Bitcoin is now the most valuable "crypto-currency" with a total market capitalisation of about $18 billion
Bitcoin plunged Thursday only hours after investors, tipping the volatile digital currency to become a safe haven in an uncertain world economy, pushed it near all-time highs.
The unit broke the $1,100 barrier Thursday morning on the Bitcoin Price Index, an average of major exchanges, continuing a dizzying rise that made it the best performing currency of 2016.
In a sign of its continuing volatility, however, the digital currency plummeted up to 20 percent in the afternoon, trading at $950.50 on the BPI at 1510 GMT, a drop of more than $180 on the day.
Bitcoin has fluctuated wildly since it was created in 2009 and lost three quarters of its value when it fell from its previous BPI high of $1,165.89 in 2013.
And news of a major bitcoin theft by hackers in August sent its price plunging by more than 20 percent.
But analysts say its volatility will ease as volumes grow and point to a strengthening US dollar and tightening currency and capital controls, as well as the rise of the digital economy, as major factors behind its appreciation.
In particular, the chaotic withdrawal of high value bills in India and restrictions on buying foreign currency in China as the yuan slides against the dollar have stoked demand, analysts say.
Exacerbating the rocketing demand is a tightening supply of fresh bitcoins.
The currency was always meant to be finite, and more than three quarters of the planned 21 million bitcoins have already been 'mined'.
Encrypted digital coins are created by supercomputers and then traded online or exchanged for goods and services.
- Bitcoin the 'go-to asset' -
Vinny Lingham, a bitcoin expert and CEO of US digital identity protection startup Civic, told AFP the dwindling supply of new bitcoins, and regular currencies sliding against the US dollar as the Federal Reserve ratchets up interest rates, were pushing up the unit's value.
"There are fewer bitcoins coming out and people are seeing bitcoin as a good hedge against currency devaluation in their countries, and instead of buying the US dollar, people are buying bitcoins," he said.
Lingham highlighted the impact of wider geopolitical uncertainty, such as US President-elect Donald Trump's potential threat to emerging markets. He has predicted bitcoin will be worth about $3,000 by the end of 2017.
"Bitcoin is reacting as a safe haven," he said.
"Millennials do not believe in gold as their parents did. Bitcoin is becoming the go-to asset if you live in a foreign market and are concerned about your government."
The price of bitcoins in many emerging market currencies has risen even more steeply than in dollars, Lingham said.
In China, the yuan is at its lowest level in eight years against the dollar and Beijing's tightening controls on individuals' foreign currency purchases to curb massive capital flight is cited as driving bitcoin demand.
Indian Prime Minister Narendra Modi's shock decision to withdraw high-denomination 500 ($7.50) and 1,000 rupee notes from circulation is also thought to have boosted the currency.
- 'Global phenomenon' -
"It's not only China, it's a global phenomenon," Bobby Lee, founder and CEO of Chinese bitcoin exchange BTC China, told AFP.
"There are a lot of demonetising examples. In India they (are) cancelling some rupee notes, in Argentina they cancelled some notes as well... it makes bitcoin more attractive, it is a real new asset class."
Lee said there would be more regulation of digital assets worldwide in future.
"There is already a limit on foreign exchange conversion... but so far, capital outflows restrictions don't hit the bitcoin," he said
Dickie Wong, Hong Kong-based research director for Kingston Securities, added it was likely Chinese investors were moving money into bitcoin as the yuan sinks to circumvent the $50,000 annual limit on foreign currency purchases.
"The devaluation of the RMB (yuan) is the main problem," he said.
Bitcoin now has a total market capitalisation of more than $18 billion -- far more than rival so-called "crypto-currencies", although a fraction of the value of other globally traded currencies.
Ajay Sunder, vice president of digital transformation for Asia Pacific at consultants Frost & Sullivan in Singapore, said wider trends such as the rise in digital payments would strengthen the currency.
"Generally people are much more comfortable now using digital payment, digital transactions," he said.
"But bitcoins are still very marginal. It's still to be seen if it will go mainstream."
Battered bitcoin slides another 12 percent after China warning
A customer feeds cash currency in to a Bitcoin ATM located in Flat 128, a boutique in New York's West Village, U.S. on August 22, 2014. REUTERS/Brendan …
By Jemima Kelly
LONDON (Reuters) - Bitcoin plunged by as much as 12 percent on Friday after China's central bank urged investors to take a rational and cautious approach to investing in the digital currency, which is on track for its heaviest two-day drop in two years.
