Bitcoin and the dark web

Cryptocurrency hits $US10,000 as illegal side revealed Bitcoin’s hyper-frenzy saw exchanges pummelled with trading volumes on Wednesday as bitcoin surged above $US10,000 for the first time in the technology’s history.

The cryptocurrency is up 950 per cent for the year, enjoying a manic 54 per cent lift in the past two weeks alone, which brought its market capitalisation to $US167 billion ($210 billion).

The cryptocurrency was fetching $US10,029 in afternoon trade in Sydney, on CoinDesk’s Bitcoin Price Index. More than $12 million poured into Australian exchange Independent Reserve on Wednesday morning, with the company now signing up as many as 800 new customers a day, up from 200 last month, as mainstream mania takes hold.

‘‘It’s going insane,’’ said Adrian Przelozny, chief executive of Independent Reserve. ‘‘We are seeing much more sophisticated investors who have been sitting on the sidelines now entering. We’re talking to hedge funds, selfmanaged super funds, the next wave of investors.’’

The blockchain was groaning under billions of trades, though largely only ‘‘buy’’ orders as speculative punters bet on bitcoin’s continued rise.

Mainstream interest was well and truly piqued, and headlines around the world broadcast people swapping houses for cryptocurrency and chatrooms exploded as more Aussie dollars, euros, greenbacks and yen were swapped for bitcoin than ever before.

But long-term watchers are warning there are some bitcoin holdings that are so large – worth hundreds millions of dollars – that they have been known to emerge at times of peak exuberance, sending shocks through the markets to wipe out smaller holders who have taken on too much risk.

‘‘There’s been extreme mainstream penetration recently and these new guys have the jitteriest hands,’’ said Duncan Campbell, director of Digital Currency Experts, an education consultancy. ‘‘We’ve seen it time and time again, where these big whales think it’s time to give the market a haircut and they move a couple of thousand of bitcoin. That’s enough to melt the exchanges and these new guys will be left extremely panicked.’’

Whale traders can spook an overheated market by selling a moderately large block of the assets below the market rate. This generally causes a panic sell-off by small traders, who flood the exchanges with sell orders.

The whale then waits and scoops up the assets when they’ve reached a satisfactory low. The practice is often known as ‘‘shaking out weak hands’’.

Earlier last month, several extremely large bitcoin holders swapped their large holdings of bitcoins for bitcoin cash – an alternative crypto-asset developed for faster transactions.

These moves saw a dramatic $US2000 plunge in the bitcoin price and showed just how many bitcoins are centralised in a few wallets.

‘‘There definitely are some guys who have a lot of power in the market,’’ said Mr Przelozny. ‘‘And we are cautioning people because there is a good chance there will be a dip in the next month or two. This does look like irrational exuberance.’’

While there is hysterical chatter above, bitcoin miners seem to be comfortably managing the extreme bitcoin demand with the average transaction time around 8 1/2 to nine minutes, and around 7.3 blocks an hour.

Not too dissimilar to the rates at the beginning of the year, given how many new mining participants have come online.

But given most people are buying and holding cryptocurrency at present, this is not as demanding on a blockchain.

Whereas if billions of commercial transactions were to begin taking place and the blockchain became infinitely more dynamic, the verification pipeline is likely to become clogged.

Indeed, bitcoin developers are still debating scaling solutions for mainstream adoption particularly with respect to how much energy is needed to power the verification network.

For example, the mining of bitcoins this year has consumed more energy than the average electricity consumed annually by 159 nations, according to Digiconomist.

There are 16.7 million bitcoins in circulation, according to data from Chainalysis, bringing bitcoin’s market capitalisation to some $US167 billion.