Bitcoin has risen tenfold in value so far this year, the largest gain of all asset classes, prompting sceptics to declare it a classic speculative bubble. The digital currency topped $10,800 (£8,060) on Wednesday morning.
The rapid growth in the value and popularity of the virtual currency, which emerged in the aftermath of the financial crisis and allows people to bypass banks and traditional payment methods to pay for goods and services, has forced central banks, financial regulators and institutions to consider how to respond.
What is bitcoin and is it a bad investment?
Bitcoin is the first, and the biggest, "cryptocurrency" – a decentralised tradable digital asset. Whether it's a bad investment is the $97bn question (literally, since that's the current value of all bitcoins in existence). Bitcoin can only be used as a medium of exchange and in practice has been far more important for the dark economy than it has for most legitimate uses. The lack of any central authority makes bitcoin remarkably resilient to censorship, corruption – or regulation. That means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it's hard (but not impossible) to trace a bitcoin transaction back to a physical person.
SirJon Cunliffe, the BoE deputy governor, told BBC Radio 5 Live: “This is not a currency in the accepted sense. There’s no central bank that stands behind it. For me it’s much more like a commodity.
“This is not at a size where it’s a macroeconomic risk to the global economy, but when prices are moving like that, my view would be investors need to do their homework.”
Banks and other financial institutions have been concerned about bitcoin’s early associations with money laundering and online crime, and it has not been adopted by any government.
The JP Morgan chief executive, Jamie Dimon, has described bitcoin as “worse than tulips”, in reference to a famous market bubble from the 1600s. Speaking in September, Dimon said the digital currency was a fraud that would ultimately blow up, adding it was only fit for use by drug dealers, murderers and people living in places such as North Korea.
However, according to reports last week, JP Morgan is considering whether to help its own clients bet on the price of bitcoin through proposed futures contracts to be offered by CME Group. The bank would collect fees for providing such a service.
Dennis de Jong, the managing director at the online currency broker UFX, said the value of the cryptocurrency was likely to rise further.
“Until bitcoin becomes a commonly used payment source, it’s very possible that it could hit $15,000 and beyond based on its current desirability,” he said. “If bitcoin falls into wider circulation, and becomes accepted into more conventional funds and exchanges, we are likely to see a normalisation of its value.”