NEW YORK, United States (AFP) — Bitcoin burst out of the shadows in 2017, seducing Wall Street and individual investors alike, even though many still struggle to understand precisely what it is.

The cryptocurrency’s rise is also pushing regulators to consider taking action after years of simply urging caution.

Bitcoin started the year at US$1,000 per unit in January but by mid-December had shot to within striking distance of US$20,000, a dizzying climb that stoked fears of a bubble even in financial circles used to speculation and volatility.

That was a decline of more than 30 per cent from its record high of $19,500 Monday, according to data compiled by Bloomberg. After starting the year near $1,000, the digital currency soared to $10,000 in late November and nearly doubled that just a couple weeks later.

And on Friday Bitcoin prices plunged by more than 20 per cent as investors cashed out just before Christmas following the wildly volatile currency’s stratospheric rise in recent weeks.

The precipitous drop came after a series of warnings by analysts and governments about a bubble that could burst at any moment as investors, many inexperienced, piled into the unit hoping to enjoy some of the eye-watering gains.

The controversial cryptocurrency, which is not backed by any central bank, stood at $12,840 near 1815 GMT from its Thursday price of $16,563.

“Bitcoin remains a major gamble as it is very much an uncharted-waters asset,” said Nigel Green of investment firm deVere Group. “An asset that goes almost vertically up should typically raise alarm bells for investors.”

But he told AFP Bitcoin’s rise demonstrated the strength of global demand for cryptocurrency. The digital currency’s moment in the limelight began on December 10 with the first trading in bitcoin futures on a mainstream market in Chicago.

“This is the year Bitcoin and the cryptocurrencies went legitimate,” said Timothy Enneking of Crypto Asset Management.

With a peer-to-peer payment system based on “blockchain” technology, bitcoin is establishing a niche for itself: In some towns, consumers can now dine in restaurants and buy cars and even houses using Bitcoin.

Remi Coux, 33, recently invested in Bitcoin and the other cryptocurrencies ethereum and litecoin.

“I did it to repatriate my funds to France without paying fees,” said the New York University geneticist, who explained he was dismayed at the cost of conventional bank transfers.

Roux now holds the equivalent of about US$20,000 in cryptocurrencies, or about three times what he initially invested. To avoid nasty surprises, he has downloaded smartphone apps to alert him to any sudden price movements.

“If that happened, I’d sell as quickly as possible.”

Bitcoin advocates want to seize on the craze to push the Securities and Exchange Commission to permit the creation of a Bitcoin-based exchange-traded fund to allow ordinary investors to park their savings.

“That will be huge,” said Bob Fitzsimmons of Wedbush Securities, who acknowledged that this could take time.

REGULATION THE INDUSTRY WANTS

However, major banks, which often underwrite the riskier transactions, are leery, pointing to the lack of transparency in how Bitcoin’s exchange rate is set and fearing the potential for market manipulations.

Created in 2009, Bitcoin has been traded on the Internet essentially without regulation.

Unlike the US dollar or the euro, it has no central bank or government backing, but is “mined” by computers that perform highly complex calculations.

Payments occur without intermediaries and providing personal information is not required.

Such anonymity and the lack of regulation has attracted traffickers and other criminals seeking to launder funds while turning off many conventional investment professionals.

Kathryn Haun, a former federal prosecutor currently on the board of the digital currency platform Coinbase, told AFP that many mistakenly believed the financial industry was resistant to any regulation.

“What the industry does not want is regulatory uncertainty,” she said.

Before getting involved, many hedge funds and other financial institutions want to know how securities and banking regulators view ‘cryptoassets’.

“So many are still waiting on the sidelines until more regulatory clarity emerges and when that happens I think you will see even more mainstream business and institutional Interest in the space,” she said.

Haun, who lectures on cryptocurrencies at Stanford business school, compares the jitters around Bitcoin to those which greeted the rise of the internet in the 1990s.

“Fairly quickly the good use cases outweighed the bad use cases and every day the technology became more and more mainstream,” she said.

But, with the exception of Japan, which recognised Bitcoin as legal tender in April, other major economies are waving red flags.

US Federal Reserve Chair Janet Yellen has said Bitcoin is not legal tender and called on banks to be certain their digital currency transactions adhere to anti-money laundering statutes.

“It is a highly speculative asset,” she told reporters this month.