Bitcoin is “fully valued” and could see a pullback in the short term after hitting $1,600 for the first time on Monday, according to one investor, but the price could go as high as $4,000 over the next 14 months.
The cryptocurrency has been on an upward move since April and was trading around $1,575.52 by early afternoon trading in London after hitting an all-time high $1,601.05 during morning trade, according to the Coindesk bitcoin price index.
In the last 30 days, bitcoin has risen over 33 percent.
Negative bitcoin news
The rally may seem perplexing given that there have been a number of setbacks for the cryptocurrency.
- The U.S. Securities and Exchange Commission (SEC) deciding to reject a bitcoin exchange-traded fund (ETF) proposed by Cameron and Tyler Winklevoss. This is now under review however. An ETF would have given further credibility to bitcoin and helped more institutional investors get involved.
- A fierce debate over the future of bitcoin’s structure. The full explanation can be read here.
- Issues with some exchanges, particularly Bitfinex, which cut off their access to the banking system meaning customers couldn’t make withdrawals in fiat currency.
So why the rally?
At the same time, there have been some positive developments.
Firstly, Japan legalized the cryptocurrency as a payment method recently and this has led to a greater amount of bitcoin being bought with yen, according to Aurelien Menant, founder and CEO of Gatecoin, a regulated blockchain assets exchange based in Hong Kong.
The second reason could be to do with a change in the code of another cryptocurrency called litecoin.
What happened with litecoin and why does it matter to bitcoin?
Last month, there was a change in the code behind the technology that underpins litecoin. It is known as Segregated Witness (SegWit) and it allows the speed of transactions using the cryptocurrency to increase.
This has given hope that bitcoin could see a similar thing.
Fork debate recap
To understand the issue, it’s key to look at how bitcoin transactions are processed. Transactions by users are gathered into “blocks” which is turned into a complex math solution. So-called miners, using high-powered computers work these solutions out to determine if the transaction is possible. Once other miners also check the puzzle is correct, the transactions are approved and the miners are rewarded in bitcoin.
But there is a big backlog in transactions and the speed at which these are processed is slowing. That’s because the rules of bitcoin only allow a certain amount of transactions through in one block.
In mid-March, the price of bitcoin saw a big drop because the community was afraid of a so-called “hard fork” which could have led to two blockchains forming, and therefore two separate cryptocurrencies.
But the example of litecoin shows that a so-called “soft fork” can happen which would increase the block size for bitcoin without major disruption.
“That example of a successful soft fork in litecoin has made people start to think that we could get a successful SegWit implementation in bitcoin and that could increase capacity and move us to the next level,” Daniel Masters, director at Global Advisors Bitcoin Investment Fund (GABI), told CNBC by phone.
GABI is an investment fund that is listed on The International Stock Exchange on the Channel Islands.
And what does this mean for price?
While bitcoin has seen a recent rally, previous peaks have seen sharp pullbacks in prices. Masters said the price rise has been “violent in the short-term” with bitcoin “fully valued for the moment”. This could lead to a pullback to around $1,100.
However, the long-term outlook remains strong.
“In the 8- to 14-month horizon, my forecast would be around $4,000,” Masters told CNBC.
Others also expect high prices. Gatecoin’s Menant said prices should climb beyond $3,000 this year.