Traditionally, no investment has been able to hold a candle to the stock market when it comes to real wealth creation. However, cryptocurrencies aren't your traditional investment.

This year alone, the aggregate market value of cryptocurrencies has soared by more than 800%, surpassing $160 billion at one point, with bitcoin, the most consumer- and investor-facing digital currency of the group, nearly touching $5,000 per coin at the beginning of September after beginning the year below $1,000 a coin. While bitcoin's near quintupling might seem impressive, other cryptocurrencies, like primary rival ethereum, have risen by more than 3,500% year to date.

A physical gold bitcoin on a table.

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Why digital currencies have been unstoppable in 2017

What's lit a fire under cryptocurrencies in 2017? Potentially the biggest catalyst has been the plummeting U.S. dollar, which recently hit a two-and-a-half year low. Generally, the dollar falls when uncertainty rises with regard to the U.S. economy. A lack of progress from the Trump administration in getting major legislation passed clearly has investors concerned that U.S. GDP growth forecasts may be a bit overzealous.

When the dollar falls, the usual response from investors is to seek the safety of gold. Gold has been used as a currency for centuries, and it's a finite resource, which allows it to be a presumed store of value when the dollar is falling. However, in recent months, we've likely seen some investors choosing bitcoin as opposed to gold as their safe-haven investment. Bitcoin's protocol limits the number of coins that can be mined to 21 million, which itself makes bitcoin somewhat of a finite resource.

The blockchain that a number of cryptocurrencies are based on, including bitcoin, could be another fundamental reason for this ferocious rally. Blockchain is a digital decentralized ledger that keeps track of all transactions. It's considered to be exceptionally secure, and some pundits believe it could be the future of peer-to-peer, client-to-business, and business-to-business transactions. In fact, more than 150 organizations are currently testing versions of ethereum's blockchain in various pilot and small-scale programs in the financial and energy sectors, to name a few. 

A person using a pin to pop a bubble with a dollar sign inside.

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If the bitcoin bubble bursts, one of these factors will likely be the culprit

While the run higher in cryptocurrencies like bitcoin has been game-changing, it's also feasible that bitcoin could be in bubble territory. After all, bitcoin's market cap has surged from roughly $3 billion in 2015 to nearly $69 billion as of Sept. 9, 2017. Though it's impossible to pinpoint what, if anything, could cause bitcoin's bubble to burst, the following five factors appear to be its most likely downside catalysts.

1. The emotional trading tide turns

Perhaps the biggest risk for bitcoin is that the upside momentum wanes among retail investors and they lock in their gains. Because bitcoin is considered a nontraditional asset, most institutional investors have avoided taking a position in the digital currency. Thus, retail investors have been determining bitcoin's price -- and retail investors are considerably more prone to make decisions based on emotions rather than logic. It wouldn't take much to strike fear into bitcoin investors and send them scurrying for the exit.

2. Brand-name businesses ditch digital currencies, including bitcoin

Another way bitcoin's bubble could burst is if brand-name and high-profile businesses suddenly decide that they don't want to accept the digital currency. Five brand-name businesses have accepted bitcoin since 2014, but if volatility in the currency grows, or if bitcoin's price were to suddenly falter, it's not out of the question that businesses could stop accepting bitcoin altogether. The fact that dozens of businesses accept bitcoin as payment adds to its legitimacy, so if businesses were to renege on their pledge to accept bitcoin, it could devastate what's often been described as a libertarian's dream currency.

Interconnected bike chains designed to represent a blockchain network.

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3. Bitcoin's blockchain loses out to a competitor

The bitcoin bubble could also burst if its blockchain turns out to be far less popular than envisioned by investors. As noted, ethereum already has an alliance of more than 150 organizations that believe its blockchain could be the next big thing. For what it's worth, bitcoin recently completed its SegWit2X upgrade that's designed to reduce transaction fees, improve transaction speeds, and increase capacity within its network (this upgrade is what precipitated the split of bitcoin into two currencies, bitcoin and bitcoin cash). Will that be enough to attract businesses? It remains to be seen.

4. Bitfinex is hit by a major cyberattack

If the largest bitcoin exchange were hit by a cyberattack, bitcoin could be in deep trouble. Currently, that title goes to Bitfinex, which, according to trading volume data found on WorldCoinIndex.com, shows it handles about half of all of bitcoin's volume in a given day. 

For those who may not recall, Mt. Gox at one time handled about 70% of bitcoin's trading volume before a cyberattack completely decimated the exchange. After bitcoin and cash were allegedly stolen by hackers, Mt. Gox filed for bankruptcy. This doesn't in any way suggest that Bitfinex is susceptible to cyberattacks to the same extent Mt. Gox was, but a debilitating cyberattack on Bitfinex, which could seriously hurt bitcoin's liquidity, can't be discounted.

A courtroom with a judge's gavel in the forefront.

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5. Regulators crack down on bitcoin

Finally, it's always possible that increased regulatory action could cause bitcoin's price to plunge. Unlike the other factors, this last point could potentially be a double-edged sword.

You could rightly argue that increased regulation is a good thing since it would validate bitcoin as a currency and help keep bad folks from tarnishing the digital currency's reputation. Then again, increased regulation would be a major blow to libertarians who want zero government involvement in bitcoin. In other words, it could reduce interest in bitcoin, thus hurting its price.

As noted, it's impossible to know with certainty if bitcoin is in a bubble. However, if my arm were twisted, I would indeed suggest the criteria for a bubble exists, and that buyers of bitcoin be fully aware of the major risks they're taking.

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