Bitcoin believers warn of bubble after ‘wild west’ currency doubles in value

Bitcoin, the digital currency that has attracted drug dealers and tax evaders, is on a roll again. But, after a price rise that echoes its first speculative bubble three years ago, the currency’s backers are warning that another sharp correction could follow.

Bitcoin first boomed in 2013 as speculators – alongside assorted lawbreakers – were drawn to the idea of a currency beyond the reach of national regulators.

Tech entrepreneurs jumped on the bandwagon, betting that it would become a platform for a disruptive new financial services industry.

The currency’s price later fell more than 80 per cent from its peak, after a cyber-heist from its biggest exchange and growing attention from regulators.

Since then, most people in the financial world have written it off as a failed experiment in digital finance, even though the idea behind a core part of its technology – the blockchain, a distributed ledger that simplifies transaction processing – has since moved into mainstream finance.

However, a 31 per cent leap since the start of December has helped bitcoin more than double this year to about $975 yesterday, pushing the value of the outstanding currency to $16bn.

Tim Draper, a venture capitalist who was an early backer, claimed that the recovery showed that bitcoin was becoming “a viable alternative when people’s confidence in their own government’s currency waivers”.

Prices are largely set in China, where more than 90 per cent of the world’s trading takes place, but even the currency’s backers say it is difficult to understand the dynamics behind its rise. “These really are the wild west,” said Mark Williams, a Boston university ­lecturer and risk management expert who has followed bitcoin since its early days. “It’s unclear what’s driving [the price].”

The high volatility, and the fact that few merchants accept bitcoin, have prevented it developing into the stable currency supporters had hoped.

Bitcoin is used heavily by people seeking to move assets out of their home countries for either legal or illicit reasons, said Micky Malka of Ribbit Capital, a venture capital group that specialises in financial services start-ups.

He and others pointed to the fact that many people in China have been racing to move some of their capital out of the country as one explanation for the currency’s rise.