So what is Bitcoin? And can it go to $1m a coin?

Ed Danziger is feeling rather pleased with himself. The twenty something law student bought a couple of thousand pounds worth of Bitcoins at the beginning of the year – when the digital currency was trading at under $1000 a piece.

Since buying his Bitcoins, the price has soared by 1500%, making him a nice profit. But Danziger missed out on the latest highs, having sold his Bitcoins just before the recent 52% leap to $20,000 on one day last week, following the most feverish bout of speculation seen since the tulip mania of the 17th century.

And the reason Danziger sold out at around $14,000 a piece? Simple. “When my dad started talking to me about Bitcoin, I feared the bubble was about to burst. It felt like I was gambling in Vegas,” he says. “I thought the it would pop, so I sold out.”

Yet the bubble has not popped. Bitcoin hit another sky-high record this week after two American commodities exchanges – the Chicago Board Options Exchange and the CME – started trading Bitcoin futures. It’s a move which would suggest that the cryptocurrency is now in the mainstream, and that more sophisticated institutional investors believe Bitcoin will become a more stable and valuable currency.

Indeed, Nassim Taleb, one of the world’s leading derivatives gurus and author of the bestselling Black Swan, has warned that investors using futures contracts to bet against the spiralling price of bitcoin are doomed to lose money because there is “no way to short the bitcoin ‘bubble’ ” properly. In a tweet to his followers, Taleb said trading on the CBOE was unlikely to stop Bitcoin rising as “futures that don’t have deliverables require a very, very deep market. Otherwise someone long in the future can push prices higher at settlement time with impunity.”

Wise words. Nor is he the only one warning against taking bets. But other experts say Bitcoin could rise to $40,000 by next year.

So what’s going on ? Was Danziger a fool to sell out when he did? And will be cursing himself on having missed out on what looks like’s one of the most spectacular asset rises in history?
He is not in the slightest bit disappointed. Quite the reverse. Even if the bubble doesn’t explode quite yet, he’s happy to be out because the law student gets that Bitcoin is neither a currency nor money as we know it but an asset, like fine wine or a painting, to be traded because it has no inherent value or rate of return.

And that’s the question at the heart of the perplexing rise of Bitcoin and the dozen or so of other cryptocurrencies now being launched: a digital currency only has value if it is accepted in exchange for another currency – think the foreign exchange markets – or used to trade other goods.

For now, though, there are only a few select places that accept Bitcoin as a means of exchange: you try paying the weekly shop at Tesco with Bitcoins and see what happens.

As the chief economist of UBS Wealth Management, Paul Donovan, warned this week: “To date, using cryptocurrencies requires (effectively) a simultaneous asset sale and purchase of goods or services…and that it is a poor store of value.”And that’s because the supply of cryptocurrencies can only ever rise and never fall in an economy because, at the moment, the amount of Bitcoins or the alternative cryptocurrencies – are limiting the supply being made.

It’s why just about every economist and political pundit in the world – is warning that Bitcoin is almost certainly heading for a ‘parabolic’ bubble on a scale not seen before. Fundamentally, Bitcoin cannot be used to make transactions as it is not – unlike gold or any other currency -an effective store of wealth because of its volatility.

You can see why: last Thursday it climbed from $16,000 to $17,000 in two hours, having gone from $15,000 to $16,000 in the five hours earlier in the day. At the start of December, it was worth $9,830.

So how can you use such a volatile currency to make a trade? Kevin O’Leary, the US investor known as the Shark Tank”, says you can’t. Here’s an example for why not: if you go and buy a cup of coffee for £2.50, you and the coffee shop seller expect the value of the pound to remain stable between the time you buy and the time you pay. Each side is in agreement that the rate of exchange is £2.50.

But you can’t do that with Bitcoin, because it moves so much and has no rate of return. Even so, as O’Leary says, it is till one of the most successful assets on the planet right now; because people believe that it has only an upside.

For whatever reason, and we will come to that in a moment, there are millions of speculators around the world from Japan to South Korea to China to the US who are willing to pay over the odds, either because they think they are playing the tables at Vegas, or because they want to avoid exchange controls.

As you would expect, the political establishment and economists worldwide are terrified of Bitcoin(and the twenty or so other cryptocurrencies such as Ether traded on Ethereum) because they are beyond the reach of the central authorities.

The political establishment, like most of us, don’t have a clue how to respond other than to warn that Bitcoin is the most dangerous bubble in history, and that retail investors should avoid getting involved at all costs.

Despite the mania, the total market in Bitcoins is still tiny: its probably worth around $200billion – about the same value as Shell and only twice the value of Goldman Sachs. Even if the bubble were to pop, it’s hardly going to put the West out of business.

No one quite knows what is behind this latest huge spike in prices because transactions – carried out on specialist exchanges such as the US Coinbase – are anonymous.

Nor does anyone know for sure who created Bitcoin. It is widely assumed, but has never been verified, that Bitcoin was launched in 2008 by Satoshi Nakamoto, a secretive software developer who wanted to develop a digital currency which can be used to pay for goods and services free from the watchful eye of politicians and central banks. Bitcoin transactions, which use the blockchain technology, are stored and transferred using a distributed ledger on a peer-to-peer network that is open, public and anonymous.

Which is why Bitcoin was hailed as the holy grail of the new world by libertarian geeks who wanted to bypass government currency controls and simplify online transactions by getting rid of third-party payment processing intermediaries.

Yet Bitcoin is not operating in quite the way that the supposedly idealistic creators would have hoped. For starters, some of the first users of the currency were drug dealers and other black market operators who used the cryptocurrency via the dark web as a way to circumvent the authorities and exchange controls. Second, the precise value of a Bitcoin is difficult to determine because the digital currency is traded at different prices on several exchanges in many currencies: hence the volatility.

The latest surge in trading also led many exchanges – like the US Coinbase – to freeze trading because of the overload in demand from both buyers and sellers so the market is not liquid.

So how far can Bitcoin go ? And what will it become ? One of the earliest investors in Bitcoin is Chamath Palihapitiya, founder of Social Capital and a former Facebook executive. He first bought bitcoin years ago at an average price of about $100 and still believes the cryptocurrency has much further to go. Palihapitiya reckons the coins can be worth $100,000 each over the next three to four years, and a million dollars over the next twenty years.

For him, it’s a confidence game. In an interview on CNBC today, he said: “There is no real utility in this. This is a fantastic fundamental hedge and store of value against autocratic regimes and banking infrastructure that we know is corrosive to how the world needs to work properly. You cannot have central banks infinitely printing currency.”

He has a point. But if trading in Bitcoins is like gambling at Vegas, who wants to bet against the house? And who exactly is the house?