In bitcoin, we trust.

Photographer: Chris Ratcliffe/Bloomberg

Bitcoin Is an Escapist Safe Haven

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Bitcoin is worth more than $1,000 for the first time since 2013, when it crossed that line very briefly. If one considers it a currency -- which is open to debate -- it would be the best-performing one in the world in the last 12 months: It has gained more than 150 percent against the U.S. dollar. That's a Donald Trump-like phenomenon in finance.  It shows a rising demand for an alternative to traditional money.

Despite its rising price and profile, bitcoin is still something of a toy currency. It has rarely logged more than 300,000 daily transactions, significantly fewer than Croatia's national clearing system registers in that country's currency, the kuna. The number of merchants accepting bitcoin is growing, but it's still extremely challenging to use it as a principle currency, wherever you live. For practical purposes, it's mostly useful to people seeking to bypass their country's currency restrictions, as some Chinese and, for example, Venezuelans do. According to Coin Dance, last year the average weekly bitcoin trading volume quadrupled in Venezuela. Bitcoin trading volumes in Chinese yuan -- the currency responsible for 97 percent of all bitcoin trading -- are double what they were a year ago, according to CryptoCompare.

At this point, however, the rally is not just about breaking out of restrictive markets. Speculators are driving up the value of the cryptocurrency because, for the first time in its history, it's looking like a reliable safe haven investment. 

Political troubles in the U.S. and Europe have clearly shown market players that old models are no longer reliable predictors. When rules go out the window and established systems tremble, Bitcoin, despite its spotty history of costly glitches, scams and criminal uses, looks like a suitable safe haven. Its decentralized nature means it's not part of any system: the number of bitcoins in circulation is driven entirely by mathematics. That makes it Trump-safe, Brexit-safe, oil-safe -- whatever danger you fear, Bitcoin has no direct exposure to it, unlike, for example, gold. The virtual currency's value rests, in the final analysis, on nothing but the faith of the community that supports it.

The faith can be relatively easy to undermine, of course. In 2013, bitcoin plummeted from its high because of a December move by the People's Bank of China, which banned mainland banks from dealing in the cryptocurrency. At the time, it looked like a harbinger of restrictive policies by other central banks. Three years have passed, however, and no crackdown materialized. On the contrary, central banks are exploring bitcoin's blockchain technology for minting digital currencies of their own. And it's possible that this year, the U.S. Securities and Exchange Commission will finally approve the first bitcoin exchange traded fund, proposed by the Winklevoss twin brothers, American internet entrepreneurs and Harvard classmates of Facebook's Mark Zuckerberg whom they sued for stealing their social-networking idea. 

The SEC has held up the ETF's registration for two years already. In October, it called for more feedback. That it hasn't turned down the fund outright despite strong doubts about bitcoin as an asset is a source of hope to the digital currency community. If the SEC gives its approval, people will be able to trade bitcoins through their broker rather than through potentially unreliable cryptocurrency exchanges.

In short, there appears to be no threat to bitcoin from regulators, and it's impervious to all other external threats. As for internal ones, the community chooses to dismiss them as growing pains. So what if the system gets hacked and money gets stolen? That is rare and anyhow not altogether unexpected on the digital frontier.

For Chinese people in particular, the virtual currency is one of the few possible hedges against the renminbi's devaluation. Trading volumes in other currencies are also on the rise, but bitcoin would sink like lead if Chinese speculators lost interest. While the yuan loses value -- and it lost 6.5 percent last year, making it the fourth worst-performing emerging markets currency -- and while regulators appear benign, there's no stopping the bitcoin rally. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net