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LONDON Bitcoin's record-breaking rally has led to a surge in retail investment interest in the cryptocurrency market.

Crypto exchanges such as Coinbase and Binance and online trading platforms including Revolut and eToro have seen a spike in activity recently, as new investors race to capture some of the wild gains in the market.

"There is certainly market data pointing to increased retail participation," said Michael Bucella, partner at crypto investment firm BlockTower Capital.

"This is reflected in the recent surge in 'altcoins'" other digital tokens that came after bitcoin "and the increase in volumes on the retail platforms, as well as the crypto-native exchanges that have historically been more retail-focused," Bucella added.

Bitcoin bulls claim the cryptocurrency's latest rally is different to a late-2017 bubble that saw its price soar close to $20,000 before collapsing as low as $3,122 the following year. The main difference, they say, is that institutional investors are driving the price gains this time round.

A number of famed investors including Paul Tudor Jones and Stanley Druckenmiller came out as believers in the cryptocurrency last year, while U.K. asset management firm Ruffer added 550 million ($747 million) of bitcoin to its portfolio.

There remain skeptics, however, such as American stock broker Peter Schiff and economist Nouriel Roubini, who see bitcoin as a speculative asset with no intrinsic value and amarket bubble that is likely to burstat some point.

Despite this, there are signs of a sharp rise in demand from retail investors, who don't want to miss out on the action. That may have significant implications for the latest crypto market cycle, as retail speculation was considered to be a big factor in bitcoin's 2017 rally.

Google trends data shows that web searches for bitcoin rose sharply at the start of the month, reminding some market watchers of the parallel increase in bitcoin's price and searches for the cryptocurrency in December 2017. Searches for bitcoin are far from where they were over two years ago, however.

The total market value of all cryptocurrencies surpassed $1 trillion for the first time on Thursday, helped in no small part by bitcoin's recent performance. Bitcoin, which also topped $40,000 a coin for the first time Thursday, is the world's most valuable digital coin, with a market cap of over $700 billion.

Meanwhile, online investment platforms are seeing a surge in sign-ups and trading volumes. EToro, for example, had 61% more unique bitcoin holders on Jan. 4 than it did a year earlier, and 49% more unique holders of ether, another virtual currency.

"There will be volatility, which is natural after the gains we have seen, but the long-term trend is clear," Simon Peters, market analyst at eToro, told CNBC. "Crypto is moving into the mainstream, and more and more investors are adding exposure."

Revolut says it signed up 300,000 new cryptocurrency customers over the last 30 days as bitcoin rallied to fresh highs. Bitcoin was the most popular digital currency on the platform in the last two weeks, followed by XRP and ether.

Prices of altcoins, such as ether, litecoin and bitcoin cash, have risen dramatically in the past week. They often rally in times of strength for bitcoin for example, ether on Monday climbed past $1,000, for the first time since February 2018.

Bucella claimed that the recent gains in altcoins were "largely driven by recent retail participation," while the "dominant players in bitcoin are institutional."

Cryptocurrency trading volumes surged to a daily record of $68.3 billion on Sunday, according to data from CryptoCompare. That eclipsed the peak of the 2017 bull run in December, when daily volumes hit a high of $27.8 billion.

Many crypto investors say bitcoin is akin to "digital gold," a potential safe haven asset and a hedge against inflation. Strategists at JPMorgan recently gave a lofty long-term price target of $146,000 for bitcoin, claiming it is starting to compete with gold as an "alternative" currency.

The risk of an abrupt reversal is high, as volatility in cryptocurrencies tends to be ignored by retail investors.

Daniel Lacalle

chief economist at Tressis Gestion

However, the strategists also noted that bitcoin's price volatility would have to drop substantially in order to reach this target. They added that there have been "some signs that retail interest has also increased sharply," pointing to rising volumes on platforms like PayPal and Square's Cash App.

PayPal last year launched a feature in the U.S. that lets its users invest in cryptocurrencies. The company plans to offer crypto shopping across its massive network of retailers later this year. The move was widely seen as a step toward mainstream adoption of crypto in things like payments.

Daniel Lacalle, chief economist at Tressis Gestion, said bitcoin and other cryptocurrencies have grown popular with retail investors in emerging markets, such as Argentina, Brazil and Turkey.

"There is a growing demand for cryptocurrencies, especially bitcoin, from savers in emerging economies that saw their domestic currency collapse relative to the U.S. dollar even in 2020 with a weak greenback," he told CNBC.

"I also believe that small investors jump into the bandwagon because they see momentum," he added. "The risk of an abrupt reversal is high, as volatility in cryptocurrencies tends to be ignored by retail investors."

Looking ahead, Charles Hayter, CEO of CryptoCompare, said there are "two clear future catalysts" in the crypto market -- the potential approval of a bitcoin exchange-traded fund (ETF) and an expected initial public offering from Coinbase.

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Bitcoin's wild rally and a fear of missing out has retail investors flocking to crypto - CNBC