There’s a reason why bitcoin critics are evoking Tulip Mania as the digital currency’s price soars to new heights.

It’s because the story of the Netherlands’ great tulip bubble of 1637 helps focus the mind on the basic question at the heart of any financial bubble assessment: whether there’s a blatant disconnect between an asset’s price and its fundamental value. There are some decent arguments why bitcoin’s detractors could be wrong. But, either way, anyone hoping to ride this rally higher should think about what constitutes the digital currency’s fundamental value.

Of course, there’s no surefire way to determine fundamental or fair value — notwithstanding the useful benchmarks for doing so in markets such as stocks — especially for something as untested as this. But the lesson of Tulip Mania is that when prices truly get into bubble territory, your gut can be as good a gauge as anything. At its peak, the price for a single tulip bulb in 1637 stood at 10 times the annual income of a skilled Dutch craftsman. Based on that simple, fundamental assessment of the market’s potential, something was clearly amiss.

Bitcoin price surge evokes 'Tulip Mania' talk

So, what of bitcoin and the 8,900% rally since Jan. 1 that took the virtual currency to a peak of $1,200 this week? The fundamental question in this case is whether the digital currency will eventually become a widely accepted means of exchange and a store of value. Will businesses and individuals everywhere routinely use bitcoin to purchase goods and services? Will they happily store their savings in bitcoin, not because they are betting on gains versus the dollar but because they regard it as a safe and stable vehicle for doing so? And if all of this is indeed part of bitcoin’s destiny, how long will it take to get there? Read: Bitcoin fever is a fool’s gold rush.

I’m generally agnostic on those questions.

My own sense is that it will take far too long for bitcoin to rise to an appropriate level of acceptance to justify a rally as fast as this — not when the dollar, euro, yen and the rest of the world’s government-issued currencies are so deeply entrenched in the global financial system. And there’s a real risk that copycat digital currencies will dilute the demand for bitcoin.

Yet there are some strong arguments in favor of this revolutionary digital currency: bitcoin has great potential as a highly secure, low-cost vehicle for electronic transactions in competition with credit cards; it could enjoy a powerful first-mover advantage allowing it to set the standard for digital currency transactions; and its inherently limited supply makes it attractive to investors seeking an alternative to both fiat currencies and gold. Bitcoin’s attributes facilitate this: it generates close to zero transaction costs; it bears powerful encryption protections; and, unlike unlimited fiat currencies, there’s expected to be a finite amount in circulation as the algorithm behind bitcoin’s production is believed to be programed to stop doing so at a predetermined point. Read: Where does your bitcoin investment go when you die?

Investors excited about the market at the wrong time

In fact, as Citibank currency strategist Steven Englander observed in a research note this week, “with its inelastic supply and deflationary bias, [bitcoin] would look attractive to [central bank] reserve managers as a complement to gold, and in contrast to fiat currencies in unlimited supply.” That makes the People’s Bank of China bitcoin’s biggest potential customer. Even if the limits to circulation will put a cap on China and other big reserve manager’s capacity to trade in this market, for now the sharp rally in bitcoin’s dollar-based valuation means that it could theoretically absorb a much bigger portion of their current reserves. It’s no surprise, perhaps, that a move by one unit of state-owned China Telecom to accept certain payments in the digital currency is being interpreted by some as a way for China to promote it. http://www.forbes.com/sites/quora/2013/12/03/what-is-beijings-rationale-for-promoting-bitcoin/

None of this precludes the prospect that bitcoin’s recent price action represents a bubble. The proof that it isn’t does not hinge solely on whether bitcoin can become a big player in commercial transactions but whether that happens fast enough to justify the exponential increase in its price versus the dollar. Tulip bulbs ultimately proved to be a lasting, viable product. They were just priced wrong.

What does matter is that investors go to the trouble of asking and exploring these fundamental questions about bitcoin’s inherent value and weigh that against the price they pay for it.

The recent rally seems to have been triggered by gestures from financial authorities that were seen as quasi endorsements: Federal Reserve Chairman Ben Bernanke’s comment last week that bitcoin “may have long-term promise” and news that the Royal Mint in the U.K. is considering a proposal by the Channel Island of Alderney to turn the British crown dependency into the first jurisdiction to mint physical bitcoin. Read about how to trade bitcoin.

Still, looking at the digital currency’s eye-popping charts, it’s hard not to suspect that a bandwagon to nowhere has set forth. Many are clearly buying bitcoin simply because they believe it’s going to go higher for its own sake. If so, it represents pure, rampant speculation — a signal for serious investors to steer clear of it.

For further reading:

David Weidner: Bitcoin fever is a fool’s gold rush.

Matt Lynn on how bitcoin, not gold, has the Midas touch.

Tatar on whether you should put bitcoin in your portfolio.

Cody Willard on trading bitcoin as prices swing.