Three reasons why this bitcoin surge is not the same

Key Points
  • Bitcoin has more than doubled this year to record highs.
  • The surge worries some about a repeat of the 2000 tech bubble.
  • Digital currency and software developers say in the long run bitcoin and its underlying blockchain technology can fundamentally change business operations.
What's behind bitcoin's big surge?

Bitcoin's exponential surge is different this time around, most digital currency investors and software developers say.

To many, the enthusiasm resembles the rush into technology stocks before the dot-com bubble burst in 2000. Bitcoin itself plunged in 2013, before recovering and skyrocketing to records above $2,700 this year.

But just as the internet has since changed the world, digital currency experts believe their technology will transform society, meaning bitcoin may just be getting started, and this time is not the same.

Here are three reasons why:

1. Higher prices add value to the digital currency system.

Bitcoin is based on a secure financial record-keeping system called blockchain—everyone from small investors to Minneapolis Fed President Neel Kashkari sees more potential in blockchain than bitcoin itself.

The digital currency will still be important. Since the creation of bitcoin, hundreds of other similar products have emerged based on the same blockchain technology, creating global networks that their founders believe can change how businesses operate. To participate in those systems, users typically need to buy bitcoins first before converting those into another digital currency. Selling out of those currencies also then results in more bitcoin purchases.

"Bitcoin is becoming the currency of choice of going in and out of the ecosystem," William Mougayar, author of "The Business Blockchain," said.

He wasn't too concerned about the rapid rise in bitcoin's price. "If anything, it makes it stronger. The higher the market cap, the stronger the ecosystem itself," he said Thursday on the sidelines of a New York conference he organized, Token Summit.

Partly as a result of greater interest in cryptocurrencies, bitcoin in less than half a year has more than doubled in price and added more than $25 billion in market value, according to CoinMarketCap.

Bitcoin market value and price (2013 - 2017)

Source: CoinMarketCap

"Lots of software developers and business developers are using that newfound wealth to build on our new ecosystem," Joe Lubin, founder of blockchain software developer ConsenSys, told CNBC in a phone interview.

"It's impossible when you have a new technology to avoid irrational exuberance," he said. As for blockchain, "this particular technology I expect will be more pervasive in the change it will bring than the internet."

2. More people, including financial institutions, want to buy bitcoin.

Many people who attended this week's two digital currency conferences in New York noted "more suits" representing businesses and funds than expected for an event on technological development.

JPMorgan and Fidelity both made announcements this week about their involvement in cryptocurrencies, while 86 firms including securities clearinghouse DTCC joined the Ethereum Enterprise Alliance. Ethereum is a younger digital currency than bitcoin that many expect can create a network to transform the internet, as the price of ethereum has exploded more than 2,000 times higher this year, far outpacing bitcoin.

"I feel like right now the price is going up so much more, and more people are getting exposed to it," CoinDesk research analyst Alex Sunnarborg said at a Token Summit panel. "More traditional places are starting to see it. I think more money will probably come into this space."

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"We also saw a record number of transactions — about 300,000 every day on the bitcoin network," he said, citing his firm's first-quarter survey.

The report also pointed to increased attention from Google users. Search trend data showed inquiries on "bitcoin" and "ethereum" leaped this month to their most in at least five years.

By region, Nigeria, Ghana and Estonia showed the most interest, while Switzerland, Singapore and the Netherlands topped the list for ethereum searches, according to Google Trends.

Google search trends for "bitcoin" and "ethereum" (2012 -2017)

Source: Google Trends

3. The real world finds more ways to use bitcoin.

This year, Japan's government recognized the digital currency as a legal form of payment, spurring a flurry of activity in new exchanges. Major retailers also began accepting bitcoin for purchases.

In the U.S., high-profile companies like began accepting bitcoin in 2014 amid another price slump. But now, developers see greater potential than just payments for bitcoin's blockchain technology. Companies are using blockchain to connect cloud services, monetize all kinds of human interactions and give refugees access to a secure identity.

The new projects have increased interest in bitcoin around the world, rather than simply being a speculative asset dominated by Chinese traders.

"I don't think it's over-exuberance. I think it's the market starting to properly discount some of the utility that these assets have," said Benjamin Roberts, co-founder and CEO of Citizen Hex, an ethereum-focused start-up backed by three Canadian venture funds.

"Of course there was a big [bitcoin] bubble in 2013. At that time, there was a lot of exuberance around what was possible," Roberts said. "But a lot of the utility, those possibilities, hadn't been realized yet. Today, across cryptocurrencies as a whole, you're starting to see some of those preliminary use cases emerge."

To be sure, new technology almost always takes longer than expected to gain traction, and if bitcoin sees some rockiness after the latest surge it could take some time to recover. The Nasdaq composite crashed more than 80 percent in the tech bubble and did not top the 2000 peak until more than 15 years later.

"Right now, we are in the honeymoon phase where everyone's just excited," Blockstack co-founder Muneeb Ali said during a Token Summit panel. As projects fail and people lose money, he said, "out of the ashes of that the next Google and Amazon [will] emerge."

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