It's been more than 15 years since the dot-com boom, when investors were able to throw a dart at their newspaper and seemingly double their money in a matter of weeks. Cryptocurrency returns in 2017 have somewhat brought back that nostalgia, but to an even wilder degree.
Since the year began, the aggregate value of all cryptocurrencies has surged from $17.65 billion to as high as $200.9 billion just a few days ago. That's a return in just 10 months and less than a week of 1,038%! Comparably, the broad-based S&P 500 has taken decades to deliver a tenfold return for investors.
Leading the way for virtual currencies is bitcoin, whose market cap recently topped $120 billion, which is actually higher than quite a few Dow Jones Industrial Average components. Ethereum, the virtual currency sidekick of sorts to bitcoin, hasn't done too badly, either. It's up about 3,600% since the year began.
Image source: Getty Images.
Explaining cryptocurrency gains in 2017
A mixture of fundamental, emotional, and news-driven catalysts are responsible for pushing bitcoin and Ethereum significantly higher for the year. This includes excitement surrounding the potential for blockchain technology, which is the decentralized digital ledger that logs transactions securely without the need for a financial intermediary like a bank. It also has to do with a weaker U.S. dollar, which has sent some investors looking for a store of value to top-performing cryptocurrencies.
Beyond the fundamentals lies a sea of news-driven events. Recently, the CME Group (CME 1.10%) announced that it'd begin carrying bitcoin futures by the end of the year. Institutional access to bitcoin futures trading should improve liquidity and reduce volatility for the world's most popular virtual currency, as well as allow CME Group to take advantage of bitcoin's popularity for its own benefit. Other news, such as Japan accepting bitcoin as legal tender, have boosted prospects for it and other digital currencies.
Fear of missing the boat has also helped send bitcoin and Ethereum soaring. Since institutional investors have been mostly barred from trading virtual currencies to this point, their prices have been determined by retail investors, who are more prone to emotional investing than institutional investors.
Image source: Amazon.com.
Make way for Amazon
But the most eye-popping news of late could be the announcement from trade publication DomainNameWire that e-commerce giant Amazon.com (AMZN 1.66%) registered three new domain names: amazonethereum.com, amazoncryptocurrency.com, and amazoncryptocurrencies.com. This is on top of the company's registering of amazonbitcoin.com approximately three years ago, according to CoinDesk.
Why on Earth would Amazon register these domains? After all, it's been raking in the dough with Web Services and recently completed the acquisition of organic and natural grocery food chain Whole Foods. Between its e-commerce platform and possible venture into healthcare as a prescription-drug middleman, you'd think it has a full plate.
One possible answer is the company is playing defense to stay on offense. It could be jumping the gun and preventing another person or company from seizing the opportunity to use the Amazon name for their own benefit.
Then again, this could be the foundation that sets Amazon up to accept cryptocurrencies like bitcoin and/or Ethereum in the future. Though Amazon Pay Vice President Patrick Gauthier clearly told CNBC in October that his company has no intention of accepting bitcoin anytime soon given a lack of demand from consumers, it's always possible that stance is changed as bitcoin's acceptance among merchants grows. More importantly, if listing on the CME winds up reducing volatility, it could go a long way toward prompting bigger merchants like Amazon to take a stab at accepting bitcoin.
Plus, Amazon has exceptionally deep pockets thanks to its cash flow, meaning it could dip its toes into the cryptocurrency waters without necessarily seeing much in the way of negative repercussions.
Image source: Getty Images.
Don't get too excited just yet
But before you go uncorking the champagne bottles and celebrating the marriage of Amazon and cryptocurrencies, keep a few things in mind.
First, increased regulations work as a two-way street for bitcoin and Ethereum. While the CME Group accepting bitcoin for futures trading is great, we also have to remember that China and South Korea banned initial coin offerings in September, with China also announcing plans to shut down domestic cryptocurrency exchanges. While regulations can help validate bitcoin and/or Ethereum, they can also shut them out of key markets.
Another serious concern is that you can't do a whole lot with virtual currencies at the moment. Whereas you can sell an investment and take your dollars to buy goods and services, virtually no major merchant outside of Overstock.com accepts Ethereum, and just a small handful of merchants accepts bitcoin. Living off virtual currencies is practically impossible, and until this changes, Amazon may have little incentive to take the plunge.
Lastly, there's always the concern that none of the biggest digital currencies today will have long-term staying power. Rather than valuing these assets as modes of payment, their true value lies with their underlying blockchain technology. While Ethereum has more than 150 organizations currently testing out its blockchain in various small-scale and pilot projects, bitcoin's blockchain doesn't appear to be nearly as popular, even after a capacity upgrade that should speed up settlement times and lower transaction costs. The barrier to entry in developing blockchain is low, meaning bitcoin and Ethereum may be replaceable.
If Amazon were to dip its toes into the cryptocurrency space, it would be the biggest thing to ever happen to bitcoin and/or Ethereum. However, until that happens, investors should understand the serious risks that come with investing in virtual currencies and, in my opinion, avoid them altogether.
