Here's why bitcoin has gone ballistic

Bitcoin, the world's most in-demand cryptocurrency, began the year trading at below US$1,000.
Bitcoin, the world's most in-demand cryptocurrency, began the year trading at below US$1,000.PHOTO: REUTERS

You probably never heard of bitcoin a year ago, but just overnight it went through the roof - several times.

In a dizzying and volatile ride on Thursday (Dec 7), the price of a single bitcoin crossed US$20,000 on some exchanges, meaning it broke though six US$1,000 markers in 24 hours from US$14,000 at the start. It then fell more than 20 per cent to just over US$15,000 before rising to above US$16,000 on Friday morning.

Bitcoin, the world's most in-demand cryptocurrency, began the year trading at below US$1,000. It hit US$5,000 in October, but the real acceleration started in late November.

So what's been fuelling bitcoin's wild and meteoric rise in the past few weeks?

1. Entry of hedge funds

News in late October that it's not just retail investors interested in the cryptocurrency. CNBC reported that more than 120 hedge funds are focused solely on bitcoin and other digital currencies.

2. Inclusion in futures trading

Arguably the biggest reason for bitcoin's spectacular rise.

On the last day of October, the world's largest futures exchange CME announced it would launch bitcoin futures. It was followed quickly by Cboe Global Markets whose bitcoin futures start trading on Sunday. CME will launch its futures next week. There was even talk that Nasdaq would get into the action.

The move by two respected exchanges to include bitcoin - which has no intrinsic value and no backing from a government or commodity - was a big step towards giving the cryptocurrency more credence as a legitimate and tradeable asset class.

The move is also expected to bring many new players into the market. With a futures contract, banks can bet on the price of bitcoin without the complications of holding bitcoins, as the New York Times noted. Some banks have already signed up with the two exchanges and can immediately begin trading bitcoin contracts.

The futures contract will also allow investors to short bitcoin, or bet on the price going down, which has been hard to do until now. Bloomberg reported last week that many hedge funds are waiting on the sidelines, preparing to use futures to short or trade against bitcoin.

3. Bubble behaviour

Over and over, the bitcoin frenzy is being compared to speculative bubbles that have spectacularly burst in the past - from the tulip mania of 1600s to the the dot.com bubble of 1995.

Warnings are rife of the irrational mentality that can take over in speculative bubbles.

The frenzy among ordinary retail investors - not just mom-and-pop but young and old - is perhaps nowhere more sharp than in South Korea, dubbed ground zero for the global cryptomania.

The craze has spread so far that, in South Korea, bitcoin is trading at a premium of about 16 per cent over prevailing international rates, and its prime minister recently warned that cryptocurrencies might corrupt the nation's youth.