New York Times: Bitcoin hits record high, this time people rarely talk about bubble

Bitcoin, a wild challenger to traditional currencies, fell below $4,000 in March and now stands at $19,783. More investors are buying it now for the long term.

After bitcoin prices skyrocketed in 2017 and peaked at $19,783, the price of a single bitcoin surpassed that figure again three years later, setting a new all-time high, according to data and news provider CoinDesk. The cryptocurrency has been surging since falling below $4,000 in March at the start of the coronavirus pandemic.

Bitcoin’s recent rally is different from the last bull run in 2017, which was driven in large part by Asian retail investors who were just learning about cryptocurrencies. Back then, the cryptocurrency quickly lost momentum as people questioned what it could do beyond easy online speculation and drug and ransom payments.

While those problems remain, less speculative investors are now driving bitcoin’s growth. Buyers, led by U.S. investors, including companies and other traditional investors, are looking at bitcoin as an alternative asset, somewhat similar to gold, according to an analysis by data firm Chainalysis. The idea is that rather than frequently engaging in arbitrage trades, they can trade cash for bitcoin, and they see bitcoin as a place to store part of their portfolio outside the reach of governments and the traditional financial system, Chainalysis and other industry firms said.

“The people who are buying bitcoin recently are very different,” said Philip Gradwell, chief economist at Chainalysis. “They’re doing it steadily over a sustained period of time, they’re taking it off exchanges and holding it as an investment.”

The excitement is being fueled by efforts by regulators and mainstream financial firms that are trying to make cryptocurrencies safer and more accessible. U.S. regulator the Office of the Comptroller of the Currency said this summer it would allow banks to custody cryptocurrencies for customers. Payments giant PayPal announced in October that it would follow rival Square in allowing people to buy and hold Bitcoin and some other cryptocurrencies.

“We took this action because of conversations with government officials and then because of the dramatic shift we saw toward digital payments during the pandemic,” PayPal Chief Executive Dan Schulman said in an interview. He said more than a million people — three to four times more than the company expected — joined a waiting list to use cryptocurrencies before the feature launched.

Bitcoin’s rise is part of a boom in cryptocurrencies and stock markets that are defying the effects of a pandemic-induced recession. The Dow, S&P 500 and Nasdaq hit record highs last month as Wall Street got a boost from the presidential election and news on a potential coronavirus vaccine.

Bitcoin is a digital currency with distributed software and mathematical rules. The Bitcoin code was released by Satoshi Nakamoto in early 2009. The computer code determines that the total supply of Bitcoin will be limited. Only 21 million Bitcoins will be created in total and distributed in the form of block rewards to certain computers (miners) and miners who maintain the online infrastructure of the currency through a process called mining.

Like gold, Bitcoin can be created, moved and stored outside the purview of any government or financial institution. Bitcoin exists on a distributed financial ledger called a blockchain, which is maintained and updated by a network of volunteers running thousands of computers (miners) around the world. The system is designed to ensure that no single computer or institution can change the rules or control the network.

The openness of the system and the fact that anyone can join and create a wallet without providing a name or phone number has made it popular with people who want to circumvent the traditional financial system. They include terrorists , drug dealers and countries like North Korea , Venezuela and Iran that want to evade U.S. financial sanctions.

“This technology already plays a role in many of the most significant criminal and national security threats facing our nation,” the Justice Department said in an October report , which described how deeply Bitcoin has penetrated the criminal world’s infrastructure.

However, Bitcoin’s stateless nature has also won over investors interested in using the technology legally. Some are motivated by libertarian distrust of government. Others with less ideological views are drawn to Bitcoin as an alternative to the traditional financial system.

Still, Bitcoin is backed by nothing but the power of its network of computers and the faith of the people who buy it and assign it value on exchanges, many of whom are betting that someone else will be willing to pay more for their Bitcoin in the future.

That has made bitcoin volatile. It fell to as low as $4,000 in March when concerns about the outbreak gripped global markets. But soon after, investors began talking about bitcoin as a beneficiary of the global economic downturn.

In May, Paul Tudor Jones, one of Wall Street's most famous and legendary hedge fund managers , said he had put nearly 2% of his portfolio into Bitcoin. He said the upper limit of Bitcoin production makes it an attractive alternative to the debasement of traditional currencies, which he believes is inevitable as central banks print more money to encourage economic recovery .

“Every day that bitcoin survives, trust in it grows,” Jones told CNBC at the time. He did not respond to a request for comment for this article.

Some public companies have also dabbled in Bitcoin amid concerns about the value of the dollar. In August, Virginia-based intelligence software company MicroStrategy said it bought $250 million in Bitcoin to store some of the cash in the company's treasury.

MicroStrategy CEO Michael Saylor said in an interview that after knowing almost nothing about Bitcoin at the start of the year, he had become convinced of how hard-coded limits on the number of tokens could help it maintain its value over time. He became so enthusiastic that he put $175 million of his own money into Bitcoin. MicroStrategy subsequently bought another $175 million of Bitcoin.

“For any money that’s in any store of value asset, people seem to think they’re better off moving it into Bitcoin,” Saylor said.

Square said in October that it would put $50 million of its corporate cash into Bitcoin. In 2018, Square also began offering the digital currency in Cash App, the electronic money transfer app people use to send money between friends and family. The company, led by Twitter CEO Jack Dorsey, said in early November that its customers held $1.8 billion in Bitcoin, up 180% from a year ago.

In October, analysts at JPMorgan Chase wrote a widely circulated note about how using Bitcoin as a replacement for gold, especially among younger generations of investors, could create a significant market for digital tokens. Given that the total value of all Bitcoin is around $350 billion, a fraction of all the gold in the world, the analysts said they could see Bitcoin's value go much higher.

Just like in 2017, Bitcoin’s rise is accompanied by a broader cryptocurrency bull run. While much of the frenzy three years ago focused on scams called initial coin offerings , interest has shifted to trying to get in on the action in a different kind of token, known as decentralized finance, or DeFi. DeFi systems, which remain buggy and unproven, are designed to make it possible to get loans and insurance or collect interest without involving any financial institution.

Central banks from countries including China, Singapore, Sweden and the Bahamas are also considering creating national digital currencies inspired in part by Bitcoin.

National digital currencies that remove bitcoin’s volatility could make digital currencies less attractive. However, they could also make the process of moving in and out of various digital currencies easier.

Given the uncertainty of Bitcoin’s value, any excitement could lead to another crash. But Bitcoin, which has survived several crashes and reborn, is changing the technical atmosphere around blockchain.

As Michael Saylor said: “We can compare Bitcoin to NBA star LeBron James (21 years old) coming on the court and starting to dominate on the court instead of LeBron James who was just starting out at 13 years old. The market has strengthened and perfected Bitcoin.”