Bitcoin on the move… higher!

The digital currency is bouncing back after a dreadful 2014 tempting investors to buy back in

by Julie Verhage and Olga Kharif, Bloomberg

Bitcoin is back in the news, but this time it seems to be for all the right reasons.

After a blockbuster 2013, the digital currency tumbled throughout 2014 on negative headlines, such as the February 2014 bankruptcy filing of Mt. Gox, a Tokyo-based Bitcoin exchange. Since then, the currency has been bouncing back and forth between $200 and $300.

That is, until now.

Bitcoin has embarked on a seven-week winning streak, the longest since November 2013, according to Bloomberg data. Industry experts and insiders have a range of reasons for the recent surge.

Market participants are citing two big reasons for the rally. The first is enhanced interest and acceptance from established financial companies. Much of this is due to Bitcoin's blockchain technology, which Goldman Sachs, Morgan Stanley, and a number of other firms have taken an interest in as they seek to apply it to overhauling the trading of securities, derivatives, and loans.

According to Gil Luria, an analyst at Wedbush Securities who covers the sector, said in an interview that Bitcoin is finally catching on with the financial establishment.

It is becoming increasingly clear to banks and financial institutions that bitcoin and blockchain technology will become an important part of the future delivery of financial services based on media coverage and investments by other large banks. As investors realize that many of the applications will be built on the bitcoin blockchain, they eventually arrive at the conclusion that if these applications succeed the price of the bitcoin currency will go up. Our 12-month price target for bitcoin is $400 based on expectations for broad adoption of bitcoin applications within the next ten years.

Others in the community are speculating that the economic situation in China could be fuelling the rise as market turbulence encourages local investors to get creative when it comes to moving their money out of the country. Bitcoin offers one potential avenue around capital controls.

This year has brought about an unprecedented exodus of cash from China following a surprise devaluation of the yuan in August and a two-month stock market rout. Investors pulled $194 billion from the country in September, extending this year’s outflow to $669 billion. 

Adding to the positive sentiment is a recent decision from a top European Union court, which ruled that exchanging virtual currencies should be exempt from value-added tax in the same way as traditional cash. Basically, this levels the playing field a bit between Bitcoin and traditional money.

Ashraf Laidi, chief executive officer of Intermarket Strategy, argued in a note this morning that the momentum from the EU ruling could Bitcoin propel the crypto currency to "store of value" status:

Bitcoin surged in June-July amid surging market expectations of a Greece exit and the revelation that China held less gold in its reserves than had been anticipated. Last week’s court ruling should push exchanges, brokerages and banks to launch bitcoin-related instruments such as ETFS, aimed at trading, hedging and speculation. Bitcoin’s medium of exchange will only grow from here. Its 'store of value' status may not be a consideration for today, but will become so next year.

Catching on with the financial establishment, it seems, is so far very lucrative.