It started the year worth less than $1,000 but has soared above $16,000. Back in 2011, it was worth less than a dollar. It is being bought and sold by investors in a frenzy, driving the price higher and higher.
Some leading economists and financiers are calling bitcoin a bubble and a fraud, but industry insiders say they think it’s only going to get bigger as it gains more widespread acceptance.
So how does the virtual digital currency work — and what’s behind its spectacular rise?
Bitcoin () was created in 2009 by an unknown person using the pseudonym Satoshi Nakamoto. Many of its backers saw it as a simple global payment system for anyone to use rather than a financial asset for investors to trade.
Unlike the U.S. dollar or Japanese yen, digital currencies such as bitcoin aren’t issued by central banks like the Federal Reserve. Instead, they are “mined” by computers using complex algorithms.
Payments in bitcoin can be made without traditional middlemen such as banks and without the need to give your name.
That made bitcoin popular with criminals and others who wanted to move money anonymously. It’s also been adopted by businesses around the world as a way to pay for everyday things like groceries, train tickets and haircuts.
Exchanges, or marketplaces, allow people to buy or sell bitcoins using different currencies. People can send bitcoins to each other using mobile apps or their computers. It’s similar to sending cash digitally, and a fee is charged for every transaction.
Bitcoins are stored in a “digital wallet” — a kind of virtual bank account that allows users to send or receive bitcoins, pay for goods or save their money.
Its price has taken off this year as mainstream investors have become more interested.
National governments are trying to keep up, puzzling over how to regulate bitcoin and other so-called cryptocurrencies. Countries like China and Venezuela have expressed interested in creating their own digital forms of money.
Some experts say the biggest force pushing bitcoin prices higher this year has been … higher prices.
Investors have been buying in this year out of “FOMO,” or the fear of missing out, according to Dave Chapman, managing director of Octagon Strategy, a Hong Kong-based cryptocurrency exchange.
“There is admittedly a lot of speculation in this market,” he said.
Bitcoin is also being driven higher by the hands-off approach many financial regulators seem to be taking toward the digital currency, Chapman said.
Japan’s government, for example, gave bitcoin the seal of approval and started licensing bitcoin exchanges earlier this year…
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