Bitcoin hits record high as South Korean banks ban cryptocurrencies

Bitcoin hit a new record high of 17,428.42 dollars on Tuesday, almost a 20-fold increase in its price in what has proved to be the cryptocurrency's most successful year with millions of new investors flocking to it.

More than 17 million Bitcoins are in circulation as it reaches the record price of almost 17.5 thousand dollars Reuters/Benoit Tessier

Bitcoin’s seemingly unstoppable rise comes two days after the launch of the first ever Bitcoin futures on a US exchange.

Such is the scale of Bitcoin's dominance that South Korea has banned its financial institutions from dealing in virtual currencies. South Korea accounts for 20 percent of global Bitcoin transactions.

The question that puzzles even financial analysts is what exactly is Bitcoin.

According to Garrick Hileman of the Judge Business School at University of Cambridge, “Bitcoin is a digital alternative currency and by digital we mean it’s electronic, it doesn’t take physical form like the coins and bank notes we keep in our pockets.

“By alternative currency this means that it isn’t minted by a central bank, you can’t pay your taxes with it, you can’t settle official legal debts with it. It is something that is produced privately and is then created outside of official government channels and the financial system. It is run by a globally distributed database called the blockchain, which is basically a network of thousands of computers operating in hundreds of countries.”

Bitcoin limited

Another key issue is that Bitcoin is a finite resource. There is a fixed upper limit of 21 million Bitcoins that will ever be produced. Currently slightly under 17 million  have been created. Once the final four million have been produced by what are called "Bitcoin miners" - the computers that make them - that will be the end, unless there is a codechange to the software of the Blockchain network that has created it.

Financial analysts are sceptical about it, describing it as purely a speculative concept and warn that this bubble must burst again.

Bubble warning

In the past week the US's Federal Election Committee (FEC) has put out a warning about Bitcoin.

“This is not the first time the FEC has issued such a warning,” said James Hughes, chief market analyst with Axi Trader. “The last time was back in 1996 and that was about the dotcom boom and all those dotcom companies that were massively overvalued.

"No one is saying that Bitcoin and cryptocurrencies and all the Blockchain technology behind will not prove to be to be the most important technology of our time. But, when things do move so rapidly, the bubble must eventually burst.”

However, Hileman is more optimisic about Bitcoin’s resilience.

"Bitcoin has crashed and been declared dead numerous times. It had a big bubble in 2011, when the price first went above 30 dollars, and it susequently lost 90 percent of its value. That happened again in 2013-14 when the price first crossed the 1,000-dollar mark and then lost 90 percent of its value over the next 12 months.

"Its showing a resilience from an economic history perspective that you don't see with some other bubbles. This is more akin to something like the Amazon.com stock, which also went up 1400 percent in 1998 and then crashed during the dotcom bubble blowout, but is now much higher in value than it ever was."