Bitcoin had been on a tear until Wednesday, gaining more than 40 percent in two weeks to hit around $1,139 on the Europe-based Bitstamp exchange, just shy of its all-time record of $1,163.
But the web-based digital currency, which has shown an intriguing inverse correlation to the Chinese yuan in recent months, plunged as the yuan soared on Thursday, falling as much as 20 percent at one point.
It continued that fall on Friday, with its losses accelerating after the central bank's warning.
It fell as low as $871, down almost a quarter from its peak on Wednesday, before recovering to about $900 by 1455 GMT (9:55 a.m. ET). That still left it down 10 percent on the day and on track for its worst two-day performance since January 2015.
The Shanghai head office of the People's Bank of China (PBOC) noted in a statement that bitcoin prices had shown abnormal fluctuations in recent days, and said those investing in it should do so carefully, with awareness of the currency's volatility.
The PBOC's words carried echoes of its 2013 warning that financial institutions should steer clear of the digital currency, which sparked a $300 slide in bitcoin.
The PBOC also repeated on Friday its 2013 view that bitcoin is not a currency and could therefore not be circulated as a real currency in the market.
"This is the Chinese authorities saying: we're watching," said Charles Hayter, CEO of digital currency data analysis website Cryptocompare. "The relative size of the bitcoin market is minor, but trading has reached up to $10 billion a day on the bitcoin-yuan pairs."
"The full meaning of the government's comments aren't 100 percent clear, but restrictions and regulation of trading is one avenue that could affect volumes and therefore price."
Hayter said trading between the yuan and bitcoin had made up about 98 percent of the market for the past six months, according to his analysis. Because there are no trading fees on Chinese exchanges, it is much easier to get in and out of trades and therefore creates a higher trading volume, he said.
Bitcoin can be used for moving money across the globe quickly and anonymously, and operates outside the control of any central authority.
That makes it attractive to those wanting to get around capital controls, such as in China, and also to investors who are worried about a devaluation in their currency - one of the reasons often cited for bitcoin's surge in 2016. While the yuan fell 7 percent, its worst year since 1994, bitcoin outperformed all other currencies, with a 125 percent climb.
But many bitcoin experts say Chinese trading volumes are overstated and attribute sharp moves to speculation by, for example, U.S.-based hedge funds.
"VOLATILE MARKETS"
The volatile trading prompted officials from the PBOC's Shanghai branch on Friday to meet representatives of a major bitcoin trading platform in China, BTCC.
"On January 6 the People's Bank of China Business Management Department and the Beijing Municipal Bureau of Financial Affairs jointly met with the relevant regulatory authorities of the 'currency network'," the PBOC said in the statement.
BTCC said in a post on Twitter: "BTCC regularly meets with (the) PBOC and we work closely with them to ensure we are operating in accordance with the laws and regulations of China."
"All of our users should be aware of the current policies on virtual goods as well as the risks involved in trading in volatile markets," another Tweet read.
Eric Gu, a blockchain expert and founder of ViewFin, a Chinese blockchain start-up, said the PBOC meets the country's major bitcoin exchanges regularly but had previously never made such meetings public.
But recent volatility has increased risks and has triggered fears that the market could be used as a channel for money laundering, he said.
"Previously, bitcoin trading volume was small, and money laundering was not possible in such a market," said Gu. "Now, the volume is up ... everyday, there are tens of billions of yuan worth of bitcoin changing hands. Volume is still (comparatively)small, but big enough to make the central bank worry."
A sticker reading "Bitcoin accepted here" is displayed at the entrance of the Stadthaus town hall in Zug, Switzerland, August 30, 2016. Picture taken August 30, 2016. REUTERS/Arnd Wiegmann
LONDON (Reuters) - The price of digital currency bitcoin slid around $50 on Wednesday after China's central bank said it had launched spot investigations on bitcoin exchanges in Beijing and Shanghai in order to fend off market risks.
The investigation of bitcoin exchanges, including BTCC, Huobi and OKCoin, was to look into possible market manipulation, money laundering, unauthorized financing and other issues, according to the statements posted on the People's Bank of China's website.
Bitcoin fell from around $909 on the Europe-based Bitstamp exchange to the day's low of $861, leaving it down almost 5 percent .
(Reporting by Jemima Kelly; Editing by Patrick Graham)
'Safe haven' Bitcoin retreats after shot at all-time high
Battered bitcoin slides another 12 percent after China warning
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