U.S. Markets closed

Three reasons why bitcoin’s price is surging higher

Luke Graham
Chris Ratcliffe | Bloomberg | Getty Images. Bitcoin is trading at its highest price in almost two years, driven by several factors, according to experts in the cryptocurrency.

Bitcoin is trading at its highest price in almost two years, driven by several factors including market conditions in Asia, according to experts in the cryptocurrency.

The online currency ended Monday at around $542.77 and hit a high of $548.5 on Tuesday. The price has surged in the last week, climbing 22 percent since last Monday; year-to-date the price for bitcoin has increased by 25 percent.

As a result, this is the highest price bitcoin has reached since August 2014. CNBC examines three reasons to explain the rising price.

Demand in Asian markets

Most experts have pointed towards fears in China and Asia that the yuan could depreciate as reasons for increased investment in bitcoin.

"Signs indicate Bitcoin's price has become linked to a number of macroeconomic factors in China," said Vijay Michalik, research analyst for digital transformation at consultancy Frost & Sullivan, to CNBC in an email.

"It highlights growing concerns about yuan currency deflation, as bitcoin's appeal has grown as an alternative asset class for a population deprived of many investment choices."

James Lynn, U.K. managing director at investment company Billon Group, corroborated this view.

"The most likely explanation appears to be linked to market confidence in the Asia region, with low confidence in local currencies providing a major boost to bitcoin demand," he told CNBC in an email.

Tightening supply

A key feature of bitcoin is that new coins have to be discovered or "mined" in order to be added to circulation, unlike fiat currencies where governments can print fresh bills. When new bitcoins are mined, a record of it is added to the blockchain, which is effectively a giant ledger recording all bitcoin transactions.

Bitcoin miners are rewarded with a set of bitcoins for each block they successfully mine. Miners used to receive a bounty of 50 bitcoins, but this was halved in 2012 to prevent bitcoin inflation and it is expected to halve again in the coming months, potentially leading to supply-side currency constraints.

"Speculators have been pointing to impending rises for some months, citing the impending halving of rewards for miners," explained James Lynn. "I think, however, that's been priced into the market on an on-going basis."

Bitcoin's becoming more robust

Several recent developments have been intended to improve bitcoin's performance and make transactions more reliable.

"Bitcoin's seen some of the developer turmoil subside over the past few months," said Vijay Michalik.

According to Michalik, new technology shows how much progress has been made in making bitcoin easier to use. For instance, the company Blockchain released an alpha version of the Thunder Network earlier this month, which allows payments to be made using bitcoin more quickly, cheaply and at a larger scale.

It is possible that by making bitcoin more robust, these changes will have made the cryptocurrency more attractive to new investors.

Follow CNBC International on Twitter and Facebook.



More From CNBC