If you think marijuana stocks have been on fire this year, then you haven't taken a peek at cryptocurrency returns. At one point earlier this month, the aggregate cryptocurrency market cap topped $161 billion, which represented an 810% increase from where they ended on Dec. 31, 2016. To give this some perspective, the average cryptocurrency over the first nine months of the year has delivered the same return as the broad-based S&P 500 over the past 27 years! Stocks are traditionally the greatest wealth creator, so this is a true eye-opener.

Leading the charge higher have been the two most renowned digital currencies, bitcoin and Ethereum. Bitcoin has risen by nearly 300% since the year began through Sept. 24, 2017, while Ethereum is up better than 3,400%. The duo now sports respective market caps of $61.3 billion and $26.9 billion, which account for well over half the aggregate value of all cryptocurrencies.

A physical gold bitcoin on a table.

Image source: Getty Images.

The most bullish bet in bitcoin

Yet, in spite of the massive gains we've already seen, some industry pundits believe cryptocurrencies -- and more specifically, bitcoin -- could head considerably higher. In May, Saxo Bank analyst Kay Van-Peterson called for bitcoin to hit $100,000 per coin within the next 10 years. Mind you, this is the same analyst that called bitcoin to hit $2,000 back when it was valued at $754 in Dec. 2016. Such a move would imply a 2,650% return still yet to come.

But that's far from the only bullish estimate. Perhaps the loftiest price target for bitcoin comes from Wences Casares, CEO of bitcoin wallet Xapo, and a member of PayPal's board of directors. While speaking at the Consensus 2017 conference in New York earlier this year, Casares suggested that bitcoin could hit $1 million per coin within the next decade. That would be a return of more than 27,300%, assuming Casares' price target on bitcoin was hit.

Why such optimism? "The Internet doesn't have a currency and it desperately needs one," said Casares. Nevertheless, he also urged some degree of caution. "The biggest mistake [would] be to buy more bitcoin than you can afford to lose. The big mistake is [also] not to own any bitcoin. Put 1% of your net worth in bitcoin and forget about it for 10 years."

An investor hugging a pile of cash on a table.

Image source: Getty Images.

The case for $1 million

But the question we should be asking is this: Could bitcoin really hit $1 million? If you had asked me a year ago if bitcoin $5,000 was possible, I'd probably have laughed hysterically, but bitcoin, with the aid of a little bit of rounding, essentially hit $5,000 per coin in early September.

Perhaps the best shot bitcoin would have at $1 million would be if its blockchain technology became the choice of enterprises around the globe. Blockchain is nothing more than the digital decentralized network that underlies bitcoin and records transactions in a secure manner. Because blockchain can be open source, it makes altering data within the network incredibly difficult.

Less than two months ago, bitcoin forked into two separate currencies, bitcoin and bitcoin cash, with the original bitcoin network implementing the SegWit2x upgrade. This upgrade is designed to take some of the information within the bitcoin network off the network in order to improve transaction settlement times, as well as lower fees and improve capacity.

The move is directly designed to appeal to enterprises, which are primarily testing Ethereum's network in pilot and small-scale projects. If bitcoin manages to lure those businesses to use its blockchain technology and it continues to gain appeal as a mode of payment with big business, then a lofty price target isn't impossible -- albeit $1 million does seem exceptionally unlikely over the next decade.

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

Image source: Getty Images.

Why this price target is probably a fantasy

Despite the bullishness surrounding bitcoin, there's also the possibility that it could implode from its current levels.

While blockchain could be its most logical source of long-term gains, there's absolutely no guarantee that bitcoin will be the choice of businesses worldwide. We also have no way to accurately value what blockchain is worth, given that the technology is purely nascent at this point. Contending that it could be worth billions, or tens of billions, of dollars is nothing more than a blind dart throw.

There are also concerns about regulation and the decentralization of bitcoin's network. Recent crackdowns on initial coin offerings in China, and the announcement that China will, in due time, shut down its domestic cryptocurrency exchanges, reduces the legitimacy of cryptocurrencies like bitcoin. Without a central trading hub, it can increase volatility and emotions with digital currencies.

However, the most dangerous aspect of bitcoin could be that emotional factor. Given that cryptocurrencies aren't backed by any government, financial institutions have largely kept their distance. This has left the pricing of digital currencies to be decided by retail investors, who are far more prone to trade on emotion rather than fundamentals. And once again, even fundamentals are unknown when it comes to cryptocurrencies.

A frustrated investor standing in front of his computer screen.

Image source: Getty Images.

How do we know investors are processing things emotionally rather than logically when it comes to bitcoin? Take a look at both the Bitcoin Investment Trust (NASDAQOTH:GBTC) and First Bitcoin Capital Corp. (NASDAQOTH:BITCF).

The Bitcoin Investment Trust is an ETF run by Grayscale that merely hangs onto bitcoin. As of Aug. 31, 2017, the fund held 172,721 bitcoin, which means that any investor could multiply the current bitcoin price by this figure to determine an accurate net asset value (NAV). As of Sept. 24, this ETFs NAV was $650.5 million. But on Friday, Sept. 22, the Bitcoin Investment Trust ended the trading session with a market cap of $1.13 billion, or a premium of 74%! In other words, investors are paying a premium of 74% over the current value of the ETF's holdings, which makes no sense whatsoever.

By a similar token, in August, investors wound up pushing penny stock First Bitcoin Capital to a nearly $1 billion valuation despite the company having very little in way of tangible cryptocurrencies operations. A look at its balance sheet reveals very little cash, and its only assets are gold-based rights from when the company held gold-mining assets in Venezuela back in 2013 before switching to cryptocurrency operations for good in 2014. Yet, according to investors as recently as August, a company with just over $46,000 in revenue was worth nearly $1 billion. 

Emotions can only carry an asset so far, and bitcoin looks to be on the verge of a possible bursting bubble.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool has a disclosure policy.