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

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.

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.'

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.

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."