To put it mildly, cryptocurrencies are redefining "investment gains" for folks in 2017. Whereas the stock market has traditionally returned 7% a year, inclusive of dividend reinvestment, the aggregate value of more than 1,100 digital currencies has increased from $17.65 billion to begin the year to $167 billion as of Oct. 18. You know, just your standard 846% gain in a span of nine-and-a-half months.
Leading the charge higher have primarily been bitcoin and ethereum, the largest and second largest cryptocurrencies by market cap. Bitcoin's value has more than quintupled year to date, with its market cap recently approaching $100 billion. For context, bitcoin was valued closer to $3 billion just two years ago. Meanwhile, ethereum is up more than 3,800% since the beginning of the year. Combined, ethereum and bitcoin make up $123 billion of the aforementioned $167 billion in digital currency market cap.
The prime catalysts pushing bitcoin and other cryptocurrencies higher
There are a number of reasons investors have been excited about bitcoin and cryptocurrencies as a whole. To begin with, there's the blockchain technology that underlies most virtual currencies. Blockchain is the digital and decentralized ledger that records transactions without the need for a financial intermediary such as a bank. Because these are usually open-source networks, altering data within blockchain would be almost impossible to do. Thus, blockchain could be the next-generation platform for secure peer-to-peer and business-to-business transactions.
A falling dollar has also lent to bullish moves higher in digital currencies -- especially bitcoin. When the U.S. dollar falls, investors holding cash will often seek a safe-haven asset like gold. Gold and the dollar have historically moved in opposite directions, and gold is a finite resource, making it a perfect store of value. In other words, what gold is on the planet right now is all there will ever be, unless we figure out a way to mine asteroids or foreign planets. Bitcoin shares this perceived scarcity with gold, given that its protocols limit the number of minable coins to 21 million. In effect, bitcoin has been a go-to safe-haven asset of late.
We also shouldn't overlook the power of momentum in pushing the price of bitcoin and other digital currencies higher. The gains in cryptocurrencies can aptly be described as once in a lifetime, so it's possible that investors simply fear missing the boat if they don't buy in now.
Big bank CEOs weigh in on bitcoin
But not everyone is a fan of bitcoin and the digital currency movement. This past week, the CEOs of the largest and third largest money center banks in the U.S. voiced their opinions on bitcoin, and you simply have to see what they said.
The most recent interjection came from Wells Fargo (WFC 0.80%) CEO Tim Sloan, who, when questioned about bitcoin by CNBC, said that "in terms of it as a cryptocurrency, I'd probably rather own a dollar than a dollar of bitcoin."
Of course, that's just a tiny slap compared to what JPMorgan Chase's (JPM 0.49%) CEO has said about bitcoin. In September, Jamie Dimon called bitcoin a "fraud" and suggested he'd "fire in a second" any of his investment employees who were actively trading bitcoin.
Last week, Dimon was at it again while taking questions from a moderator at an Institute of International Finance conference. Said Dimon:
If you're stupid enough to buy it [bitcoin], you'll pay the price for it one day. The only value of bitcoin is what the other guy'll pay for it. Honestly I think there's a good chance of the buyers out there are out there jazzing it up very day so that maybe you'll buy it too, and take them out.
What is noteworthy, though, is that while both men could care less for bitcoin the virtual currency, they both appreciate the blockchain technology that underlies cryptocurrencies. "I think in terms of the underlying technology, it's very interesting. Distributed ledger technology is very interesting in terms of how it can be applied to all sorts of products and services within financial services," Sloan said. Similarly, Dimon has said he believes the underlying blockchain technology is valid, but he has no interest in the non-fiat digital coins.
This is a far bigger worry than comments from big-bank CEOs
While you could construe the comments of big-bank CEOs as blunt and opinionated, one factor that can't be spun is just how exposed digital currencies are to competition.
Right now, bitcoin and ethereum are sort of a one-two punch in terms of popularity. Investors have latched on to bitcoin as a payment platform, although recent software upgrades to its blockchain are designed to attract big businesses. Meanwhile, ethereum derives its valuation from the potential for its blockchain. More than 150 organizations, including nine brand-name companies, are testing a version of ethereum's blockchain in pilot and small-scale projects. But none of these technologies is protected or guaranteed to remain popular.
For instance, six banking giants, including Credit Suisse and Barclays, recently joined a project UBS began in 2015. These banks are working on technology that'll allow for the clearing and settling of transactions worldwide over blockchain. This partnership also comes with its very own digital coin, which is being called the "utility settlement coin." The point is that all it really takes is some time and capital, and anyone can be a blockchain player. There's nothing particularly unique at all about bitcoin, other than its current size, that could keep a consortium of companies from dethroning it with superior blockchain technology
Now that's a real-world concern that should have bitcoin investors seriously worried.