It’s been a remarkable year for cryptocurrency. As I write, bitcoin is at $10,015 USD.  Considering BTC closed at $966 on December 31, 2016, that’s a gain of over 930% year-to-date. Bitcoin has more than doubled in the last three months, and has risen 70% in just the last 30 days.

Year-to date, the market capitalization of all cryptocurrencies has grown from $20 billion to over $300 billion. It’s important to note that, despite this huge surge, crypto’s total market cap is still a fraction of the $365 trillion total invested in all assets across the globe. The cryptocurrency asset class is just being discovered – it’s very early in the digital asset mega-trend that’s likely to last for decades.

2017 Cryptocurrency Market Cap Growth

Cryptocurrency Market Cap YTD 2017.PNG

What is behind the rise in bitcoin and other cryptocurrencies? Here are three factors driving the massive appreciation of crypto assets:

Skyrocketing interest among retail traders in bitcoin and related currencies.

Global interest in bitcoin is surging, as is the number of individual investors trading the sector. Coinbase statistics show that users of its online wallet function have more than doubled since the beginning of the year. A check of Google searches for “buy bitcoin” reflects the explosion of interest in the sector – far outstripping interest even in gold.

Google Search “Buy Bitcoin” vs “Buy Gold”

Buy Bitcoin vs Buy Gold.jpg

The number of hedge funds in the crypto space is soaring.

At the beginning of the year, the number of hedge funds dedicated to the crypto space was about 30. It now stands at around 125, with more being added every month. We estimate that total assets under management by crypto funds is now nearly $3 billion, having tripled over the last year. Several high-profile former Wall Street fund managers have, or will soon, open hedge funds dedicated to crypto.

Futures and derivatives are being introduced for bitcoin.

Due to illiquidity and other factors, many institutional investors cannot directly invest in bitcoin and have been left on the sidelines, watching crypto massively outperform traditional assets.  But the introduction of futures and derivative products now gives big money traders a way to participate in the digital currency market. The announcement by the CME on October 31 that it intends to introduce bitcoin futures by year-end lit a fire under the already hot sector. Expectations are soaring that institutional investors will pile into bitcoin in the months ahead, driving prices even higher. Coinbase said it added more than 100,000 users in the 24 hours following the CME’s announcement.

In August, the Chicago Board Options Exchange – the largest U.S. options exchange – said it plans to offer cash-settled bitcoin futures by early 2018, pending review from regulators. New York-based digital currency-trading platform LedgerX received approval to clear derivatives in July, and began offering institutional clients the ability to trade bitcoin options several weeks ago. In an e-mail to CNBC, LedgerX CEO Paul Chou stated the company cleared $1 million in the first week and $2 million in the second week. He said he expects to see more exchanges launch similar products.

Clearly, bitcoin and cryptocurrency – relatively tiny, but quickly growing markets – are likely to see increasing demand from institutional traders in the months ahead.

Noted Wall Street analyst Tom Lee of Fundstrat Global Advisors recently set a 2022 target for Bitcoin of $20,000, based partly on expectations that bitcoin derivatives products will launch, opening up the sector to deep-pocketed players. With the $10,000 psychological barrier now shattered, I suspect we will see $20,000 much sooner than that.

However, while the outlook for bitcoin and digital assets is exceptionally bright, a near-term pullback, or period of price consolidation, would be normal after such a steep rise. Investors seeking to initiate or add to positions in the sector may want to proceed slowly, accumulating coins over the weeks ahead, looking to buy more aggressively into any pullbacks.

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