Bitcoin — the digital “cryptocurrency,” popular online for its anonymity — has been on a massive run, with the price of a single bitcoin jumping by more than 40 percent in the past 10 days to nearly $2,400. The rally has been spurred on, at least in part, by the recent global cyber attack dubbed “WannaCry,” with hackers demanding their $300 ransom in bitcoin.
But one bitcoin expert attributes the currency’s run to a “positive feedback loop,” where members of the press (like me) cover the price surges, and more investors flood the market as a result. This is accelerated by the supply of bitcoin slowly rising toward its 21-million unit limit.
“Growing demand, [combined] with a finite or decreasing supply is applying upward pressure on the price,” said Adam White, vice president of the San Francisco-based Coinbase (think of it as a Charles Schwab for users to buy and sell bitcoin and other digital currencies in exchange for their money).
But there are a myriad of digital currencies to choose from, so why would speculators flock to bitcoin?
White pointed to four reasons:
- First mover advantage — Bitcoin is being rewarded for being at the forefront of digital currency.
- Metcalfe’s Law — This is where a network grows exponentially, rather than linearly, as more people join it.
- It’s secure — Bitcoin rarely goes “offline” because the ongoing ledger that tracks payments is shared by everyone.
- It’s “community driven” — A “dictator” is not pulling the strings, determining the price.
There are two additional factors working in bitcoin’s favor: It’s becoming more widely accepted by governments and businesses — earlier this week a Japanese airline said it would start accepting bitcoin payments — and consequently, the industry is becoming more regulated.
And this is bad for cyber criminals. Right now, hackers are able to hide behind bitcoin’s nameless payment method, which only relies on an ID number for their “digital wallet.” As bitcoin becomes more mainstream, the likelihood of hackers making off with large payments goes down, because their IDs would be tied to a name on regulated exchanges like Coinbase.
In the long term, White sees investors moving toward bitcoin because its network charges a “very small fee” for transactions, and as more speculators jump into the market, its price will continue to increase.