The price of bitcoin is expected to more than double next year in part because of slower growth in the supply of the digital currency, Reuters reports.
Bitcoin hit $500 last month for the first time since August last year, with Chinese demand for a pyramid scheme set up by a Russian fraudster cited as a reason for the increase. Experts see the price testing its 2013 highs of above $1,100 next year.
“Bitcoin’s price is likely to be driven in large part by similar factors to a traditional fiat currency, following the age-old principles of supply and demand,” Reuters said.
In particular, the reward for bitcoin “miners,” currently 25 new bitcoins, will be halved in July to keep a lid on inflation. Miners validate blocks of bitcoin transactions by competing to solve mathematical puzzles every 10 minutes.
On its own, the halving of the mining reward will increase the price of bitcoin by around 50% percent from where it is now, Daniel Masters, co-founder of Jersey-based Global Advisors’ multi-million dollar bitcoin hedge fund, told Reuters.
“The bitcoin market is still in its infancy, and I don’t think that factor is discounted into the price fully,” he said.
When the mining reward was previously halve in November 2012, from 50 to 25 bitcoins, the price increased by about 150% in the preceding seven months — roughly the time left before the next halving. By the end of 2017, the price could reach $4,400, according to Masters.
The halving “dampens supply so, all other things being equal, that puts upwards pressure on price,” explained Jeremy Millar, partner at London-based financial technology specialists Magister Advisors.
A price increase, Reuters said, could also reflect the increased acceptance of payments in bitcoin by big companies and authorities, rapidly growing interest and investment in the “blockchain” technology that underpins bitcoin transactions, and more demand from China as its currency weakens and the economy slows.
“For such an innovative, decentralized digital asset, I say ‘boy, are we undervaluing it’. But it takes a while for people to realize that,” said Bobby Lee, chief executive of China’s BTCC bitcoin exchange.