The price of bitcoin surged through $10,000 on Wednesday, adding to its tenfold jump in value this year and fueling a debate as to whether the virtual currency is gaining mainstream acceptance or is merely a bubble waiting to burst.
Shortly after bitcoin reached $10,000, it surged past $11,000 — and then dropped. As measured by the website CoinDesk, the cost of buying one bitcoin was as low as $9,300 midday Wednesday. A price of one bitcoin had been roughly $1,000 at the beginning of the year.
The vertiginous rise in the price of bitcoin and other virtual currencies this year has divided the financial community on their merits and whether — or when — the value might come crashing back down.
The chief executive of JPMorgan Chase has called bitcoin a “fraud,” as it is based only on software code and is not backed by any monetary authority.
Other executives, including International Monetary Fund chief Christine Lagarde, say virtual currencies should not be dismissed and could have useful applications, such as a means of payment in countries with unstable currencies.
Some countries, such as China, have tried to stifle bitcoin exchanges. But in a move that gave further credibility to the virtual currency, the U.S. exchange operator CME Group said last month that it plans to open a futures market for the currency before the end of the year if it can get approval from regulators.
Bitcoin was created about a decade ago as an alternative to government-issued currencies. Transactions allow anonymity, which has made it popular with people who want to keep their financial activity, and their identities, private.
Whereas virtual currencies were initially used primarily as a method of payment, in recent months they have become a hot investment among speculators.
Daniele Bianchi, an assistant professor of finance at the Warwick Business School in England, said the price increases are due to rising demand but also to the fact that the supply of bitcoins is kept fixed. There are only 21 million that can be mined in total.
Bianchi also noted that trading in bitcoin is becoming more professional and open to the general public. He believes virtual currencies are “here to stay” and expects the price to rise higher still.
“The increasing demand pressure from investors and speculators makes the case for an even further increase in bitcoin prices in the near future,” he said.
Others are far more skeptical.
Neil Wilson, a senior market analyst at ETX Capital in London, said bitcoin is “following the playbook for a speculative bubble to the letter.”
A new market enjoys a boom when professional investors start entering the market. That's followed by euphoria as others rush in to partake in the gains. Wilson said that bitcoin could rise much further, but that when it comes to the bubble bursting, the question is when, not if.
“This sort of thing never, ever lasts,” he said.
How bitcoins work
Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users' transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with U.S. dollars and other currencies.
Is it a risky investment?
The value of bitcoins can swing sharply. Earlier this month, bitcoin's value plunged 22% against the dollar in just three days.
Why bitcoins are popular
Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators — and criminals.
Is it really anonymous?
Yes, to a point. Transactions and accounts can be traced, but the account owners aren't necessarily known. However, investigators might be able to track down the owners when bitcoins are converted to regular currency.
Who's using bitcoin?
Some businesses have jumped on the bitcoin bandwagon amid a flurry of media coverage. Overstock.com accepts payments in bitcoin, for example. The U.S. exchange operator CME Group said in October that it plans to open a futures market for the currency before the end of the year, if it can get approval from regulators.
Still, its popularity is low compared with cash and cards, and many individuals and businesses won't accept bitcoins for payments. Some high-profile banking executives have spoken against bitcoin, with JPMorgan Chase Chief Executive Jamie Dimon calling it a “fraud.”
How bitcoins are kept secure
The bitcoin network works by harnessing individuals' greed for the collective good. Miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. The blockchain prevents rogues from spending the same bitcoin twice, and the miners are compensated for their efforts with the occasional bitcoin. As long as miners keep the blockchain secure, counterfeiting shouldn't be an issue.
How did bitcoin come to be?
It's a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn't matter: The currency obeys its own internal logic.