Though the stock market has historically been the greatest creator of wealth, it's cryptocurrencies such as bitcoin and Ethereum that have left traditional assets in the dust in 2017. Bitcoin has seen its value climb by nearly 500% year to date, while Ethereum, the second-largest digital currency by market cap, was up by more than 4,000%. We'd have to go back more than three decades to get returns like that from the broad-based S&P 500.
Three reasons investors are excited about cryptocurrencies
The rally in cryptocurrencies has mainly been due to a combination of excitement surrounding blockchain technology, a weaker U.S. dollar, and in some instances the opportunity of using digital coins as an alternative payment platform.
Blockchain is the digital and decentralized ledger that underlies most cryptocurrencies, and which doesn't require the need for a financial intermediary like a bank. Blockchains are often open-source networks, meaning it's almost impossible to get away with altering logged data. Thus, the future of blockchain could lead to more secure peer-to-peer and business-to-business payment platforms than we have today.
In terms of a falling U.S. dollar, bitcoin has become a popular safe-haven investment. Usually when the dollar falls, gold becomes the go-to asset, since it's a finite resource. In other words, what gold is on the planet now is all there will ever be. The same can somewhat be said for bitcoin, which has protocols in place limiting the number of mined coins to 21 million.
Lastly, consumers are excited about the potential for using digital coins to buy goods and services. As the most popular cryptocurrency, a handful of brand-name companies have accepted bitcoin since 2014, as well as a slew of smaller merchants. Although it'd still be a challenge to live off bitcoin, the mere fact that we're seeing merchants jump onboard at all is encouraging.
The first brand-name company to accept Ethereum
However, Ethereum, which is arguably more coveted for its blockchain technology than bitcoin, hasn't had as much luck attracting merchants as a form of payment. In fact, until recently there weren't any brand-name businesses that accepted ether, the digital currency of Ethereum, as a form of payment. But that changed this summer, when online retailer Overstock.com (OSTK -3.19%) once again became a pioneer for cryptocurrencies and opened its doors to Ethereum owners.
On Aug. 8, Overstock announced an integration with ShapeShift, a digital asset exchange, allowing it to accept all major cryptocurrencies for its more than 4 million online products. That list of cryptocurrencies includes bitcoin, Ethereum, and bitcoin cash, as well as Litecoin, Dash, and Monero. Users won't have to set up any new accounts or enter any personal data in the process. They'll simply select their preferred cryptocurrency and submit their order before being prompted to transfer the required number of coins, just as you would with any digital-wallet transaction. As for refunds, Overstock will be doling them out in bitcoin, which users can then exchange for their favorite cryptocurrency (if it's not bitcoin) through ShapeShift.
"Overstock is pro-freedom, including the freedom of individuals to communicate information about value and scarcity without relying on a medium created through the fiat of unaccountable government mandarins," said CEO and founder Patrick Byrne. "For that reason, we have been an early proponent and adopter of cryptocurrencies."
While this move could give Overstock a head start over its e-commerce peers, it's also not been perfect. For example, Overstock's second-quarter results show that it took a $3.3 million loss building out its Medici t0 blockchain, which is designed to be a blockchain-based securities lending system that'll go toe-to-toe with brokers on Wall Street. Clearly, Overstock is willing to take risks by courting cryptocurrency owners and investors, but it remains to be seen if that'll translate into profits for the company.
These concerns can't be overlooked
But even though Ethereum's blockchain is highly popular among businesses, there are still major concerns for cryptocurrencies and investors in this space.
Perhaps the biggest worry is that there's virtually no clarity on what blockchain technology could really be worth, and if Ethereum's will remain the most popular among enterprises. There's no denying the potential for blockchain, but it's primarily been used in pilot and small-scale programs for the time being.
What's more, businesses have been pooling their resources and minds to develop their own versions of blockchain and/or virtual currency. The barrier to entry for cryptocurrencies is exceptionally low, which isn't good news for Ethereum or bitcoin.
There's also concern about possible regulatory issues. For example, China and South Korea have both shut the door on initial coin offerings, with China taking things one step further and announcing the eventual end of domestic cryptocurrency exchanges within the country. Though an increase in regulation could validate these digital currencies in some countries, it could also close doors in others.
If my arm were twisted, I do believe Ethereum has a better chance to succeed relative to bitcoin, given that Ethereum's blockchain incorporates smart contracts, which are computer protocols that facilitate, verify, and enforce the negotiation of a contract. But that's not saying much, with growing competition and a regulatory gray cloud hovering overhead.