Bitcoin prices diverged dramatically across global exchanges on Friday, as hyperdeflation and frenzied demand drove the price to over $25,970 a coin on some exchanges before a sharp correction took hold.
Volumes on the world’s five largest exchanges saw $US10 billion worth of trade change hands in a period of 24 hours, though prices differed by as much as $US2,000 as the exchanges struggled to manage the onslaught of demand.
Before the correction bitcoin was fetching $US15,992 on Bitfinex, a Taiwan-based exchange, whereas it was fetching as much as $US18,300 on US-based GDAX.
More than 3,000 new customers signed up to Australian-based Independent Reserve’s platform on Friday alone, helping to drive the price in Sydney up to $25,970 – significantly higher than in many other exchanges – before the correction started.
“It’s just been explosive,” says Adrian Przleozny, chief executive of Independent Reserve. “We are hiring people at an unbelievable rate just to deal with identity verification and compliance.”
The manic demand for bitcoin – though not generally spilling over into other cryptcocurrencies – saw the market capitalisation of the entire ecosystem grow at nearly $US30 billion per day this week.
But global bitcoin exchanges themselves are buckling under the onslaught of demand.
Coinbase suffered a series of server outages after record-high traffic flooded onto its platform, driving bitcoin from $US16,000 to $US9,500 in less than three hours.
Tawain’s Bitfinex, the world’s largest bitcoin exchange, said it has been under a denial of service attack for several days and the attack recently got worse. The exchange is also currently under a cloud of suspicion regarding an alternative token called ‘Tether’, allegedly used for widespread market manipulation.
Bitfinex and South Korea’s Bithumb were responsible for roughly a quarter of total transactions combined this week and US-based GDAX came in third at roughly 8 per cent of daily transactions.
Furthermore, an enormous hack on Friday morning failed to properly destabilise confidence in bitcoin. NiceHash, a mining firm based in Slovenia, announced that 4,700 bitcoins had been stolen from its wallet, resulting in a theft worth almost $US70 million at the time.
The hack is the latest in a series of incidents that have not undermined confidence in the cryptocurrency, which is facing its own internal scaling battle as the developers work on just how the technology will enable mass transactions should it continue its blistering rate of adoption.
As the price continues to defy skeptics, and fiat currency continues to pour into exchanges around the world, a bout of extreme hoarding is taking place.
“Hoarding is the rational response to runaway deflation,” says Emin Gun Sirer, a professor of computer science at Cornell University.
When hyperinflation occurs, prices rise so fast that the incentive to spend as fast as possible also rises, which dramatically pushes up demand for goods and their prices.
Hyperdeflation is the opposite of that, where the cost of everyday goods (in bitcoin terms) is becoming ever cheaper. This reverses the incentive: people hoard the currency and push its value higher.
“If I spend 1 BTC now and the price [of bitcoin] doubles in a week, then I’ve effectively spent 2 BTC on that thing by next week,” argues one reddit member. “I’m not going to sell.”
However, there are many contributing factors to the recent amazing rally in bitcoin, not least the notable absence of sell-orders.
Many point to the debut of Cboe Global Markets’ – one of the world’s largest regulated exchanges – launch of a new bitcoin futures product on Monday, as cause for the heightened interest this week. CMC Group also has permission to offer bitcoin futures and their launch is set for December 18.
Given both exchanges are overseen by US regulators, many suspect large institutional investors and hedge funds will begin to take bitcoin positions.
“These kind of names give bitcoin legitimacy,” says Leon Warburton, chief executive of Warburton Investment Management.
“Other people see those kind of regulated entities entering the market and providing access and that gives them cause to jump in.”
Bitcoin volumes had been largely coming out of Asia before CMC’s announcement, whereas as of Friday most trade was driven by US demand.
Coinbase, the world’s largest bitcoin wallet providers, saw more than one million new accounts opened after the Thanksgiving holiday and after the first announcement of approval for a new cryptocurrency trading product.
But Mr Warburton said resilience bitcoin has shown in recent weeks in the face of several cybersecurity challenges means he is not overly concerned by them.
“It just seems to bounce back when these kinds of problem occur,” said Mr Warburton.