Due to a rule written in the cryptocurrency’s code which could tighten its supply and as it becomes a safe-haven bet amid broader macroeconomic worries, the price of bitcoin has hit its highest level in more than two years.

Touching its highest since February 2014, Bitcoin briefly broke the $700 barrier on Monday. The price of digital currency has risen over 51 percent n the last month.

This spike in the value of the digital currency is believed to be an upcoming shift in the fundamental code governing the digital currency. There is a finite supply of 21 million coins that will ever be released.

A process known as “mining” creates bitcoins. In order for a bitcoin transaction to go through, people using computers to solve complex mathematical puzzles and this is the process in which mining for bitcoins is done. The miner is awarded with bitcoins once the problem is solved.

However these mathematical problems get harder over the course of a bitcoin’s life which began in 2008 as a white paper before coming into existence in 2009. And in addition to this, starting sometime next month, the reward offered to miners is set to reduce.

50 bitcoin per “block” – which is a group of transactions, was the reward for mining that was given to the users at the beginning. In 2012, this value felt to half of it at 25 bitcoins. Now the supply of bitcoin would be further reduced as the reward is now set to half again. The process that was written in the original code for bitcoin is known as “halving”.

The price has risen with increased trading activity as there are fewer bitcoin coming into the system.

“We are seeing very high trading volumes,” Bobby Lee, chief executive of BTCC, one of the largest bitcoin exchanges in the world based in China, told CNBC by phone on Monday.

“The block halving will dramatically decrease the bitcoin being added as we approach 75 percent of all bitcoin issued. People understand that in this world of ever expanding assets and printing of money, we have something that’s fixed and limited in issuance. It gives a decent alternative for people who want to hold assets that can have sustained purchasing power,” Lee said.

The price of bitcoin has even surged to over $1,216 in 2013 and it has typically been a very volatile currency. But with the U.S. Commodity Futures Trading Commission last year classifying bitcoin as a commodity and with policymakers talking about its potential, the cryptocurrency has been gaining more legitimacy.

Bitcoin has infact acted as a safe-haven asset in certain circumstances. For example, last year when Greece was close to a defaukt, the digital currency had found some support.  Lee said that that bit coin has been further supported by the prospect of a further depreciation of the yuan and the concerns over the health of the Chinese economy.

“It’s kind of a mess worldwide in terms of economy and all different asset classes,” Lee told CNBC.

(Adapted from CNBC)

Categories: Economy & Finance