Bitcoin Surges to Two-Year High as Supply Seen Shrinking in July

By Justina Lee for Bloomberg

Bitcoin surged to a two-year high amid expectations supply of the digital currency will shrink next month.

The cryptocurrency rallied to $720.77 on Monday, the highest since February 2014, according to data compiled by Bloomberg. It was trading at $692.83 as of 2:20 p.m. in New York, up 20 percent from Friday.

Profits from mining bitcoins will be reduced in July, a process that’s written into the code to limit supply, according to Chinese exchanges OKCoin and Huobi. Increased attention from venture capitalists and banks on blockchain, the technology of digital ledgers, has boosted bitcoin’s legitimacy, Jack C. Liu, chief strategy officer at OKCoin, said in Hong Kong.

“The halving of the supply of Bitcoin is attracting many retail investors,” Liu said. “More broadly, we continue to see follow-through from the blockchain hype cycle translating to interest in bitcoin the asset.”

The price of bitcoin has mostly recovered following a steep decline to less than $200 in January of last year from more than $1,000 in December 2013.

Bitcoin’s rebound is coinciding with weakness in the yuan, which fell the most in two months on Monday in Shanghai. Losses have accelerated in recent weeks as the dollar strengthened and China’s economic outlook deteriorated. Data Monday showed industrial output rose 6 percent in May from a year earlier, while fixed-asset investment increased 9.6 percent in the first five months of 2016, missing all 38 economist forecasts.

Capital Outflows

“What we’ve seen over the weekend is more of the same: Chinese fear of a slowing economy and the yuan potentially looking to make another move lower,” said Ryan Rabaglia, head of wholesale product management at ANX International in Hong Kong. “Each time we see yuan weakening we tend to see a triggering of capital outflows out of China, and bitcoin has been on the winning end of that.”

The yuan is trading near the five-year low it touched in January, while the Shanghai Composite Index is this year’s worst performer among 93 global stock measures. Goldman Sachs Group Inc. warned this month that the yuan weakness may trigger capital outflows and increase bets on a one-off devaluation.

Bitcoin was created in 2008 under the name of Satoshi Nakamoto, a programmer or a group of programmers, and does not operate through a central bank. Rather a network of volunteers validate transactions via their computers, which require encrypted electronic signatures, and in return earn fees based on market prices.

In the first quarter of 2016, venture capital investment in startups commercializing blockchain reached $1.1 billion, according to industry researcher CoinDesk. The U.S. Commodity Futures Trading Commission officially classified bitcoin as a commodity in 2015.

“The halving of production has fueled expectations of supply reduction,” said Li Lin, founder of Huobi. “Use of bitcoin has become more common among the public, giving its development a more favorable social environment.”

First appeared at Bloomberg