Bitcoin Soars Above $1,600 On Relentless Japanese Buying Frenzy

Four days ago we reported that bitcoin has surged above $1,400, hitting a new lifetime high, while rising above $1,500 on certain Chinese exchanges. Since then, bitcoin's latest exponential rise has only accelerated, and moments ago the price of the cryptocurrency surged as high as $1,600 on the Coinbase exchange, rising as high as $1,655 on the troubled Bitfinex exchange.

What is prompting this relentless surge in Bitcoin?

Several things.

The first, as we noted on Monday,  was "plain old supply and demand." While unclear if the result of a regulatory crackdown seen recently in Chinese-based exchanges, Hong-Kong based Bitfinex and some other crypto exchanges in the industry "have been dealing with liquidity and withdrawal issues the past few weeks." Specifically, Bitfinex had trouble processing transactions after the Taiwanese banks that handle them started blocking requests. That’s part of a trend where some banks are pulling out of sectors they deem risky. A representative from the exchange had confirmed to the WSJ that the inability of investors to withdraw bitcoin is affecting the price. Perversely, instead of forcing the price of bitcoin lower, the liquidity squeeze was forcing traders to offer higher bids to get their bitcoin out, which is subsequently forcing the price up.

Then, there is Japan.

As we observed previously, according to Japan's Nikkei more than 10 Japanese companies are launching exchanges for bitcoin and other virtual currencies, with an eye to tap growing demand after legal changes that make such trades cheaper and easier in the country. As discussed previously, starting July, Japan's consumption tax will no longer apply to purchases of virtual currencies. Exchanges in Japan have also been required since April to obtain a special license, which has requirements for finances and asset management structures, from the Finance Ministry.

One example: SBI Holdings has set up SBI Virtual Currencies, an exchange between the yen and cryptocurrencies like bitcoin and that of the Ethereum platform. The GMO Internet group is also establishing its own company, with plans to increase the number of digital currencies it trades based on demand. Securities and foreign exchange trader Money Partners Group plan to enter the field as well.

While the Bitfinex issue my be localized, Japan's demand has been clearly confirmed by capital flows on various exchanges. Alex Sunnarborg, a CoinDesk research analyst, pointed to a spike in global trading volume, especially from Japan and its bitFlyer bitcoin exchange.

As the chart below shows, Japan’s currency JPY has been responsible for more than half, or 52.35% of bitcoin trading volume in the recent 24 hours, followed by the USD at 28.12%, CNY 8.23%, EUR 4.92% and KRW 2.9%.  The rise in value shows a surge in trading activity, nearly $700 million in bitcoin according to CoinMarketCap. The trading is markedly led by Japanese markets

As Cryptocoinsnews adds, the Yen-bitcoin trading is all the more notable given that Japan continues to impose an 8% consumption rate tax on purchasing bitcoin through exchanges. Toward the end of 2016, Japanese officials took the call to formally end this tax tariff, a move that will go into effect in July this year.

Finally, there is the recent spike in demand for all other alt-coins.

As we further noted on Monday, there has been ongoing investor interest in other cryptocurrencies such as Ethereum which today also reached record highs, rising above $90, further boosting demand, according to Sunnarborg. These alternative digital currencies are usually bought and sold with bitcoin, requiring traders to buy bitcoin. 

The Ripple network is experiencing adoption by a large number of financial institutions to process domestic and cross-border payments. This, in turn, has sparked interest in Ripple’s digital currency, which has had an impressive rally in the last two months, increasing from $0.0054 on March 1 to $0.054 on May 1.

We summarized the ongoing bitcoin frenzy as follows on Monday: "just as the Chinese bubble frenzy in bitcoin is fading, it may be replaced with a new one, in which thousands of Mrs. Watanabe traders shift their attention away from the FX market and toward digital currencies" and added that "If the transition is seamless, there is no telling just how far this particular bubble can grow."

Four days later and $200 dollar higher, we are observing first hand how accurate this predication may have been, although like on Monday, we have no way of telling how long this particular mania phase will last.