Enthusiasm from institutional investors, investment banks and payment companies and continued money printing by central banks means the price of bitcoin is close to its all-time high.
The cryptocurrency has seen its price surge 52 per cent since the start of September and currently sits at a three-year high of more than $18,000, or £13,600.
Despite the sharp rise in recent weeks, optimists said the bitcoin boom was nowhere near its peak and will reach a new high of more than $20,000 a coin by the end of this year.
Bitcoin has surged 52% since September and is close to the all-time high it reached in 2017
The previous all-time high was more than $19,000 a coin, set in December 2017.
But while that boom and subsequent bust were driven largely by individual retail investors piling into the cryptocurrency, crypto watchers said things were different this time around.
Simon Peters, an analyst at investment platform eToro, which lets investors buy bitcoin, said: ‘Three years on, there are a whole host of factors contributing to the current price rise.
‘This includes a massive influx of investors from large scale institutions such as listed investment trusts, pension schemes and university endowment funds, which shows how far bitcoin has come.’
Analysts at America’s largest bank JP Morgan also said bitcoin demand was being driven by institutional investors, pointing to the recent performance of the $8.9billion Greyscale Bitcoin Trust, which offers high net worth investors exposure to bitcoin.
The trust, which has seen millions of dollars poured into it in the last six months, was evidence that ‘some investors that previously invested in gold ETFs may be looking at bitcoin as an alternative to gold.’
JP Morgan analysts had previously said the cryptocurrency could potentially compete with gold due to its finite nature, with the number of coins capped at 21million.
This may prove particularly attractive at a time when central banks are injecting billions into economies battered by the coronavirus, as holders seek to maintain the value of their money in the face of potential future inflation.
‘Bitcoin’s finite supply may make it attractive to those who feel their need to preserve their wealth in the face of rampant growth in money supply’, Russ Mould, investment director at AJ Bell said.
Analysts at JP Morgan said institutional investors were driving the surge in bitcoin’s price
But the JP Morgan analysts also warned it looked ‘overbought’ and its volatility is one of the reasons major hedge fund manager Ray Dalio warned bitcoin was limited as an effective store of wealth and value.
However, as an alternative payment method, bitcoin has increasingly been endorsed by mainstream companies.
For example, PayPal said it would let US customers buy, hold and sell bitcoin and use it to make payments and Twitter founder Jack Dorsey’s company Square buying $50million worth of coins in early October.
‘Corporate endorsements of bitcoin and in particular the endorsement by PayPal a couple of weeks ago appear to have propagated further demand for bitcoin’, analysts at JP Morgan added, with the growing ability to use the cryptocurrency cementing its value among investors.
And with the surge in price driven largely by institutional investors, some optimists believed the bitcoin bull run still had further to go.
Endorsements from mainstream payment providers like PayPal have vindicated bullish bitcoin investors as they argue the cryptocurrency has a case as an alternative currency
‘The longer-term picture looks very healthy’, Glen Goodman, an expert and author of the book The Crypto Trader, told This is Money. ‘The best news is that most people haven’t woken up to that yet.
‘In a sustainable bull market, popular interest tends to build up slowly, and it’s only when your granny starts asking you about how to buy bitcoin, as in late 2017, that the market reaches its big peak and collapses.’
He added: ‘One great gauge of where we are is the “Maisie Williams Indicator”. The Game of Thrones actress asked her Twitter followers this week whether she should buy bitcoin.
‘After almost 1million votes, more than half said ‘no. This tells me we are still nowhere near the long-term peak of this bull market, when I’d expect to see at least 80 per cent yes votes.’
More than half of people who responded to a poll by Game of Thrones actor Maisie Williams said she shouldn’t buy bitcoin, which one analyst said was a reason its price rise had further to run
He said he expected mainstream interest in bitcoin to take off again if it hits the $20,000 mark, which Simon Peters said he believed was ‘possible’ this year.
Novembwe has seen the most amount of money invested into bitcoin since December 2017.
Mr Peters added: ‘Should we surpass that, then we are into uncharted territory as sentiment remains positive.
‘Bitcoin’s maturity, evidenced by the diversity of its investors and extensive and wide-ranging data sets, mean that we can say with some trepidation, “this time is different”.’
The price dipped below the $5,000 a coin mark in mid-March and has been as low as $3,200 since the boom and subsequent drop three years ago.
If you do buy into bitcoin
Find out how bitcoin and the blockchain works, so that you have some understanding of the system, the ledger, the major players and the public and private key elements.
Remember bitcoin yields nothing and its main source of value is scarcity. Most bitcoin activity is trading not investing.
Research coin wallets, the digital vaults where cryptocurrency is held, and consider security carefully. Bitcoins have been stolen before, understand how this happened.
Be prepared for extreme volatility. The price can move by 20 per cent in one day and you could easily lose half of your cash in a far quicker time that investing in the stock market.
Consider how you would cash in any gains. There are reports that this has proved hard for some people. A time of market stress could lead to people being locked in and unable to trade.
Read our guide to How to be a successful investor, which looks at the far less high octane world of long-term investing and how to make it a success.
What is bitcoin?
The digital currency that most will be familiar with is free from government interference and can be shared instantly online. It doesn’t rely on trusting one central monetary authority.
The underlying technology is blockchain, a financial ledger maintained by a network of computers that can track the movement of any asset without the need for a central regulator.