity website. “I love this stuff,” Johnson said at a digital currency conference in New York.
But despite these reasons to buy, many investors are warning that the current surge can’t continue.
“Definitely what we’ve seen is completely unsustainable,” Bogart said. “You have people coming out of the woodwork asking me if they should buy. Really, you wanted to be here five or six months ago.” He expects to see a correction in the near future.