Bubble trouble: Bitcoin’s rapid ascent rings alarms

Cryptocurrency tops $11,000, but fades after sharp rally by 3.7 percent

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

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

Bitcoin enables fast transfer of funds outside of a centralized payment system.