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Bitcoin s resurgence may be short-lived
Jun 4th 2016
BITCOIN is back. Fans (and holders) of the crypto-currency were celebrating
after its price jumped more than 20% in the five days to May 31st, to nearly
$550 a level it last reached in August 2014. They should contain their elation:
the factors driving the rally are not unalloyed positives, and the competition
is doing even better (see chart).
Most trading in bitcoin takes place in China: Huobi and OKCoin, two Chinese
exchanges, are thought to account for more than 90% of transactions. The
currency seems to have become an outlet for Chinese savers frustrated with
their limited investment options and searching for high-yielding assets. The
Chinese authorities are worried enough to have banned banks from dealing in
bitcoin, but individuals are still free to speculate and have been doing so
with gusto. Bitcoin s newfound popularity in China is unlikely to diminish its
volatility, however, and thus boost its acceptance as a reliable international
payment system.
China has also become the global hub for bitcoin mining, the process by which
heavy-duty computing power is used to process transactions involving bitcoin,
earning those doing the processing some new bitcoin as compensation. Over 80%
of new bitcoin are now minted in data centres in places like Sichuan and Inner
Mongolia.
All this virtual mining may be playing a part in bitcoin s rally. Operators of
bitcoin mines get 25 bitcoin (about $13,500) for every block of transactions
they process. But this payment is set to halve on or around July 10th. That is
because the maximum number of bitcoin that can ever be produced is limited to
21m. As the number in circulation gets closer to the limit, the rate at which
miners can produce them automatically declines, according to a pre-ordained
formula. That makes life harder for miners: on May 29th, one of the biggest,
KnCMiner, declared bankruptcy, blaming the coming change. The reduced issuance
of new bitcoin should also push up the price, an outcome the current rally
seems to be anticipating.
Bitcoin s resurgence has come just as champions of crypto-currencies have
started to gravitate to another system, Ethereum, whose digital tokens are
called ether . This has both political and technical causes. Bitcoin s
developers have yet to agree on how to increase the capacity of their network,
which can only process seven transactions per second. And Ethereum makes it
easier for users to create self-executing smart contracts , something of a fad
in the world of crypto-currencies. Last week Coinbase, one of the biggest
bitcoin exchanges, declared bitcoin stagnant and said it would start to trade
ether too.