Bitcoin climbed back above $18,000 last week to flirt with record levels, a spectacular rally driven by a new group of buyers seeking the opportunity for big profits.

The digital currency traded as high as $18,965 on Friday, according to CoinDesk, about 4% below its all-time high of $19,783 set in December 2017. It has surged more than 50% in the past month alone.

The rally has attracted a wide cast of characters, from the Wall Street billionaires Paul Tudor Jones and Stanley Druckenmiller to momentum investors who aim to ride winning assets higher and losing markets lower.

Their participation, in turn, has fueled more buying, which mirrors a similar dynamic playing out in stocks such as

Tesla Inc.,

which investors keep pushing higher with little regard for fundamentals. As in 2017, when bitcoin became a cultural phenomenon, much of the hype has traveled by word-of-mouth.

Lately, bitcoin has even been a winning topic on sports radio. Gregg Giannotti, co-host of the “Boomer & Gio” morning sports-talk radio show on WFAN in New York, has been talking up the cryptocurrency on the air after investing $10,000 earlier this month.

There was a strong response to the bitcoin segments, Mr. Giannotti said. “As soon as I brought it up on the air, it started,” he said, adding that old friends wrote to him, sales people wanted to talk about bitcoin and listeners jammed his Twitter feed. “It struck a nerve,” he said.

Bitcoin, a form of money that exists only digitally, started in January 2009 during the depths of the financial crisis and was positioned as an alternative to government-backed money. It operates across a network of linked but independent computers that can’t be controlled by any one party, such as a central bank.

It was designed to have a fixed supply that would make it resistant to inflation. With central banks pledging this year to push up inflation, more investors have been willing to test bitcoin as a hedge. Its potential, however, has been difficult to gauge because inflation hasn’t reached the Federal Reserve’s target of 2% in years.

Aiding this interest has been the increasing number of mainstream platforms that facilitate bitcoin trading. The combination of accessible platforms and bitcoin’s potential as an inflation hedge is what is primarily driving the cryptocurrency this year, said

Dan Morehead,

chief executive of Pantera Capital, a venture fund that has been investing in the sector since 2013.

“Paper money is being debased, and bitcoin is not,” he said.

The last time bitcoin attracted such attention—in the fourth quarter of 2017, when it nearly quadrupled to approach $20,000—the industry wasn’t prepared. There were few outlets for trading beyond startup exchanges, and bitcoin had little practical value. The momentum washed out, new investors disappeared, venture capital dried up and the industry went through a wave of retrenchment and layoffs.

Much of that has changed, bulls argue. For one thing, the regulatory landscape is much clearer than it was in 2017. State and federal agencies, including the Internal Revenue Service and the Securities and Exchange Commission, have laid out rules for the treatment of cryptocurrencies. That has led companies such as

CME Group Inc.,

CME -0.85%

Intercontinental Exchange Inc.

ICE -0.61%

and Fidelity Investments Inc. to offer services for buying and selling crypto assets.

There are also retail-oriented platforms catering to interest in crypto trading. Volume has surged at

Square Inc.’s

SQ -4.18%

Cash App, which has allowed customers to buy and sell bitcoin since 2018. In the third quarter, customers bought $1.6 billion of bitcoin, up from $555 million the year before.

In October,

PayPal Holdings Inc.

PYPL -1.99%

unveiled a service that allows its users to buy and sell bitcoin directly in their accounts. It became available to all U.S. users on Nov. 12 and will expand to Venmo and some international markets next year.

Grayscale Investments, a private fund manager that sells 10 over-the-counter trust funds focused on bitcoin and other cryptocurrencies, has benefited from the new interest. The firm reported Tuesdaythat its assets under management had risen to more than $10 billion from $5.9 billion at the end of September.

Despite the recent growth, the bitcoin market is still tiny compared with other assets, which contributes to its volatility. Pantera estimated that trading volumes on PayPal and on Square’s Cash App alone would exceed the amount of new bitcoin being created daily.

With hedge funds and other professionals also buying, supply will become even more constrained, according to Pantera Capital’s Mr. Morehead. “The only way supply and demand equilibrates is at a higher price,” he said.

That dynamic is part of what attracted Mr. Druckenmiller. He sees bitcoin as similar to gold, he told CNBC in an interview earlier this month, but because of bitcoin’s smaller size and volatility, he believes it could outperform the precious metal. Mr. Jones told the network in May that he put about 1% to 2% of his assets in bitcoin, calling it a “great speculation” that he believes will emerge as a new asset class.

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Neither Mr. Druckenmiller nor Mr. Jones responded to requests for comment.

Still, bitcoin’s history shows exactly how volatile and risky it can be for investors. Its price fell as low as $3,867 on March 13, when global markets cratered, a drop of more than 60% from the beginning of the year. Bitcoin lost about 50% of its value in January 2018 after the spectacular 2017 run, eventually sinking to as low as $3,122 by December 2018.

Those risks haven’t deterred investors such as Wayne Sharp, a retired investment adviser in Columbus, Ohio, who bought her first bitcoin in September, investing $10,000. She said she was swayed by arguments about bitcoin’s value as an inflation hedge, as well as the respectability conferred by investors including Mr. Jones.

She acknowledged the purchase was speculative but said she is tired of watching safer, “value” investments fall behind momentum trades. She put a small amount of her wealth into the cryptocurrency and said she might buy more down the road.

“I figure what the heck, just go for it,” she said.

In an original WSJ documentary, markets reporter Steven Russolillo ventures to Japan and Hong Kong to explore the universe of cryptocurrencies. His mission: create WSJCoin, a virtual token for the newspaper industry. Image: Crystal Tai. Video: Clément Bürge (Originally Published October 3, 2018)

Write to Paul Vigna at [email protected] and Anna Hirtenstein at [email protected]

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