Bitcoin had a wild ride over the past two years, with prices driven by speculation, investment and government regulation, and investors should expect nothing less in 2015.
"Although the swings in absolute value seem to be lower in 2014 than they were at the end of 2013, the volatility will likely remain for the next few years," Zennon Kapron, managing director of Shanghai-based market research firm KapronAsia told CNBC.
"Bitcoin is largely a binary outcome with it either being a tremendous success or reduced to something only used by enthusiasts. There is a tremendous amount of private equity and venture capital money being put into bitcoin to create new and compelling business models, but the only thing that will temper volatility is increased acceptance and usage," he said.
Bobby Lee, CEO and Co-Founder of China-based bitcoin trading platform BTC China agrees: "Volatility will be inherent for this new asset class. The reason is simple: It has a small circulation value now, but theoretically, with wide adoption, the circulation value should be 100x or 1,000x what it is today," he said. "The price would have to appreciate dramatically, and that would involve very high volatility for years to come."
An over 8,000 percent price increase over the course of 2013 to its peak of around $1,147 early that December put bitcoin on the map. In early 2014, bitcoin's fall was just as quick; concerns about increasing government regulation and a market bubble saw bitcoin's value halve in just a few months.
Bitcoin is currently trading around $337 on the BTC-e exchange.
Driving forces for 2015
Developments on three fronts have the potential to drive bitcoin higher in 2015: a better usage model, more companies using blockchain-based technology and increased usage for remittances.
"Bitcoin is a technology that still needs to find its use case," Kapron said. "The iPhone defined an industry by giving consumers and businesses something that they didn't know that they needed. For bitcoin, there's no proven killer app, although numerous players are working on it. We need a bitcoin usage model in 2015 that does something better today than we did yesterday, and we're just not there yet."
Increased usage of blockchain technology will also boost bitcoin's appeal. The blockchain is a decentralized ledger that records every verified transaction. Each piece of information is stored on an immutable time-stamped list, which is then replicated on other servers across the globe ensuring protection from corruption, technological or otherwise.
"More companies are using this technology," Roger Ver, the bitcoin investor often referred to as "Bicoin Jesus" told CNBC. He highlighted Ethereum, which offers a platform and programming language that leverages blockchain technology for contracts and financial transactions, among other things. The company recently pulled around $15 million in a crowd funding campaign.
Remittances are another interesting case cases for bitcoin, Kapron said. "The idea of sending money nearly instantly anywhere in the world for cheap is very compelling. Companies are working on these solutions today, but still struggle to match the scale of established vendors like Western Union or the informal lenders that dot shopping malls across South-East Asia. This is developing rapidly though and could be big in the future."
Adoption and regulation
Adoption is likely to be driven by compelling use cases, not for regular purchases like groceries as credit cards and mobile payments are still more convenient, Kapron said.
But Ver believes wider adoption is highly likely: "as bitcoin becomes easier for non-tech-savvy people to use, adoption will increase."
If transaction volumes are anything to go by, he may be right. Bitcoin saw its highest ever number of transactions in a single day in late November, according to blockchain.info, surpassing the previous peak set during the 2013 bitcoin bubble.
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Meanwhile, regulation still has the potential to hamper bitcoin.
"We'll also see additional regulation in 2015," Kapron said. "Many countries have yet to take a stance on bitcoin and digital currencies or haven't completely promulgated their rules."
"Governments all around the world care about this because this is real and important. Rules and regulation will continue to evolve, to accommodate this new asset class that is completely digital," BTC China's Lee added.
The Australian Senate's Economics References Committee said in October that it will hold an inquiry into the implications of digital currencies. It plans to present the results in March, 2015.
"Regulation itself will not stop Bitcoin," Kapron said, "but it could slow it enough that people lose interest or is replaced with something else."