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Bitcoin tops $11k, but fades after sharp rally

Bitcoin's rapid ascent has led to countless warnings that it has reached bubble territory.

Bitcoin's rapid ascent has led to countless warnings that it has reached bubble territory.

Bitcoin yesterday zoomed past $11 000 (£8 185.5) to hit a record high for the sixth day in a row after gaining more than $1 000 in just 12 hours, stoking concerns that a rapidly swelling bubble could be set to burst in spectacular fashion.

After soaring more than 1 000% since the start of the year, Bitcoin rose as much as 15% on Wednesday, but by mid-afternoon in New York, the virtual currency was trading at $9 500, down 3.7% on the day on Luxembourg-based Bitstamp, one of the largest and most liquid crypto-currency exchanges.

"As many seasoned traders know all too well, anything that rockets higher, tends to fall down faster when the time comes, and the time will come," said James Hughes, chief market analyst at FX broker AxiTrader.

Bitcoin topped $10 000 for the first time in early Asia trading, before surging above $11 000 less than 12 hours later to reach $11 395.

Bitcoin's rapid ascent has led to countless warnings that it has reached bubble territory. But the warnings have had little effect, with dozens of new crypto-hedge funds entering the market and retail investors piling in.

London-based, one of the biggest global Bitcoin wallet-providers, told Reuters on Wednesday that it had added a record number of new users on Tuesday, with more than 100 000 customers signing up, taking the total number to more than 19 million.

The evidence suggests that few of the users are buying Bitcoin to use it as a means of exchange, but are speculating to increase their capital.

"What's happening right now has nothing to do with Bitcoin's functionality as a currency – this is pure mania that's taken hold," said Garrick Hileman, a research fellow at the University of Cambridge's Judge Business School.

Hileman, who last week gave a lecture to the Bank of England on the risks of Bitcoin and other crypto-currencies, also flagged the risk of the whole market collapsing entirely.

"There's always the possibility that some fundamental cryptographic flaw that we can't solve craters the whole space, or that regulators unite and decide this represents systemic risk and actually could trigger the next financial crisis," he said.

"Exit ramps"

Created in 2008, Bitcoin uses encryption and a blockchain database that enables the fast and anonymous transfer of funds outside of a conventional centralised payment system.

It has far outstripped gains seen in any traditional asset classes or currencies this year. Its rise accelerated in recent months as exchanges such as the CME Group and the Chicago Board Options Exchange announced plans to offer futures contracts for the crypto-currency.

On Wednesday, a source with knowledge of the matter said Nasdaq plans to launch a futures contract based on Bitcoin in 2018.

Sceptics say it is a classic speculative bubble with no relation to real financial market activity or the economy. Most famously, JPMorgan boss Jamie Dimon labelled it a "fraud".

But even Dimon and others who say Bitcoin represents a bubble – now the consensus view among mainstream investors – do not deny its price rise could still have further to go.

"It's got all the shapings of your tulip bubble chart [but] that tells you nothing about where that price line could go depending on the number of people who wish to own it," said Standard Life's head of investment strategy, Andrew Milligan. "Who is to say it doesn't reach $100 000?"

In some emerging markets, Bitcoin had hit well over $10 000 previously.

In South Korean exchanges, too, Bitcoin was already close to $11 000 or higher early this week. On Zimbabwe's local exchange, Bitcoin touched a new high of $18 500 on Wednesday before retreating to $18 000.

The fact that Bitcoin now provides "exit ramps" from national currencies that were becoming easier to use, Hileman said, could exacerbate any future financial crisis. Coordinated regulatory action might therefore be necessary in order to stave off an "economic calamity", he said.

Despite its mushrooming value, however, Bank of England deputy governor Jon Cunliffe said Bitcoin was not big enough to pose a risk to the global economy.

New York Federal Reserve president William Dudley said the Fed is in the early stages of considering "what it would mean" to offer digital currencies sometime in the future and whether it may be necessary as an alternative to cash.

Mike Novogratz, a former macro hedge fund manager at Fortress Investment Group, said in a Reuters Investment Summit this month that mainstream institutional investors were about six to eight months from adopting Bitcoin.

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