The price of a single bitcoin hit an all-time high of above $3,500 this week, dragging up the value of hundreds of newer, smaller digital rivals in its wake. Now some investors fear a giant crypto-bubble may be about to burst.
It has been a year of unprecedented growth for the largely unregulated market, with dozens of new currencies appearing every month in “Initial Coin Offerings” or ICOs.
They have achieved value almost instantly, drawing in those who are eager to get in and make a quick buck.
At the start of 2017, the total value – or market cap – of all cryptocurrencies in existence was about $17.5 billion, with bitcoin making up almost 90 percent of that, according to industry data firm CoinMarketCap.
It is now around $120 billion – around the same value as Goldman and RBS together – and bitcoin makes up only 46 percent.
Bitcoin Cash, a clone of bitcoin that was split off from the original last week by a rival group of developers, was valued at more than $12 billion less than 24 hours after it had started trading.
“It’s just created new value out of nowhere,” said Rob Moffat, a partner at Balderton Capital, a London-based venture capital firm who focuses on fintech. “There’s no fundamentals behind any of this – it’s all based on public perception, so you can start to see some really strange phenomena.”
For an interactive Reuters graphic of the top cryptocurrencies, click on: here
Cryptocurrencies – so-called because cryptography is used to keep transactions secure – allow anonymous peer-to-peer transactions between individual users, without the need for banks or central banks. They use blockchain technology, a shared record-keeping and processing system that means digital money cannot be copied and spent more than once.
But advocates of cryptocurrencies say 2017 is just the beginning of bull run. They argue the finite nature of these currency units – there will never be more than 21 million bitcoin, for example – as well as the technological innovation that underpins them will ensure their enduring value.
Whichever way cryptocurrencies move, they are likely to move together because their values are highly correlated, feeding off each other and magnifying the market effect.
That’s partly down to investor sentiment, but also because the start-ups issuing new coins in ICOs generally collect money in a more liquid cryptocurrency, such as bitcoin or, more commonly, Ethereum’s ether – the second-biggest cryptocurrency in total value.
That has driven demand for ether, which has climbed over 3,000 percent so far this year and now has a market cap of around $28 billion.
Bitcoin, which was launched in 2009, was the first successful cryptocurrency and is still easily the biggest, with a market cap of over $54 billion, Reuters reports.
Its price has shot up around 225 percent so this year, and performed better than any conventional, central-bank issued currency in every year since 2010 bar 2014.