Bitcoin Rally: Digital Currency's Surge Driven By China, Speculators, The Blockchain (And Ponzi Schemers?)

Bitcoin is in the midst of a spectacular surge. Over the last month, the digital currency's price against the dollar has nearly doubled. On Wednesday, bitcoin climbed above $500 before settling back to $456 at 1:30 p.m, showing a 14 percent increase in a day.

Analysts and brokers see a tangle of factors at play, from capital flight out of China to increased consumer confidence in bitcoin’s underlying technology. At the same time, however, bitcoin enthusiasts are worried that some of the malfeasance that marked bitcoin’s early days -- namely Ponzi schemes -- may be accelerating the rally.

For adventurous traders, bitcoin’s skyrocketing price could mean quick profits, just as a sudden economic drop (like the one in early 2014) could spell big losses. However, volatility in the digital currency is unlikely to change institutional interest in its technological backbone.

Here are five factors likely contributing to bitcoin’s recent surge:

China Unleashed

The price of bitcoin has soared since the Monday announcement that BTCC, a major bitcoin exchange in China, will be accepting direct deposits from banks. BTCC plans to halt deposits via agents on November 15, profoundly simplifying the bitcoin exchange process.

“Recent bitcoin price increases have reignited enthusiasm in buying bitcoin. BTCC is confident this trend will continue. As such, we are pleased to announce that we now accept direct deposits,” the BTCC announced Monday.

In the days leading up to the announcement, bitcoin’s price was making small, single-digit increases on the CoinDesk Bitcoin Price Index (BPI). Following the announcement, bitcoin soared, increasing 10.54 percent at Monday's close, then increasing a further 11.51 percent the following day.

Bitcoin is a useful way for consumers and small businesses to sidestep the country's capital controls, which stop individuals from moving more than $50,000 out of the country in a single year. Gil Luria, a leading digital currencies analyst at Wedbush Securities, said that this could be a factor in the rising price.

“Part of it is Chinese citizens that have capital they want to get out of the country are using bitcoin,” said Luria. BTCC’s announcement makes it easier than ever to do so. “Those types of changes do seem to have an impact on the price of bitcoin,” he said.

China is no stranger to virtual currencies. Tencent’s Q-Coin, which was used to buy virtual items for avatars on the instant messaging service, developed into something of a precursor to bitcoin as users began trading coins between themselves. The party didn’t last long: in 2007, the Chinese central bank announced a crackdown on virtual currencies like Q-Coin. It remains to be seen what restrictions, if any, the Chinese Communist Party imposes on bitcoin trading. For now, however, BTCC is open about its activities.

Investor Confidence On The Rise

The blockchain, which governs the way bitcoin is exchanged, is developing a reputation as a secure method of managing transactions through a decentralized network. It works as a "distributed ledger" to track transactions in the network.

There is a new confidence in the power of the blockchain, highlighted by a frontpage story in the Economist last week, as organizations seek to use the distributed ledger technology in a variety of ways. NASDAQ has plans to record trades with a similar system, while Barclays has signed contracts with two blockchain startups called Chainalysis and Wave. Honduras is even looking at using distributed ledgers for its land registry.

Luria said that an interest in bitcoin has been sparked by these companies exploring blockchain potential. "The coverage [of bitcoin] has become a lot more favorable," he said.

Ponzi Schemes

Even as bitcoin’s star has risen on Wall Street, some old bugaboos still haunt the currency. After the first bitcoin bubble of late 2013 burst, a slew of Ponzi schemers and scam artists came to light. Some were convicted. Others escaped charges.

Now, bitcoin exchanges are sounding the alarm about an apparent global pyramid scheme masterminded by Sergei Mavrodi, a former Russian politician who was convicted in 2007 for defrauding investors out of $4.3 million.

The gambit, called MMM Global, asks people in emerging economies like South Africa and Indonesia to “donate” money to others in the form of bitcoins. These payments are converted to a proprietary currency known as 'mavros', named for founder Mavrodi, which accumulate interest at extremely high monthly rates, sometimes up to 100 percent. Members are incentivized to recruit others and share profits.

MMM casts the entire operation as a “community of people providing each other financial help” through direct transactions. Members who post video testimonials attesting that “MMM pays” get higher payouts -- a Youtube search yields more than 15,000 of these videos.

Though it’s impossible to tell to what extent the rapidly expanding network has contributed to global demand, increasing bitcoin trading volumes in countries like South Africa align closely with local Google searches for “MMM”.

O’Connor, who called the MMM developments “very important,” stopped short of ascribing recent price gains to the scheme. “That stuff happens in this space. It’s very difficult to pinpoint in this situation,” he said. Two of China's major bitcoin exchanges have issued warnings over MMM.

Luria also declined to attribute bitcoin price movements to questionable activity. “That drives part of the volume in bitcoin, but it doesn’t necessarily drive price up or down in any given period."

The End Of Silk Road

Recent trading volume may also have to do with the impending sale of 44,341 bitcoins seized in 2013 as part of the U.S. government’s investigation into bitcoin-based black market Silk Road.

The auction, which at current prices would bring in $21 million, marks the end of the U.S. Marshals’ bitcoin hoard, which once totaled more than 144,000 BTC. Much of that bounty came from the stash of Ross Ulbricht, aka Dread Pirate Roberts, who was convicted in February of money laundering and other serious charges in connection with his involvement in Silk Road.

Apart from heralding the end of Silk Road’s riches, the big sale means a bump in activity for bitcoin exchanges. “Anytime in the past where one of the auctions is coming up, you see increased trading activity, both positive and negative,” said O’Connor.

Speculation

As is always the case with bitcoin -- and any other tradable asset -- rallies invite new investors eager to get a piece of the action. Rallies can sustain themselves on optimism that turns into a feeding frenzy. “Small changes in perception of future outcome make big changes in the price of bitcoin,” said Luria.

For traders, the ease of buying and selling bitcoin puts it in league beyond assets like stocks, which must be traded in legal, regulated exchanges. That allows for more extreme movements than one might see in other assets.

Luria didn’t offer any prognosis for the future of the rally. “We’ll see if it lasts. All we can anticipate is it will continue to be volatile.”