Unless you've been living under a rock for the past year, chances are you've heard of the meteoric rise of Bitcoin and the astounding returns that have come with ownership of the digital currency. If you haven't, check out our beginner's guide to cryptocurrencies.
Indeed, many stories of college-kids-turned-millionaires are making everyone, from high-flying bankers to your grandma, wonder about the legitimacy of Bitcoin and other cryptocurrencies, and consider whether to get in on the action themselves.
For those of you on the fence, here's you why you should in four words: limited downside, unlimited upside.
Whether you believe in decentralized currencies or not (and you should), there's no denying that some very real gains are being made from buying and holding various cryptocurrencies.
Doing some quick math, let's say you had invested $1000 dollars in Bitcoin six months ago. Today, the market value of that investment would be worth $6000. To see similar gains in the stock market, you would have had to invest in Amazon 5 years ago.
And this is just comparing to the past six months; the really early investors (those that got in at Bitcoin's inception), have reaped unfathomable gains ($100 invested into Bitcoin when it first began in 2012 would be worth just over $26 million dollars at today's price).
"But isn't it a risky investment?"
As with all investments, there is the potential to lose whatever you put in. But unlike traditional investments, the possibility of earning multiples on your initial capital is very real, and at the moment much more common when compared to traditional financial instruments.
There's no less risk than investing in your brother-in-law's cheese-grating business, or buying penny stocks, or -- if you want to talk low returns -- buying a lottery ticket or playing casino games.
"But how can this growth be possible?"
There are many different aspects at play regarding Bitcoin's growth. Two aspects that I would attribute to be the most important would be:
1) The digital nature of cryptocurrencies
Think about how quickly videos today can go viral, spreading around the globe in a matter of hours or less. Now apply the same concept to money, and you can see why Bitcoin is so powerful (I realize this is grossly oversimplified, but I'm just trying to convey a sense of the viral power a digital currencies).
With regards to utility, cryptocurrency is simply money that can be sent around the globe in a matter of minutes, with minimal cost, as easily as sending an email. Considering that previously, if someone wanted to transfer a sum of money internationally, they would have to pay a large fee, and wait several business days before their money showed up.
With cryptocurrencies, simply enter the destination address, click send, and a few minutes later (and for something trivial like 30 cents) your money has arrived!
Throw in a lack of regulation (although this is rapidly changing) and scripting ability, and you can see why cryptocurrencies have taken the world by storm! Truly a twenty-first century payment system of the people.
"Well I must have missed the boat on this party then"
Well... hard to say. The market cap of all cryptocurrencies took four years to get to $100 billion, four months to get to $200 billion, and only three weeks to get to $300 billion!
The exponential growth is definitely there.
Yet the total cryptocurrency market cap of $0.3 trillion is still a drop in the bucket compared to the $7 trillion of daily volume the foreign exchange markets experience, so there's still a lot of room to grow.
However, cryptocurrencies' greatest strength is also their biggest risk: volatility. Volatility is what makes these massive gains possible, but with massive gains comes the potential for massive losses, so do your research and invest wisely.
And perhaps next time you think of buying a lottery ticket, or playing the slots, maybe buy some cryptocurrencies instead and get some skin in the game!