5 theories behind bitcoin's dizzying rally above $12,000 (BTC)

Bitcoin has tripled in price in under three months, from $4,000 at the start of April to over $12,500. After soaring to a record high of nearly $20,000 in December 2017 then plummeting below $3,300 last December, the cryptocurrency has now recovered more than half its losses. It has surged by more than a third in the past week.

Rising mainstream interest, geopolitical tensions, expansionary monetary policy, a supply cut next year, and bitcoin whales may be responsible for the cryptocurrency's breathless rise. We examine each factor below.

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Cryptocurrency is going mainstream

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Bitcoin is benefiting from broader interest in cryptocurrencies. Facebook partnered with Visa, PayPal, Uber, Spotify, and other companies to launch Libra this month , a digital coin intended to simplify online payments and purchases.

Asset manager Fidelity has begun buying and selling bitcoin for institutions , online broker TD Ameritrade rolled out trading of Bitcoin futures in December, and securities brokerage E*Trade is close to introducing cryptocurrency trading on its platform.

"The primary drivers behind bitcoin's turbo-charged appreciation revolve around growing optimism over the cryptocurrency being accepted by the mainstream," said Lukman Otunuga, research analyst at FXTM. "Libra has sweetened appetite towards bitcoin."

However, he warned the cryptocurrency's gains aren't guaranteed to stick.

"Lessons from the past have illustrated how unpredictable non-traditional financial instruments like bitcoin can be," Otunuga said. "With explosively volatile moves being nothing new in the world of cryptocurrency, bitcoin could still experience periods where it finds itself under sudden selling pressure."

Bitcoin is being seen as a safe haven

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America's trade war with China and disputes with Iran, Mexico, Germany, and other countries have spurred investors to buy bitcoin as a way to diversify their portfolios.

"As the geopolitical situation remains so uncertain, strategic investors are still looking at bitcoin and ethereum as uncorrelated with centralized assets, so they provide a quasi safe-haven option." said Marcus Swanepoel, CEO of Luno, a cryptocurrency platform.

However, bitcoin may not be the best hedge. A recent study found it was vulnerable to the same market forces as conventional financial assets.

Central banks may be juicing bitcoin demand

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The European Central Bank's commitment last week to cut interest rates and purchase assets as necessary to protect the eurozone economy, and the Federal Reserve's hinting that it could cut rates as soon as next month, may be fueling demand for cryptocurrencies.

Lower interest rates reduce borrowing costs and discourage saving. As central banks pursue expansionary monetary policies, bitcoin buyers may be anticipating an influx of liquidity into markets that will push cryptocurrency prices higher.

"The liquidity injection from central banks has forced a range of assets like gold, bonds, the yen etc, so bitcoin is just being swept along by those macro currents," said Neil Wilson, chief market analyst for Markets.com.

"Nominal and real yields have retreated sharply, reducing the opportunity cost of holding (or HODLing) bitcoin," he added, referencing the acronym used to describe bitcoin owners who 'hold on for dear life.'

Theres a supply cut next year

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Bitcoin prices could be rising in anticipation of a "halving" next year. The payout to bitcoin miners for discovering new "blocks" of bitcoin started at 50 bitcoins but automatically halves every four years to combat inflation. The reward will fall to 6.25 bitcoins in May 2020, according to Forbes .

The smaller reward could lead to some people deciding the computing power and electricity bills are no longer justified and hanging up their virtual mining picks. It's also likely to reduce the inflow of new bitcoin into the system, pushing up prices.

Next year's halving is "being talked about increasingly as bearing on price action now," Wilson said.

Whales may be driving prices higher

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Associated Press

A big chunk of bitcoin is held by a small number of early investors such as the Winklevoss twins . These whales may be colluding to lift the price of bitcoin .

"There is a core group of large, wealthy bitcoin 'hodlers' that will never let bitcoin drop down too low," Sid Shekhar, co-founder of crypto analytics firm TokenAnalyst, said in an interview. "These are also the folks who support it during rallies."