Tech Transformers

Bitcoin soars above $1,700 as market cap adds $1 billion in just 24 hours

Key Points
  • The price of bitcoin rose above $1,700 Tuesday morning, according to a price index by industry website Coindesk.
  • With bitcoin's price so high, analysts are contemplating what risks could scuttle the recent surge.
Bitcoins prices are surging

The price of rose above $1,700 Tuesday morning, according to a price index by industry website Coindesk.

With the price so high, analysts are contemplating what risks could scuttle its recent surge.

The digital currency has been rallying significantly in recent weeks. Over one month, the price has increased by 43 percent, according to Coindesk figures. Over one year, the market capitalization for bitcoin has increased massively, from around $7.16 billion in May 2016 to $27.9 billion today. In just the last 24 hours its market capitalization has risen by over $1 billion, according to the website's price index.

While the price rises, cryptocurrency investors are also becoming more confident. The number of "long" bitcoin positions held — where investors speculate that it will rise in price — has increased from a low of 7,649 on April 29 to 15,279 on Tuesday, according to data from bitcoin exchange Bitfinex. Over the same period, short positions held have remained fairly consistent at around 17,000.

Recent developments in bitcoin are continuing to sustain the rally. Japan's decision to legalize the currency as a payment method has led to a spike in popularity and a greater amount of bitcoin being bought with Japanese yen. Supply and demand dynamics are also having a large impact on the digital currency, according to Chris Burniske, a blockchain products lead analyst at fund manager ARK Invest.

Bitcoin on the rise

Last summer, bitcoin's annual rate of supply creation was halved. This was an automatic process, written into bitcoin's code when it was invented in 2008 to reduce the rate of supply every few years to prevent inflation.

"This means half as much bitcoin is being minted in 2017 as in the first half of 2016," Burniske told CNBC via email.

"When that decreasing rate of supply expansion is coupled with ongoing growth in bitcoin being used as a means of exchange and store of value, either velocity must go up or the price must go up to accommodate the market dynamics."

But, risks remain for bitcoin, and one of the biggest risks might be internal politics. Over the past few months, bitcoin proponents have debated how to scale up the technology to allow more simultaneous transactions.

"While some progress has been made regarding the ongoing scaling debate, there are still strong interests that are diametrically opposed in how to proceed," said Burniske.

Bitcoin shakes off rejection

"On one side, a few influential Chinese miners want to increase bitcoin's block size to accommodate more transactions per block. On the other side, bitcoin's most influential software developers want to implement a software update called Segregated Witness to accommodate more transactions, among a host of other improvements to the protocol."

This divide threatens to split bitcoin proponents and could lead to a "fork" in the bitcoin blockchain, effectively creating two separate types of bitcoin.

One result of such a split would be to resolve the conflict by putting both ideas to the test, but it would also create problems, warns Charles Hayter, CEO and founder of price comparison site Crypto Compare.

"The issue with a split, and especially one for bitcoin, is the fallout in terms of publicity as it will gain no favors in the complexity and show of disunity," he told CNBC via email.

"This is why the issue or absolute impasse in negotiations has been skirted round at all costs. Although there are the more bellicose and fanatical elements in the equation — the general spirit is to move in a compromise that gives concessions to various parties and finds routes round various obstacles."

While the scaling issue remains, fears of a "hard fork" have softened recently, thanks to the implementation of Segregated Witness in a different cryptocurrency called litecoin. For a full explanation, read here.

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