2017 has been the year of cryptocurrency – with Bitcoin, Ethereum and other popular digital currencies experiencing unprecedented growth. Bloomberg recently reported that the price increase in Bitcoin and Ethereum (respectively 358 and 4000 percent) has been “staggering” considering “[t]ech stocks rose just over 1000 percent over the entire course of their [late-’90s] bubble.” As of September 23rd the market capitalization of cryptocurrency was over $131 billion, with Bitcoin being the largest at over $62 billion, and Ethereum next at over $26 billion. Beyond the main two, there are approximately 1117 other cryptocurrencies being traded on various exchanges throughout the world. To get a scope of the price run, Money magazine recently reported that a $10,000 investment in Bitcoin made on September 1, 2016 would be worth over $85,000 on September 1, 2017.
Despite – or perhaps because of – the price surge, cryptocurrency has attracted a chorus of sceptics. Legendary investors Warren Buffett , Ray Dalio, and Mark Cuban have all expressed doubt, and Wall-Street titan Jamie Dimon even went so far as to call Bitcoin a flat out “fraud.”
Are the skeptics right; is the remarkable growth in the price of Bitcoin and other cryptocurrencies simply due to unfounded speculation? Or are there more fundamental factors at play?
It is very easy to purchase Bitcoin these days. In fact, if you live in a major metropolitan area, chances are you can walk to a nearby Bitcoin ATM (there are more than 800 of them in the U.S. alone), where all you have to do is download a free digital coin wallet, insert the desired amount of cash, place your phone up to the scanner and – voila! – you own Bitcoin. The ease with which you can purchase cryptocurrencies – the most common method is via online exchanges such as Coinbase or Kraken – combined with increased media attention, has led to an influx of new, less sophisticated, buyers who have contributed to the price surge.
Technological Familiarity and Network Effects
There is also an active effort underway to make cryptocurrency more familiar and less opaque. Internet entrepreneur and New York Times best-selling author Joel Comm has argued that the efforts of groups like etoro (who markets a “Crypto CopyFund” as a way to gain exposure to a diverse basket of digital coins in a single portfolio) and Hargreaves Landsdown (a U.K firm offering “exchange traded notes that track the performance of Bitcoin”) to familiarize the general public with this new technology is also driving up prices. Celebrities have also helped spread the message, with the likes of actor Jamie Foxx and boxer Floyd Mayweather promoting various initial coin offerings on social media.
Courses are starting to be offered worldwide on cryptocurrency. Netflix and Khan Academy series’ have also increased public familiarity, which in turn has fuelled more speculators (given the ease of access noted above). In addition, the general public and many “nascent investors” are also becoming familiar with blockchain and the underlying technology powering cryptocurrency. Bloomberg reports that many people like cryptocurrency’s “underlying concept” (ie. decentralized payments through the blockchain) and that is why it is so popular. For proof on how much the subject is being talked about (and how popular it has become), do a simple “Google news search” for the terms ICO, Bitcoin or blockchain.
Market speculation, ease of access, and familiarity is being amplified by a “network effect” – which describes the phenomenon when a technology or innovation becomes more valuable simply because more people are using it. Trace Mayer, early Bitcoin investor and host of the Bitcoin Knowledge Podcast, suggests that the network effect can be seen in a chain as follows, “[m]erchants accept it because speculators hold it, consumers use it because merchants accept it.” Consumer adoption then leads to greater mining and development activity, which in turn fuels financial activity (ICOs) and eventually “settlement currency” where cryptocurrency is seen as a substitute for gold or the U.S. dollar. Currently, very few merchants accept Bitcoin for payment, with the most notable being overstock.com.
Another reason for the run up in the price of cryptocurrencies, particularly Bitcoin, is its ability to facilitate criminal activity and to make transactions anonymously – away from the informational reach of government and regulators. Many of these transactions are explicitly illegal (like money laundering) while others are controversial (and potentially giving rise to sanction) like “donating to Wikileaks.” A recent academic study by Omri Marian, at the University of Florida, reviewed the extent that cryptocurrencies are potential “super tax havens” and suggested that they could become the “weapon of choice for tax evaders.”
In addition to fueling illicit activity, cryptocurrencies can also be involved in more traditional securities market fraud, like pump and dump and Ponzi schemes. Regulators have begun to take action, as evidenced by the SEC’s recent decision to suspend trading in three publicly traded blockchain-related businesses and the Commodity Futures Trading Commission’s (CFTC) recent crackdown on alleged Ponzi scheme Gelfman Blueprint, Inc.
