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Bitcoin Bubble: How 'Geeks' Sent Prices Parabolic

Casascius | Wikipedia

With the price surging more than 50 percent in just the past three days, even Bitcoin supporters acknowledge that the digital currency is unofficially in bubble territory.

Widespread chatter about the alternative money has sent values parabolic, with one Bitcoin fetching $93.04 at daybreak Monday, then zooming to $141.32 nearing midday Wednesday, according to trading on Mt. Vox, the most popular Bitcoin exchange. (Click here for a Mt. Gox chart)

"There is a little bit of a bubble. I'm not happy about prices going up as fast as they have," said Alan Safahi, CEO of Zip Zap, which bills itself as the largest cash payment processor of Bitcoins. "For any commodity it's normal to have price adjustment, to test new lows and new highs. It's not good to always go up."

Yet that is exactly what Bitcoin has done, swelling from $34 on March 3 all the way up to an intraday high of $147 a month later.

(Read More: Bitcoin Bonanza: Cyprus Crisis Boosts Digital Dollars)

Bitcoin is an open-source digital, highly encrypted currency that is bought and sold online. Buyers give cash and receive a code that allows them to make purchases at a growing number of online retailers.

Lest anyone think they live strictly in the domain of underground computer geeks, no less a source than Art Cashin, the well-respected market veteran and director of trading floor services at UBS, addressed the craze in his morning note to clients.

"It is rare that we get to see a bubble-like phenomenon trade tick for tick in real time. Usually it's kind of regional aggregate pricing like real estate reports," Cashin said. "But, all that may be changing—before our very eyes—quite literally. The bubble du jour may be something called a 'bitcoin.'"

(Read More: Bitcoin Shows 'Aggressive Bubble' Behavior: SocGen)

There are several events that could be tied to the recent surge in Bitcoin trading.

Financial media outlets have glommed onto the trade; the price surged 13.5 percent a week ago, coinciding with a CNBC.com report on the phenomenon.

At the same time, the trade got a huge boost when the Financial Crimes Enforcement Network on March 18, without mentioning Bitcoin specifically, said it will not prosecute those issuing what it deemed "virtual currencies."

Also, Western Union recently said it will begin experimenting with digital currencies for customer convenience.

Throw into the mix geopolitical turmoil, such as the tax imposed on private depositors in Cyprus to stave off the nation's banking crisis, and the stage has been set for a meteoric Bitcoin surge.

(Read More: 'Like a Funeral': Cyprus Bank Counted Down Brutal Death)

"It got traction because it's decentralized, it's not subject to government meddling, it's considered safe and there's limited supply. So that drives value in kind of a commodity-type perception," Safahi said. "We now have a whole new generation of geeks who are willing to accept open-source as reliable."

Whether the Bitcoin craze ever spreads beyond those "geeks" is dependent on several factors.

One of the primary issues is security—critics worry that a clever hacker could plow into a Bitcoin system and pilfer accounts with aplomb. Some were concerned that volatile Wednesday trading, which saw a range from $147 at the high to $107.08 at the low, suggested the system is subject to a "Hack Crash" similar to the stock market's 2010 "Flash Crash" that sent major averages plummeting in a matter of minutes.

(Read More: Bitcoin Boom? An ATM for Virtual Money)

"It's impossible to ignore, because everybody is tweeting me about it. It's on everybody's radar displays," said Boris Schlossberg, managing director at BK Asset Management. "As far as a viable currency, it's a fantasy in most people's eyes, but it's definitely emblematic that there's a huge amount of anxiety among the investment class."

Schlossberg figured the enthusiasm w`ill last as long as it takes for the government to decide Bitcoin use has become too widespread not to be regulated.

"At the end of the day if the government decides to regulate it one way or the other you may wind up with just a bunch of code in your hands and nothing else," he said. "It doesn't really have any value other than it's socially acceptable."

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