Wild swings in the price of bitcoin took a pause on Wednesday, with the cryptocurrency hanging on to a 13 per cent gain as it bounced back from a sharp sell-off driven by fears of a bubble.
The cryptocurrency’s value plummeted by nearly a third last week, and was dealt another potential blow on Monday when the Israeli Securities Agency said it would bar companies trading in bitcoin from operating on the Tel Aviv stock exchange and investigate how to regulate the digital currency because of concerns about volatile prices.
Yet bitcoin rallied sharply on Tuesday, and was hanging on to its gains on Wednesday morning, trading around $15,947 according to composite prices compiled by Bloomberg.
“I think it looks like a bubble, smells like a bubble, acts like a bubble and feels like a bubble,” said Shmuel Hauser, director of the Israeli watchdog.
The price of the cryptocurrency remains below its mid-December peak of nearly $19,666, but its rapid ascent since the start of the year when it was worth just $1,000 has alarmed regulators and financiers who fear the market shows all the signs of overheating. At the time of writing one bitcoin was worth $15,707, according to Coindesk.com. On Tuesday the currency was up 43 per cent from Friday’s low.
Last week, Citi analysts warned that bitcoin security was “weak”, adding that its “poor design” meant the cryptocurrency was “likely to be a bubble”.
“Timing of [the] bubble peak is unclear — government action could become a trigger,” they added.
Concerns about the spiralling price of bitcoin and huge volatility in the value of the currency have prompted regulators around the world to take action in recent months amid fears a collapse in its price could leave investors nursing heavy losses.
In 2014, Mt. Gox, then the world’s leading bitcoin exchange, suspended trading and entered administration following an admission that approximately 850,000 bitcoins had been either lost or stolen. Investors lost an estimated $450m, leading many to question both the security of the currency and the exchanges on which it traded.
The Financial Industry Regulatory Authority, Wall Street’s self-regulator, last week warned investors to be “cautious when considering the purchase of shares of companies that tout the potential of high returns associated with cryptocurrency-related activities”.
Chinese authorities went further by deciding to close bitcoin exchanges and ban initial coin offerings in September.
However, cryptocurrencies remain popular, not least because of a number of celebrity endorsements. Paris Hilton, the hotel heiress and reality TV star, has recently promoted LydianCoin while boxer Floyd Mayweather has endorsed Stox.com. Others to join the cryptocurrency craze include film star Jamie Foxx and Ghostface Killah, a member of the rap collective Wu-Tang Clan.
Investors have pumped in more than $1bn into what have become known as initial coin offerings since the start of this year, evoking further memories of the dotcom boom and bust of the late 1990s.
Early evangelists include Tyler and Cameron Winklevoss, the former Olympic rowing twins who sued Facebook founder Mark Zuckerberg for allegedly stealing their idea for the social network. Last year, they told the FT that they saw bitcoin as “better than gold”.
“I remember when people said Facebook was a fad,” Tyler Winklevoss said. “We saw this movie play out already with Facebook. We feel like we’re in the same movie again, just with a different cast of characters.”
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