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All the theories behind bitcoin's recent price surge

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
A visual representation of the digital Cryptocurrency, Bitcoin is displayed on April 03, 2019 in Paris, France. Photo: Chesnot/Getty Images

Bitcoin (BTC-USD) is back.

The cryptocurrency has risen by over 100% against the dollar since the start of the year and over 50% since the start of the month. As of Tuesday, bitcoin was trading at a 10-month high above $8,000.

What’s behind the recent price spike? Everyone has a theory, but no one quite knows for sure.

“It’s kind of like saying why is there GDP growth that’s positive today — it could be many factors,” Tim Byun, the US CEO of crypto exchange OKCoin, told Yahoo Finance UK.

Here’s are all the main theories behind the recent price bump.

US-China trade tensions

President Donald Trump, right, with China's President Xi Jinping, left, during their bilateral meeting at the G20 Summit, Saturday, Dec. 1, 2018 in Buenos Aires, Argentina. Photo: AP Photo/Pablo Martinez Monsivais

While bitcoin has been trending higher throughout 2019, it has spiked 30% since Friday.

That coincided with US President Donald Trump slapping 25% tariffs on $200bn-worth of Chinese imports at the end of last week and China retaliating in kind on Monday.

The tit-for-tat trade war sent stocks tanking, with the S&P 500 (^GSPC) and the Dow (^DJI) both falling more than 2% on Monday.

As a result, some market commentators think bitcoin’s bull run has been fuelled by investors dumping stocks and buying bitcoin as the trade war heats up.

“It’s a natural hedge,” David Siemer, CEO of blockchain-focused investment firm Wave Financialtold Yahoo Finance. “The pitch for crypto for people like me has always been that it’s a non-correlated asset with the stock market, and it’s proven that a lot of times.”

David Cheetham, chief market analyst at trading platform XTB, said: “As is often the case with such an opaque market it is hard to definitively state what has caused this rally, but the recent escalation in US-China trade tensions seem about as plausible reason as any.”

Chinese investors piling in

The Chinese yuan has been falling against the US dollar. Photo: Yahoo Finance UK

A slightly different take on the trade war theory is that Chinese investors are piling into bitcoin to protect their wealth.

Some analysts argue Chinese investors are dumping yuan (CNYUSD=X) for bitcoin, reasoning that bitcoin will likely hold its value more than yuan over the next few months. The Chinese currency fell to its lowest level against the dollar since December on Monday.

“Rather than investors seeking out inherently risky assets as safe havens, a more likely explanation is the recent drop in the Chinese Yuan and the expectation of a further depreciation when Beijing seek to make exports more attractive in response to the latest round of US tariffs,” Cheetham said.

China banned bitcoin trading in February last year but investors in the country are reportedly still able to buy bitcoin from over-the-counter dealers rather than online marketplaces. Because bitcoin is still officially banned, this practice takes place in the shadows and it’s hard to tell how significant it is.

Lots of good headlines

Facebook cofounders Cameron, left, and Tyler Winklevoss have launched a new app that lets you spend crypto in stores like Whole Foods. Photo: AP Photo/Charles Krupa, File

Bitcoin’s rally also coincides with Consensus 2019 in New York, one of the industry’s biggest annual conferences. Around 5,000 people have descended on the Manhattan Midtown Hilton Hotel to talk about all things bitcoin and crypto.

As well as creating a feel-good buzz, it’s led to a slew of crypto-related announcements that could be pushing the price higher.

READ MORE: Crypto world descends on New York as bitcoin makes come back

Some of the most significant announcements include: Bakkt, a crypto exchange-backed by the New York Stock Exchange, announcing plans for bitcoin futures; Microsoft building a new identity verification tool using bitcoin; and Facebook cofounders the Winklevoss twins launching a new product that lets people spend bitcoin at places like Whole Foods.

These announcements all came on Monday, several days after crypto’s recent price spike began. But the good news may have helped sustain the rally.

Financial institutions getting into crypto

In this March 28, 2019, photo people are reflected in a window as they walk by a Fidelity Investments office in New York. (AP Photo/Jenny Kane)

Another explanation is more institutional investors embracing cryptocurrency.

Grayscale Bitcoin Trust, a fund that invests only in bitcoin, said Monday that its assets under management have hit a 10-month high of $1.4bn. Two thirds of its investment came from institutional investors.

CME Group, the Chicago-based options and futures exchange operator, also had a record day on Monday for bitcoin futures, a product only available to institutions not individuals.

“Yesterday, the bitcoin futures at the CME Group reached an all-time high of 33,677 contracts,” Mati Greenspan, an analyst at trading platform eToro, said in an email on Tuesday. “Each contract is worth 5 coins, so that's an equivalent of 167,385 BTC. If we assume an average price of $7,500 per coin, that's a total volume of $1.26bn, the highest ever recorded by far.”

READ MORE: Ex-Thomson Reuters CEO: 'Big banks feel they can be fast followers' on blockchain

These headlines follow a report last week that Fidelity, the US investment giant, is planning to launch crypto trading for institutional clients within a few weeks.

“One of the main suspected catalysts for the recent surge was the news that Fidelity is preparing to open up their bitcoin products for their clients shortly,” Greenspan said. “The firm currently has $2.46trn under management. If just 1% of that were to hedge into bitcoin it would cause an inflow to the market of about $25bn.”

Caution: bumpy road ahead

It’s hard to say which if any of these factors contributed to the bitcoin rally and to what extent. But executives and entrepreneurs in the space are quick to caution that the good times may not last.

“As an exchange, I think it’s very prudent for us to emphasis that prices are volatile,” OKCoin’s Byun told Yahoo Finance UK at Consensus. “It does go up and down a lot. While we see it green today, we’ve seen many days where it’s red. Why does it go down a lot? It’s hard to pin point.”

READ MORE: Bitcoin turns 10: An annotated timeline

“I think this is a short-term price movement that may evolve into something bigger, it’s very difficult to tell,” Thomas Chippas, the CEO of crypto exchange ErisX, told Yahoo Finance UK. “Everyone gets very happy and excited about it going up but we could come here tomorrow and it could be back down in the $3,900 range for all we know.”

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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