Policy —

Two reasons Bitcoin just surged past $4,000

The virtual currency has risen 300-fold over the last five years.

Bitcoin has risen 300-fold in five years.
Enlarge / Bitcoin has risen 300-fold in five years.

The virtual currency Bitcoin hit a new record over the weekend, surging past the $4,000 mark. As of press time, one Bitcoin is worth $4,250. It's an astonishing rally for a currency that was worth $580 a year ago and has risen 300-fold over the last five years.

It's not clear what's causing the currency's value to rise so rapidly.

One likely factor: last week, the Bitcoin network officially accepted a long-debated upgrade called segregated witness. The Bitcoin network limits the size of blocks on the Bitcoin blockchain, which in turn limits the number of transactions the network can process each hour. For the last year, the network has been bumping up against this limit, leading to congestion on the network and high transaction fees. Segregated witness aims to relax this bottleneck by moving part of each Bitcoin transaction outside the blockchain, allowing more transactions to be squeezed into each block.

Another possible factor: earlier this month, the Bitcoin network forked, creating a spinoff currency called Bitcoin Cash. Many people expected the schism to undermine confidence in Bitcoin, but that doesn't seem to have happened. The spinoff went smoothly, and the mainstream Bitcoin network continued working as well as ever.

The value of one Bitcoin has risen about 50 percent since the split happened on August 1. Perhaps Bitcoin speculators are simply relieved that a contentious fight is over and nothing catastrophic occurred.

Finally, there's an ongoing boom in "initial coin offerings"—sales of new, Bitcoin-like cryptocurrencies for a variety of applications. Last week, for example, a company called Filecoin raised $187 million in a single hour selling a not-yet-created cryptocurrency that will be used to purchase online storage space. Another virtual currency called Tezos raised more than $200 million in July. A third, called Bancor, raised $153 million in June.

These exotic new currencies are often offered for sale using Bitcoins, since it's often easier to exchange one cryptocurrency for another than to directly sell new cryptocurrencies for dollars. So people who want to invest in an ICO often need to get their hands on bitcoins (or ether, the currency of Bitcoin competitor Ethereum) first. With hundreds of millions of dollars pouring into these ICOs, that translates into a lot of demand for the most famous virtual currencies.

Listing image by Zach Copley

Channel Ars Technica