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Bitcoin Showing Typical ‘Aggressive Bubble’ Behavior: SocGen

Wednesday, 3 Apr 2013 | 10:02 AM ET
Luismolina | E+ | Getty Images

Online currency bitcoin has surged in value since the Cyprus bailout saga sparked global interest in alternatives. The currency surged over 360 percent in the past month, but one currency analyst is warning of its unstable nature.

Bitcoin is a virtual currency allowing users to exchange online credits for goods and services. There are currently 10 million Bitcoins in circulation but the currency is capped at 21 million coins. While there is no central bank that issues them, new bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining.

Bitcoins effectively bypass conventional banks, but they haven't escaped attention in the financial community with analysts at Societe Generale addressing the subject in a note to clients after a deluge of requests from as far afield as India.

Sebastien Galy, senior currency strategist at the bank told CNBC the rally in bitcoins has been driven by changes in the rules on creating new coins by mining, rather than a rally sparked by Cyprus uncertainty.

"With far more rapid advances in the technology of processing than mining, the rules have already been changed to stop some form of mining which were too effective. This was effectively a form of revaluation of the currency," Galy said in a research note on Wednesday.

The price of a bitcoin versus the dollar closely follows the cost of mining the virtual asset, he said, adding that as more people opt to mine bitcoins the price rises because of a fixed weekly supply.

According to Bitcoincharts.com, a bitcoin traded at about $141 on Wednesday morning, up from $30 at the start of March.

What is Bitcoin?

"From a trading point of view, we broke out of the upward trending channel in an exponential upswing typical of aggressive bubbles," Galy said.

The rising value has generated even more buyer interest and according to Galy that has led to hoarding, creating a"positive feedback loop, whose nature is quite questionable".

"With confidence in this bitcoin potentially increasing, the market actually starts building up its intrinsic value as a means of exchange, which might eventually make it potentially more stable in the long-term," he said, adding that professional investors he had spoken to think that bitcoin is going to rise through a very bumpy road in the next few months.

"Volume is low and hence it is easy to influence the price. There is no certainty that the supply of Bitcoins will follow the original rules, these rules have already been changed and presume a trust in the ones able to issue the currency. In many countries, printing money is a state privilege that will come to bite in the future as this, like gambling, is regulated for good reasons."

Contact Europe: Economy

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