And the gravity-defying rally continues…

We’ve seen Bitcoin prices move from sub-$1,000 at the start of the year, to $7,398.98 at the time of writing and there look to be no signs of a sell-off. The market cap of Bitcoin now sits at $120bn, quite a shift from the July dip attributed to investor concerns over the summer’s hard fork and evolution of Bitcoin Cash.

The rally has been so resilient that, year-to-date, Bitcoin has only seen 17 weekly declines during its 743% year-to-date rally.

Daily transactions have also gone through the roof, with transactions now sitting at 300k plus levels. Volumes suggest that there is a strong support at just shy of $7,000 and, with buyers looking to enter on the dips, the trend continues to look bullish.

Despite the Jamie Dimons of this world calling it a fraud and talk of a bubble, support continues to come from new market participants looking to get in on the action.

Speculation over whether Bitcoin is the new gold may come to an end with the recent moves. Market risk appetite remains particularly bullish and Bitcoin remains well ahead of more traditional equity markets, with even the NASDAQ record-breaking run paling in comparison to the Bitcoin’s rally.

What influences Bitcoin Price?

While some have suggested that Bitcoin is the new gold, the rally looks more aligned with strong risk appetite than risk aversion. Geopolitical woes may continue to linger, with North Korea the main threat to world peace at present, but its risk on and has been for much of the year.

For some, it may be easy to accept a possible shift in preference towards safe-haven asset classes, but market preference for a virtual currency over a physical commodity seems unlikely to be a factor.

In spite of recent rate hikes by the FED and the latest rate hike by the Bank of England, interest rates are at record lows over the world. It’s almost free and in some places, it’s cheaper to hold the virtual currency than legal tender.

The latest surge in Bitcoin has been attributed to a surge in demand from Japan. The surge in demand has, not only been fuelled by regulator acceptance and recognition of Bitcoin as a legal currency in Japan but also the current interest rate environment. The Bank of Japan continues to maintain negative interest rates. And, With the ECB’s negative deposit rates, that’s quite a significant source of funds for the cryptoworld. Thrown into the mix is the fact that some of the larger financial institutions have taken a softer stance on Bitcoin. Goldman Sachs recently announced that it was looking into Bitcoin , as pressure builds on banks to offer trading platforms for Bitcoin and other cryptocurrencies.

We appear to have passed the speculative investment period and have now moved into the ‘herd stage’, where every man and his dog wants to get a piece of the pie. The herd on this occasion including hedge funds and the high net worth investors who are normally ahead of the pack.

The introduction of margin financing and talks of a futures market by the end of the year are a reflection of cryptocurrency infancy, while the gains since its evolution are far from it. As the market evolves and becomes more developed, the investor group widens further, increasing volume and demand during the current cycle. Until the money starts to get a little pricier and we begin to see a pickup in volatility to unsettle investors 600 plus percent gains, the trend is expected to continue.

Bitcoin, What's Next?

We have yet to truly experience a Bitcoin correction, with the headline gains having come this year. Perhaps the real question is whether there is a correlation between the more traditional asset classes and Bitcoin.

Looking at the moves in the Asian equity markets, with the Hang Seng and the Nikkei both making solid gains this year, the correlation appears to be more associated with the riskier asset classes. Such a view suggests that, as is the case with the global equity markets, that global macroeconomic environment combined with the current monetary policy climate will continue to support demand for Bitcoin.

As institutional investors look to join the Bitcoin rally, the supply and demand relationship will remain positive for Bitcoin and then there is the prospect of tax reforms in the U.S that could lead to an increase in disposable income for U.S investors.

There are plenty of pros, but there are some cons to also consider and, while we see further gains ahead and a likely break through to $10,000 levels, the dilemma for many will be whether it’s too late.

For now, the greatest risk to Bitcoin remains regulatory. Bitcoin managed to avoid a backlash from the Chinese government’s decision to shut down Bitcoin exchanges in September, supported by the virtual nature of Bitcoin and the acceptance of Bitcoin by other countries. The real test will come if there is a change of heart by the more accepting governments and regulators come down hard on cryptocurrencies in general.

Such an outcome could see a bitcoin cough up this year’s gains and see prices return to sub-$1,000 levels, which would still be an impressive return for early investors, but not the masses who would experience quite a loss in such an instance.

Bitcoin spectators will be hoping for the latter. When considering the increased level of government scrutiny on financial transactions and the ‘know your customer’ (“KYC”) process in financial institutions, a clampdown is perhaps the more likely outcome. For many governments, concerns over the funding of criminal and even terrorist activities will be just caused to remove the anonymity that Bitcoin and other cryptocurrencies provide. Once the anonymity has been removed, the Darknet market will have to relocate.

For now, however, new market entrants will likely continue to provide the necessary support, displacing the more cautious investor looking to pocket gains. Some have certainly realized a significant wealth thanks to the Bitcoin phenomena that will likely be etched in history. The only question that remains is whether it will sit alongside the dot.com story, where the market went from boom to bust.