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Bitcoin Price Hits Two-Year High

The price of the digital currency bitcoin hit a two-year high Monday, trading above $700 for the first time since 2014, after it jumped 21% over the weekend.

The surge came days before an unusual event called the “halving,” an adjustment to bitcoin’s protocol designed to control the creation of new coins.

The last time the currency traded at this level—as high as $719 Monday, according to data provider CoinDesk—was February 2014, when it was coming down from its December 2013 high of $1,147.

Bitcoin, launched in 2009, is a digital currency that runs on a decentralized network of computers and isn’t backed or controlled by any government. Trading volume is growing but remains thin relative to other capital markets, so a small amount of trading can trigger large swings in prices. About 400,000 bitcoins, worth about $279 million, traded hands from Sunday through Monday afternoon, according to Coincap, which follows virtual currencies.

The biggest driver of bitcoin’s recent price gain is likely a rare event that is coming within a month: the ‘halving.’ PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGES

Other factors could have contributed to the recent rise. Bitcoin is a popular speculative trade in China. And bitcoin, with gold-like qualities as a store of value, sometimes gets a boost when investors in broader markets start seeking havens.

The biggest driver of the recent move, though, is likely a rare event in the bitcoin world that is coming within a month: the halving.

A quick explanation: Bitcoin is designed to be run by a network of computers that independently confirm transactions on the network. To ensure that individuals are willing to contribute their computing power, a reward is included for every block of transactions confirmed: a batch of newly created bitcoins. Because this process somewhat resembles physical mining, the contributors are dubbed the “miners.”

When bitcoin was released, it had a cap programmed into it: No more than 21 million bitcoins would ever be produced (about 15.7 million have been mined so far). To ensure that those bitcoins would be mined over a long time (well into the next century), certain speed bumps were programmed in.

One was a roughly 10-minute gap between confirmed blocks. The other was a quadrennial reset of the mining reward, an event called the halving. Every four years, the mining reward is cut in half. When bitcoin launched, the reward was 50 bitcoins. In 2012, it was cut to 25. In less than 30 days, it will be cut again, to 12.5 bitcoins.

This second halving is currently slated to occur in about 26 days.

It isn’t clear what will happen during this halving. On the one hand, it should have a pretty predictable supply-and-demand effect: With the supply getting cut, demand should push prices higher. That is what seems to be happening now, as traders are essentially front-running the halving.

On the other hand, the bitcoin network has changed in four years. At the last halving, on Nov. 28, 2012, bitcoin still was a tiny, mostly hobbyist network, with miners still using desktop computers and graphics cards.

Now miners are multimillion-dollar operations. Cutting the reward in half could wreak havoc with their business models. Already, one miner, Sweden-based KnCMiner, has filed for bankruptcy protection.

In the last two years, more of bitcoin’s mining and trading has been located in China, with four of the five largest miners in that country.

More trading is there as well: Fully 85% of bitcoin trading by volume in the last day was denominated in China’s yuan. Only 12% was denominated in U.S. dollars.

Bitcoin’s surge helped another cryptocurrency that already was having a good 2016: ether, the currency underlying a burgeoning bitcoin-like network called Ethereum. Ethereum takes bitcoin’s model and changes the focus from currency transactions to Web-hosting applications.

On Monday, the price of ether rose about 14%, to $17.14, on the back of the bitcoin rally. Ethereum prices were already up nearly 1,400% this year, rising from 95 cents in January to $14.17 through Friday. Large corporations such as Microsoft Corp. and Deloitte in recent months have begun to use the platform. In May, a startup called the DAO raised about $150 million worth of ether through a crowdfunding campaign, the largest crowdfunding on record.