SAN
FRANCISCO — The chief executive of JPMorgan Chase, Jamie Dimon, has
called Bitcoin a fraud and made it clear that he will not allow his bank
to begin trading the virtual currency any time soon.
But
that has not stopped a growing wave of big Wall Street investors — many
of them hedge funds — from pouring their money into Bitcoin, helping
extend an eight-month spike in its price.
The
price of a single Bitcoin climbed from below $6,000 two weeks ago to
above $7,400 on Monday, more than it moved in the virtual currency’s
first seven years in existence.
Since
the beginning of the year, the value of Bitcoin has jumped over 600
percent, putting the combined value of all Bitcoin at about $120
billion, or more than many of the largest banks in the world.
The rise has been fueled by several factors, including the sudden interest in virtual currencies from small investors in Japan and South Korea.
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Now
market watchers say a significant amount of the new money is coming
from large institutional investors, many of them hedge funds looking to
capitalize on the skyrocketing price.
Many
of the hedge funds were set up over the last year to invest exclusively
in virtual currencies. The research firm Autonomous Next has said the
number of such hedge funds has risen from around 30 to nearly 130 this
year alone.
More
general-purpose hedge funds have also been buying up Bitcoin, like one
run by Bill Miller, a well known mutual fund manager who spent most of
his career with Legg Mason.
Even more big investors are looking at the space after the Chicago Mercantile Exchange announced last week
that it would launch a Bitcoin futures contract in the next few months.
The contract will make it easier for financial institutions plugged
into the exchange to get involved with the Bitcoin market without having
to worry about holding Bitcoin itself.
Bobby
Cho, the head trader at one of the largest Bitcoin trading businesses,
Cumberland, said that after years of hesitancy, institutional investors
now accounted for most of his business.
“The
vast majority of the trading we do is with institutions,” Mr. Cho said.
“The education and research have turned into real-life activity.”
The New York Times Explains...
- What Bitcoin is and how it works: click here »
- What Ethereum is and how it works: click here »
- What an initial coin offering is and how it works: click here »
The entrance of these big investors creates new risks for Bitcoin.
Kevin
Zhou, a longtime trader in the space, said that hedge funds were more
likely than small investors to pull out a lot of money at once, and that
Bitcoin was still small enough that a single fund’s cashing out could
cause the price to drop sharply.
“You
could get a possible run on the bank if one large investor withdraws
and that causes the price to tank,” said Mr. Zhou, a co-founder of the
trading firm Galois Capital. “That could cause a cascade of
withdrawals.”
The
rising importance of Wall Street is an unexpected turn for a virtual
currency that was invented in 2008 by an anonymous creator known as
Satoshi Nakamoto and designed to operate outside the traditional
financial system.
The Soaring Price of Bitcoin
Since the beginning of the year, the value of Bitcoin has jumped over 600 percent.
$6,000
4,000
2,000
0
$7,377
2017
April
July
Oct.
(11/5)
Bitcoins,
even those held by hedge funds, are recorded and stored on a
decentralized database known as the blockchain, kept on a network of
computers around the world. The whole system is governed by so-called
open source software that is maintained by a community of volunteer
programmers.
The
lack of backing from any government or established institution has
concerned many large banks. The chief executive of Credit Suisse,
Tidjane Thiam, said last week that he saw no inherent value in Bitcoin, joining the list of bankers who have called the market a bubble.
But some financial leaders, including Goldman Sachs’s chief executive, Lloyd Blankfein, and Christine Lagarde,
the head of the International Monetary Fund, have defended the idea
that virtual currencies could one day play a role in the global
financial system because they can be obtained by anyone with internet
access.
The
debate about Bitcoin has been part of a broader explosion of interest
this year in the various technological concepts introduced by the
virtual currency. Many banks, including JPMorgan, have been trying to
find ways to create their own decentralized databases, like the Bitcoin
blockchain, that could provide a more reliable and secure way to track
information.
In the technology industry, there has been a rush this year of so-called initial coin offerings,
a way for entrepreneurs to raise money by creating and selling their
own custom virtual currencies. Initial coin offerings have taken over $3
billion from investors this year after attracting almost no interest
before.
These
coin offerings have created their own demand for Bitcoin because the
new coins generally have to be bought with an existing virtual currency
like Bitcoin.
The interest in Bitcoin could be dampened in the coming weeks, however, by a debate among Bitcoin followers.
Bitcoin
start-ups and programmers have been fighting for nearly three years
about the best way to update the software that governs the currency and
the network on which it lives.
The
battle is expected to come to a head this month when new Bitcoin
software, backed by many of the biggest virtual currency start-ups, is
released. The new software aims to double the number of transactions
flowing through the network. Currently, the computers processing Bitcoin
transactions are limited to about five transactions per second.
Most
of the programmers who maintain the Bitcoin software have opposed the
changes because they say it would make it harder for individuals to
track their own Bitcoins.
Some
of the computers on the network are likely to update to the new
software while others stay with the existing rules, creating a split, or
fork, in the network that would result in two separate Bitcoins.
A
Bitcoin fork could prove disruptive and drive away investors. But
several signals suggest that the proposed rule changes are not likely to
win enough support to survive for long, which would leave the status
quo in place.
Bitcoin has already survived past attempts to fork the software and create imitators. In August, a group of former Bitcoin supporters created Bitcoin Cash, a totally separate virtual currency that makes it easier to do small transactions, like paying for a cup of coffee.
The
price of Bitcoin temporarily wavered before Bitcoin Cash was
introduced. All previous holders of Bitcoin were automatically granted
the same number of Bitcoin Cash, and the value of those has also been
rising, essentially doubling in the last month.
Chris
Burniske, a co-author of a book on virtual currency investing,
“Cryptoassets,” said most of the new investors weren’t too concerned
about the exact design of Bitcoin or the current debates.
“I
don’t think a lot of the new buyers are overly concerned about the
long-term technical aspects of Bitcoin,” he said. They are “simply
approaching it as a financial instrument.”
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