Why Is the Bitcoin Price Rising?

Editor's Note: Bitcoin crossed $1,700 on May 9, less than a week after this story posted.

After gains of as much as 65% over the last five weeks, many investors are asking, "Why is the Bitcoin price rising?"

On the surface, the soaring price of Bitcoin doesn't make sense. Most of the Bitcoin news this year has been negative.

Bitcoin price risingLess than two months ago, the U.S. Securities and Exchange Commission (SEC) rejected the Winklevoss Bitcoin ETF proposal.

In early February, the People's Bank of China ramped up scrutiny of the Bitcoin exchanges, suspending Bitcoin withdrawals and compelling the exchanges to charge trading fees to cut down on speculation.

Meanwhile, the two-year "scaling debate" within the Bitcoin community has continued to rage unresolved. With increased use, the network has reached the limits of how many transactions it can handle. But the two sides differ strongly on how to fix it.

While the combination of those three issues managed to pull the Bitcoin price down to about $936 on March 24, it's been on a rocket ride ever since. Today (Wednesday), the digital currency broke through the $1,500 level on the Coindesk Bitcoin Price Index. [Editor's Note: Bitcoin hit an all-time high of $1,540.71 early Thursday.]

Here's why the Bitcoin price is soaring...

Why the Bitcoin Price Is Rising So Quickly Right Now

As often happens with rising Bitcoin prices, multiple factors appear to be at work.

On April 1, a law that made Bitcoin legal tender in Japan went into effect. The law triggered a wave of retailers announcing they would accept Bitcoin, which in turn spurred buying.

Less than two weeks later, the Russian government reversed course on Bitcoin. Where last year the Russian Foreign Ministry was threatening cryptocurrency traders with jail, now it's planning ahead for full legalization of digital currencies by next year. (The Russians haven't gone soft - they believe they can use the technology to combat money laundering.)

On April 25, the SEC caused a stir when it announced it would reconsider the Winklevoss Bitcoin Trust ETF proposal. The SEC hasn't change its position, but was simply responding to an appeal by the BATS BZX Exchange where the Winklevoss ETF would trade. But the news raised hopes (and Bitcoin prices) anyway.

A less visible factor in the rise of the price of Bitcoin is its connection to the trading of other cryptocurrencies.

Over the past few months, many of Bitcoin's most popular digital cousins have themselves soared in value, including Ethereum, Ripple, Dash, Litecoin, NEM, Golem, and Decred.   According to Coindesk, the average "blue chip" cryptocurrency (the 37 digital currencies with market caps of $30 million or higher) gained 180.56% in the first quarter of the year.

In many cases, traders use Bitcoin to buy these other cryptocurrencies either because it's easier or because they can't use fiat currency. But they need to buy the Bitcoin first, adding to demand.

Related: How to Buy Bitcoins - Your Guide to Digital Profits

Then there are the problems at the Bitfinex and Poloniex Bitcoin exchanges. Both exchanges were affected by a policy shift at Wells Fargo & Co. (NYSE: WFC) , which stopped processing transfers from the Taiwanese banks both exchanges use.

On April 13, Bitfinex, the world's largest U.S. dollar-based Bitcoin exchange, announced indefinite delays in withdrawal requests for U.S. dollars from customer accounts.

One would think this would be bad for the price of Bitcoin, but it had the opposite effect.

The Bitcoin price on both Poloniex and Bitfinex has soared past levels on other major Bitcoin exchanges. It's possible traders were buying more Bitcoin with their U.S. dollars so they could get their money out of the exchange.

At one point the Bitfinex price was as much as $125 higher than Bitcoin prices elsewhere. Whether it was arbitrage or psychology, the issues at Bitfinex and Poloniex have helped pull global Bitcoin prices higher.

All of these factors are contributing to why the Bitcoin price is rising so rapidly. But one development is having the biggest impact right now - and it's one that will keep driving the price of Bitcoin higher for many months, if not years...

Why the Price of Bitcoin Will Keep Rising

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Over the past two years, we've seen increasing interest from financial institutions around the world in Bitcoin and the blockchain network technology that underpins it.

But while that interest had been focused mostly on Bitcoin's technology and how banks and other financial institutions could use it to increase efficiency (and profits) within their operations, lately it's expanded to include Bitcoin as an investment.

"The biggest driver right now is you're starting to see institutional investors take a keen interest in the entire sector," Brian Kelly, founder of Brian Kelly Capital, told CNBC yesterday (Tuesday). Brian Kelly Capital manages a digital asset fund that invests in Bitcoin and blockchain technology.

Kelly told CNBC that he'd become aware of this trend through conversations with other investors and institutions.

"I don't think this is hot money. This is real money that's going to sit around and build the new Internet," Kelly said.

The influx of institutional money would explain not just the rise in the price of Bitcoin, but its ability to maintain these large gains.

And it suggests a long, sustained rally in Bitcoin because big investors will need to take time to build their positions. The global Bitcoin market simply doesn't have the volume for a big investor to buy a large amount at once. Even with Bitcoin's hefty price increase, daily volume is only about $400 million to $500 million.

Compare that to Warren Buffett's purchase of just one stock, Apple Inc. (Nasdaq: AAPL), this past January. The 72 million shares he bought represented an investment of about $8.5 billion. If he bought an equal amount on each of the 20 trading days in January, Buffett alone would have invested $425 million each day. Meanwhile, the average amount of trading in AAPL shares each day in January was about $3.38 billion.

A major player investing in Bitcoin will require many months to build up a sizeable position - a great long-term catalyst for the price of Bitcoin.

That makes the loftier 2017 Bitcoin price predictions made at the end of last year all the more attainable.

For instance, Vinny Lingham, co-founder and CEO of Gyft and a board member of the Bitcoin Foundation, predicted Bitcoin would reach $3,000. And Tim Draper, founding partner of the Draper Fisher Jurvetson (DFJ) venture capital firm, called for an end-of-the-year price of $10,000.

And remember, the forces driving Bitcoin so much higher have done so even with the drag of the negative factors mentioned above. Imagine how rapidly the price of Bitcoin will climb when those issues, especially the scaling debate, are resolved.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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