While cryptocurrencies are clearly used for nefarious purposes, it is difficult to determine exactly how much this activity contributes to the price. Cryptocurrency (in particular Bitcoin) does remain, for the moment, the “criminal currency of choice” for hackers, including those behind the recent HBO attack, because of anonymity and the ability to convert it into cash (or “wash” it) in the “darknet” (where developers often will take a “cut” of the illegal proceeds for assistance in cleaning the money). One report noted that certain banks have even started to “hoard Bitcoins” as a purse for future ransom attacks.
One central factor that is driving market demand for the most popular cryptocurrencies (like Bitcoin and Ethereum) is the “red hot” initial coin offering (ICO) market, where a company issues digital coins or tokens that provide access to a service (often called a “utility” or “app” token) or that represent an investment opportunity in the company (like a traditional security). ICOs have generated over $1.2 billion of new start-up capital this year alone, and are seen by many as a work-around traditional venture capital. Where is the connection to cryptocurrency demand? Generally speaking, a new coin offering can only be purchased with an existing form of cryptocurrency (most often Bitcoin or Ethereum) and often only through a coin exchange. So we have a simple application of economic supply and demand – to participate in the ever-growing ICO market, people must purchase, on the open market, either Bitcoin or Ethereum – more demand for ICOs means more demand for Bitcoin or Ethereum (hence the price increase).
Another demand factor that has been suggested is a continuing, post-financial crisis, distrust of the traditional banking sector. It is very difficult, if not impossible to quantify how much this factor has contributed to the demand surge, but it does exist. It has been argued by Rick Yang (of the venture capital firm New Enterprise Associates) that the rise of the financial technology (fintech) industry has been fuelled by “massive distrust of existing financial services.” One could also argue that this is true with cryptocurrency and the payments markets. A recent Guardian opinion noted,
“[Jamie] Dimon, a modern high priest, faces a rival value system in Bitcoin. It has no temple, no central authority and uses a rubric over which he has no control. In other words, it is an alternative financial establishment, whose popularity is inextricably linked with the ebbing of trust in the global system that was triggered by the credit crunch.”
International Safe Havens and Geopolitical Volatility: Is Bitcoin A New Gold?
Some investors (primarily those outside of stable monetary systems) view Bitcoin and other cryptocurrencies as a hedge against volatile local currencies and geopolitical risk. A well-documented example of this is the growing number of individuals who engage in cryptocurrency mining in Venezuela, despite the risk. It appears that as long as some countries still support digital coins then there will be continuing demand. As John McGinnis and Kyle Roche of the Wall Street Journal note, “[i]t’s become a trusted alternative when fiat money’s value is corrupted by politics.”
Some global investors are taking the position that it is a “new gold” in that it has a fixed supply and performs “in analogous ways to gold.” This belief that Bitcoin is now the “prominent digital reserve currency” is starting to gain traction, and although it seems that there is a widely held opinion by financial industry leaders that Bitcoin will ultimately fail, there is currently “more money trying to get in than out” – thus the demand.
One analyst, Naeem Aslam (Chief Market Analyst at Think Markets UK) has also called cryptocurrency a new “safe haven” or a “precautionary trade, which investors can make under heightened uncertainty”. In a contribution to Forbes, Aslam has further speculated that another price spike in the cryptocurrency might occur due to the U.N. sanctions on North Korea’s refined petroleum imports, as Kim Jong-un (who is known to be fond of cryptocurrency) may look to deploy his “army of hackers” on South Korea’s busy cryptocurrency trading markets in an effort to “bypass” trade restrictions.
It is very difficult to pinpoint one determinative factor in the price spike of cryptocurrency. This article has highlighted several contributing factors, including ease of access, technological familiarity, network effects, criminal usage rates and the allure of anonymous transactions, the offering mechanics of the ICO market, a growing distrust of traditional banking, and the “new cyber-gold” belief, which is leading some people, in volatile regions, to use Bitcoin as a hedge against local currency risk. Identifying one overriding factor is also difficult given how widely held cryptocurrency is – particularly Bitcoin (which has been estimated to have over 16.8 million addresses holding a balance of less than 0.00001 BTC).
There are many people who believe cryptocurrency is a bubble, including Yale economics professor and Nobel Laureate Robert Shiller, who recently commented that the run up of prices is driven by “stories” and not by “fundamentals” and that this is similar to the case of other bubbles. Even if Shiller is correct – does this mean that the underlying technology (or idea for that matter) will forever disappear? It is hard to say. The internet bubble burst and it didn’t lead to the extinction of the internet – quite the opposite. Perhaps we are heading for an ultimate showdown between the Sovereign and those who would prefer to live in “Galt’s Gulch in the cloud.” Or perhaps, as former Securities and Exchange Commission Chairman Arthur Leavitt Jr. put it, cryptocurrency is “here to stay.”  Given present global instability, and the historical propensity for reckless governments to inflate away their currency, it is safe to assume the cryptocurrencies will be around for many years to come. The question then becomes, in what form?
