Analysts, insiders warn about risks of digital currency's speculative nature
The value of Bitcoin has surged again recently, jumping around 26 percent since May 27. Some analysts have attributed the increase to growing demand from Chinese investors, who account for an estimated 90 percent of the global trade of the digital currency. Other factors, like the depreciation of the yuan and the sluggish mainland stock markets, have also prompted Chinese investors to put money into Bitcoin, industry insiders said. However, no one is sure how long the rally will last because Bitcoin remains a highly speculative investment. Analysts said investors need to be wary of the huge risks involved with trading the digital currency.
Remember Bitcoin, the digital currency that was once worth more than gold?
On November 29, 2013, a single Bitcoin was trading for about $1,242, greater than an ounce of gold at the time. In the following months, however, Bitcoin's value plummeted, falling back to some $200 by April 2015. Over that period, several Bitcoin trading platforms went bankrupt.
In the last few weeks, though, the digital currency has become hot again. Its value has surged 26 percent since May 27.
By 6:47 p.m. Beijing time on Monday, a Bitcoin was worth $595, according to data from Bitcoin exchange huobi.com.
Bitcoin's rebound has caught the attention of some investors.
"I'm attracted by the recent surge, and might re-invest in Bitcoin," said Li Yan, a 28-year-old Bitcoin investor in Suihua, Northeast China's Heilongjiang Province.
Li sold all of his Bitcoins in April, earning a small fortune, he told the Global Times on Tuesday.
Now, he is considering shorting the digital currency because he doesn't think the recent rally will last.
Regardless of whether the rally falters, the price surge has drawn a lot of attention to Bitcoin. From May 16 to May 30, the number of newly registered users on huobi.com grew about fivefold from the previous two weeks, said Du Jun, one of the exchange's co-founders. On a busy day, total Bitcoin transactions can reach some 5 billion yuan ($762 million) on the exchange, Du noted.
China demand has been a major factor driving the rally, as the two largest Bitcoin exchanges in China, Huobi and OKCoin, account for around 92 percent of global Bitcoin trading, The Wall Street Journal reported May 30.
An alternative investment
Bitcoin, which was released in 2009, is created via a complicated computing process called "mining."
Based on a technology called blockchain, the mining process gets ever more challenging over time - the number of Bitcoins created from one block will be halved every four years, with the total number of Bitcoins eventually fixed at around 21 million, which should take place in around 125 years.
The number of Bitcoins created from a block is expected to be halved to 12.5 in June. It's one of the reasons for the recent rally as demand for Bitcoins "has not halved accordingly," Du told the Global Times on Tuesday.
There are many factors that can affect the value of Bitcoin. Some analysts have said that the weakening yuan might be one of them, as people convert yuan assets to other assets to protect their value.
The mainland's sluggish stock markets and news of frequent defaults in the online peer-to-peer lending sector have also partly contributed to the surge in Bitcoin.
There are other theories for Bitcoin's recent success. The promising prospects of the blockchain technology behind Bitcoin may be another reason why investors are buying up Bitcoin, said Li Chao, an industry analyst at consultancy iResearch Consulting Group.
For instance, the Russian central bank said in February that it planned to study blockchain applications in finance and other sectors.
In addition, a deputy governor of Japan's central bank said in May that central banks around the world should pay close attention to developments in digital currencies and blockchain technology.
Looming risks
As more people get to know Bitcoin, the number of merchants accepting the digital currency has grown.
For instance, in December 2014, Microsoft added Bitcoin as a payment option for some digital content on its online platforms. On May 26, PayPal filed a U.S. patent application for a modular payment device that accepts Bitcoin and other digital currencies.
But even though the applications for Bitcoin have grown, analysts and some investors remain uncertain about the digital currency's future.
"I don't think Bitcoin makes a good investment alternative," Li from iResearch told the Global Times on Friday.
The value of Bitcoin as an investment target is diminishing because fewer people are paying attention to it now, he said. Most investors are merely speculating instead of considering the long-term potential of the digital currency.
Li's view was backed up by a Bitcoin investor surnamed Yin in Shenzhen, South China's Guangdong Province.
"I don't have much faith in the future of Bitcoin, and I'm just speculating," he told the Global Times on Tuesday.
Yin said he has made about 100,000 yuan from the recent rally, but he warned that the Bitcoin market is highly speculative and inexperienced investors need to be cautious.
The People's Bank of China, the country's central bank, warned the public about the potential risks of Bitcoin in December 2013.
It said Bitcoin is a virtual product and not a real currency, so it cannot serve as a payment method in China. Still, the central bank hasn't banned Bitcoin trading, giving it tacit approval so long as the trade operates within the law.
After the central bank's warning, Bitcoin's value in China plunged 60 percent in the following three weeks.
On Saturday, central bank official Sheng Songcheng reiterated that message in an article in the Guangzhou-based newspaper 21st Century Business Herald.
He pointed out that the digital currency still lacks the support of central authorities and faces competition from numerous other digital currencies, such as the Litecoin, which is also gaining popularity among investors. These competing digital currencies could end up replacing Bitcoin.
No one is sure whether Bitcoin's rally will continue. The volatility of Bitcoin's value over the last few trading days is proof of that.
"All financial products go through a bear-and-bull cycle, and so does Bitcoin," said Du, from huobi.com.
