The price of bitcoin has experienced a steady rally in 2016: It has increased from $433 in January, surging past the $700 mark for the second time in late October. That marks a year-to-date increase of around 60 percent at today’s price, which seems to be settling down a bit at around $690 – $700 per bitcoin. Bitcoin’s price surge should not come as a big surprise given that 2016 has been an excellent year for the currency, and even more so for its underlying blockchain technology.
Blockchain distributed ledger technology is finally gaining widespread adoption for an array of different purposes. The use of the blockchain is currently being implemented to reduce operational costs in the financial services sector, record land ownership, fight digital content piracy, develop smart contracts, prove physical asset ownership and reduce cross-border payment costs, among other uses. While there have been many skeptics when it comes to bitcoin as a currency, the blockchain is poised to become the game-changing technology that bitcoin enthusiasts once predicted it will be.
Having said that, it is not only the blockchain that has been gaining in popularity and acceptance. In 2016, bitcoin adoption has shot up globally, according to data collected by Coin Dance. Most notably, it has increased heavily in nations that have experienced political or economic distress in 2016, such as Turkey, Ukraine, Brazil, Venezuela and Colombia.
News regarding Bitcoin regulation, which has been a key factor affecting the price of the currency, has been largely positive throughout the year. Russia has softened its stance on bitcoin, while China has hosted a major blockchain conference and South Africa has given the green light for Bitcoin startups to blossom.
In late October, the price of bitcoin surpassed the $700 mark for the first time since June and began climbing toward a new annual high, continuing its steady price increase — only interrupted in the summer months by the Bitcoin halving and the Bitfinex exchange hack.
Here are a few potential reasons why the price of bitcoin has surged in 2016 and why it will likely continue to move north in the coming months.
Positive Bitcoin News in the Headlines
Not a week goes by where there isn’t an announcement of a new startup disrupting another industry using blockchain technology. From the financial industry to the music industry and the art market, it almost seems as if blockchain applications are endless. These headlines have put bitcoin in a positive light and have helped to improve the digital currency’s tainted image, which has also likely aided in the recent price improvement.
Another driver behind the positive bitcoin price trend is the scaling of Bitcoin. On October 27, Bitcoin Core version 0.13.1. was launched, which introduced Segregated Witness. Segregated Witness (SegWit) is a proposed soft fork of the Bitcoin protocol that aims to solve issues around scalability of the Bitcoin network. The proposed update to the Bitcoin network includes making programming more flexible, a malleability fix and a block size limit increase to about 1.6 to 2 megabytes, depending on the type of transaction, among several other improvements.
This proposed fix for the heavily debated Bitcoin scalability issue has likely been another underlying driver of bitcoin’s recent price movement, although it remains to be seen whether the SegWit soft fork will be implemented by the bitcoin mining community.
China’s Weakening Currency Boosts Chinese Bitcoin Demand
One of the primary reasons cited behind increasing bitcoin demand coming out of China has been the weakening of its currency, the yuan renminbi (CNY). On October 17, the People’s Bank of China (PBOC) set its USD/CNY fixing rate at a 6-year low of 6.7379, which is a touch weaker than its previous fix of 6.7157.
Since the beginning of 2016, the yuan has depreciated over 3.5 percent against the U.S. dollar. As China is a net exporter and the U.S. is one of its key trading partners, it is in China’s best interest to keep its currency weak against the U.S. dollar. This, on the other hand, weakens the Chinese consumers purchasing power. Hence, a move from CNY into bitcoin makes sense, especially given this year’s positive bitcoin price trend.
Growing Bitcoin Demand in India
Bitcoin adoption has increased substantially in India in the year 2016, according to LocalBitcoins.com transaction data. The driving forces behind this increase have been the leading Indian bitcoin startups Coinsecure, Zebpay and Unocoin, which recently raised $1.5 million in funding. Unocoin and Coinsecure are the two leading bitcoin exchanges in India, while Zebpay offers a bitcoin wallet that allows for in-app bitcoin purchases and money transfers via text message.
If bitcoin adoption increases in a highly populated country like India, this could lead to a serious jump in price in the future.
Increasing Incentive to Hold
The more the price of bitcoin increases, the more the propensity to hold bitcoin also increases. Given the historical price performance of bitcoin, it makes more sense to hold bitcoin as opposed to using it as a spending currency. Hence, it is no surprise that many bitcoin users prefer to hold rather than to spend the digital currency. This creates a scenario where the demand increases but the supply stays somewhat stagnant.
Bitcoin’s recent rally was dampened on November 3, when it was announced that Chinese authorities are considering imposing capital controls on bitcoin. Chinese traders have a massive impact on the price of bitcoin. Hence, this news led to a substantial price drop of around 10 percent within hours of the headline hitting news outlets. However, the price quickly recovered back above the $700 mark as the rumor was not substantiated.
Shocks to the price of bitcoin will continue to happen, as exchanges and companies suffer cyber attacks, regulators impose new laws on Bitcoin and negative headlines about scams or other digital currency-related criminal activities hit the international news wires.
However, as the overall sentiment toward bitcoin continues to improve, VC funding for Bitcoin companies increases further and global bitcoin adoption continues to rise, it is easy to be optimistic about the future of bitcoin’s price development.
Alex Lielacher is a location independent entrepreneur who travels the world while working remotely on various start-up ventures. He has been following bitcoin since 2011 and regularly writes about personal finance, fintech and digital currencies.