 See Hiawatha Bray, Instant Bitcoins – at a price, The Boston Globe (July 6, 2017), https://www.bostonglobe.com/business/2017/07/05/instant-bitcoins-price/LHo7nc95clgnfGZvIAypeP/story.html.
 See Evelyn Cheng, Bitcoin speculators are the new day traders, CNBC (June 23, 2017), https://www.cnbc.com/2017/06/23/bitcoin-speculation-markets-trading.html.
 See Kevin Helms, Five Leading Russian Universities Start Offering Cryptocurrency Courses, Bitcoin (September 18, 2017), https://news.bitcoin.com/russian-universities-cryptocurrency-courses/.
 See Michael Hooper, Why Bitcoin is Rising, Seeking Alpha (May 9, 2017), https://seekingalpha.com/article/4071204-bitcoin-rising.
 See Investor who Bought Bitcoin at 25 Cents Says It Can Hit $10,000 In A Few Years, Valuewalk (May 26, 2017), https://www.valuewalk.com/2017/05/bitcoin-value-10000-dollars/.
 See Id. See also Five Thoughts On What Bitcoin’s Rise In Value Means, Forbes (March 31, 2017), https://www.forbes.com/sites/forbestechcouncil/2017/03/31/five-thoughts-on-what-bitcoins-rise-in-value-means/#c655d5e32bd.
 See Bloomberg, supra note 15..
 See id.
 See Tali Arbel, Why Bitcoin is the HBO hackers’ payment of choice, Business News Network (August 8, 2017), http://www.bnn.ca/why-bitcoin-is-the-hbo-hackers-payment-of-choice-1.824819.
 See Simon Usborne, Digital gold: why hackers love Bitcoin, The Guardian (May 15, 2017), https://www.theguardian.com/technology/2017/may/15/digital-gold-why-hackers-love-bitcoin-ransomware.
 See Jamie Doward, City banks plan to hoard bitcoins to help them pay cyber ransoms, The Guardian (October 22, 2016), https://www.theguardian.com/technology/2016/oct/22/city-banks-plan-to-hoard-bitcoins-to-help-them-pay-cyber-ransoms.
 See Erin Griffith, Why Startups are Trading IPOs for ICOs, Fortune (May 5, 2017), http://fortune.com/2017/05/05/ico-initial-coin-offering/.
 See Saheli Roy Choudhury, Billionaire CEO Taizo Son predicts that ICOs will come to dominate fundraising, CNBC (September 20, 2017), https://www.cnbc.com/2017/09/20/ico-cryptocurrency-will-become-major-funding-source-billionaire-taizo-son-says.html.
 See Tanzeel Akhtar, Is Bitcoin the New Gold, The Street (August 28, 2017), https://www.thestreet.com/story/14285619/1/is-bitcoin-stealing-gold-s-safe-haven-status.html.
 See Tanzeel Akhtar, Bitcoin Will Soar to $5000 Barring A Major Catastrophe, The Street (September 22, 2017), https://www.thestreet.com/story/14315973/1/bitcoin-valuation.html.
 See Lana Clements, Is Bitcoin The New Gold? Cryptocurrency price rise and scarity make it ‘a safe haven’, Express (September 21, 2017), http://www.express.co.uk/finance/city/857063/Bitcoin-latest-updates-price-gold-Cryptocurrency-news-forecast-safe-haven.
 See Cheng, supra note 9.
 See Elizabeth Gurdus, Nobel Prize Winner Robert Shiller explains how bitcoin resembles past market bubbles, CNBC(September 6, 2017), https://www.cnbc.com/2017/09/06/economist-robert-shiller-explains-how-bitcoin-resembles-past-bubbles.html.
 See Tim Ferriss, Nick Szabo Interview, YouTube (Aug. 11, 2017), https://www.youtube.com/watch?v=3FA3UjA0igY.
 See See Thomas Heath, Is bitcoin another tulip craze or a legitimate investment? The Washington Post (September 14, 2017), https://www.washingtonpost.com/news/get-there/wp/2017/09/14/is-bitcoin-another-tulip-craze-or-a-legitimate-investment/?utm_term=.dc78d51fec25. See also Arthur Leavitt Jr. & Peter Smith, BankThink Heres What The BItcoin Naysayers Get Wrong, AMERICAN BANKER (August 15, 2016), https://www.americanbanker.com/opinion/heres-what-the-bitcoin-naysayers-get-wrong.