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Bitcoin: What the hell is going on?

  What is the future of the virtual currency?

2017 became the year that bitcoin grew.

The year began with a value of less than $ 1,000, but has increased more than 1,300% to around $ 14,000. In 2011, it was worth less than a dollar.

Some leading economists and financiers are calling bitcoin a bubble and a fraud, but industry experts say they think it will only get bigger as it gains wider acceptance.

So, how does the virtual digital currency work, and what is behind its spectacular increase?

Related: Bitcoin appears above $ 14,000 for the first time

What is Bitcoin?

Bitcoin ( XBT ) was created in 2009 by an unknown person who used the pseudonym Satoshi Nakamoto. Many of its sponsors saw it as a simple global payment system that anyone can use instead of a financial asset for investors to market.

Unlike the US dollar. UU Or the Japanese yen, digital currencies like bitcoin are not issued by central banks like the Federal Reserve. Instead, they are "mined" by computers that use complex algorithms.

Related: Bitcoin bubble brewing or is it still a bargain?

Bitcoin payments can be made without traditional intermediaries like banks and without the need to give their name.

That made bitcoin popular among criminals and others who wanted to move money anonymously. But it has also been adopted by businesses around the world as a way to pay for everyday things like groceries, train tickets and haircuts.

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Its price has taken off this year as mainstream investors have become increasingly interested.

National governments are trying to keep up, puzzling over how to regulate bitcoin and other so-called cryptocurrencies. Countries such as China and Venezuela have expressed interest in creating their own digital forms of money.

Related: Venezuela plans its own version of bitcoin

Why did prices go crazy?

Some experts say that the biggest force that pushes bitcoin higher prices this year have been … higher prices.

Investors have been buying "FOMO" this year or fear of getting lost, according to Dave Chapman, CEO of Octagon Strategy, a Hong Kong-based exchange of cryptocurrencies.

"It is true that there is a lot of speculation in this market," he said.

  Bitcoin jumps 1000% this year

Bitcoin is also driven by the non-intervention approach that many financial regulators seem to be taking towards the digital currency, said Chapman.

The government of Japan, for example, granted Bitcoin the stamp of approval and began granting bitcoin exchange licenses earlier this year.

The only black mark has been China, which has been reducing some uses of the virtual currency.

The announcements of some important financial institutions in the USA. UU They are helping Bitcoin gain greater acceptance of the mainstream.

Related: Bitcoin craze extends to Overstock, Square

This month, investors will be able to start trading bitcoin futures through the Chicago Board Options Exchange and the Chicago Mercantile Exchange.

Nasdaq of New York plans to launch its own bitcoin futures in 2018.

"The fact that CME, CBOE and Nasdaq will now offer bitcoin products gives additional legitimacy" to the digital currency, Chapman said.

Who is buying it?

For much of this year, it has been investors who have been buying.

Many are in Japan and South Korea, where recent changes in regulation have made it easier to exchange bitcoin, experts say.

But the biggest gains from the massive recovery of the virtual currency are likely to be concentrated among a relatively small number of investors.

Related: Russia dominates the dominance of cryptocurrency

When you invest in bitcoin, you do not have to buy a complete unit. According to the BitInfoCharts research site, the vast majority of bitcoin accounts contain only 0.1 bitcoin (around $ 1,400) or less. Only 3% of more than 20 million bitcoin accounts have a bitcoin or more.

Large institutional investors, such as hedge funds and asset managers, have remained aloof. But some experts predict that they will move to the market in the coming months, despite the skepticism of people like Warren Buffett and JPMorgan Chase ( JPM ) CEO Jamie Dimon.

What's next?

Some insiders in the industry are incredibly bullish.

Arthur Hayes, CEO of Bitmex, bitcoin of Hong Kong, predicts that prices could reach $ 50,000 by the end of next year, driven by the flow of money when institutional investors "squeeze the trigger" when investing in the digital currency.

Octagon's Chapman is willing to lengthen his neck even more. He thinks he will go above $ 100,000 before the end of 2018.

Related: The Nobel Prize winner says that bitcoin should be banned & # 39;

With a total value of around $ 235 billion, the bitcoin market is small compared to the more established assets.

"This is a drop in the ocean compared to the trillions of daily transactions" in the currency and stock markets, said Thomas Glucksmann, head of marketing for Bitcoin Exchange in Hong Kong, Gatecoin. Only a small amount of money from mainstream investors would make a big difference in bitcoin prices, he said.

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But some veterans of the financial industry are cautious.

Innes de Oanda, who has worked in currency trading for decades, referred to Buffett's famous investment advice piece: "Be fearful when others are greedy."

"Following the herd rarely produces large-scale profits," Innes said.

Investors received a reminder of the unpredictability of Bitcoin in November. After reaching $ 11,000, he collapsed more than $ 2,000 before resuming his promotion.

CNNMoney (Hong Kong) First publication on December 7, 2017: 12:20 a.m. ET

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