Traditionally, the stock market is the best creator of wealth over the long run. It's returned about 7% annually over more than 100 years' time, inclusive of dividend reinvestment and adjusted for inflation, suggesting that invested money tends to double, on average, about once a decade. That's a pretty healthy return that sets long-term-oriented investors up to double their money many times over.
Make way for cryptocurrencies
And then there are cryptocurrencies, which have packed a lifetime's worth of gains into just an 11-month timeframe. Since the year began, the aggregate market cap of the more than 1,300 cryptocurrencies combined has vaulted from $17.7 billion to $388 billion as of late in the evening on Dec. 6. For your math-phobic people out there, that's a nearly 2,100% gain in 11 months and less than a week!
The biggest source of gains for virtual currencies looks to be the hoopla surrounding blockchain technology. Think of blockchain as the infrastructure that virtual currencies are built upon. It's the digital and decentralized ledger that records transactions without the need for a financial intermediary like a bank. Best of all, it operates at a lower cost since there's no middleman involved, and transactions are processed 24 hours a day, seven days a week, offering a quicker means to settle payments between peers or businesses.
Because cryptocurrencies have no federal government or central bank backing, news events also seem to be a major driving force behind their strong gains. Recent announcements of blockchain-based partnerships and small-scale testing involving Ripple, Ethereum, and IOTA, are all examples of how blockchain technology is going mainstream.
For cryptocurrencies like bitcoin and Litecoin, it's been more about their potential for facilitating payments. Litecoin has recently upped its efforts to reach new merchants, while bitcoin has been steadily boosting its merchant base.
Insane! Here's how much $1,000 invested in bitcoin over seven years ago is worth today
Of course, when all is said and done, it's really bitcoin that steals the show. Yes, its more than 1,200% year-to-date gain isn't on par with Ethereum, Ripple, and Dash, which have risen considerably more on a percentage basis in 2017. Nevertheless, bitcoin's market cap comprises 57% of the aggregate $388 billion noted earlier. When we're talking about virtual currencies, we're really talking about bitcoin.
While some folks are in awe of bitcoin's $235 billion market cap surpassing the likes of Chevron, Procter & Gamble, and AT&T, it's the aggregate gain of what an ultra-patient investor could have made on bitcoin had they purchased it in March 2010 and hung on through Dec. 6, when bitcoin hit $14,100, that's really jaw-dropping.
Assuming you had crystal ball-like timing and a willing seller, you could have taken $1,000 and scooped up 333,333 bitcoin for $0.003 each back on March 17, 2010. This is when bitcoin was first listed on the now-defunct BitcoinMarket.com exchange for trading. Today, based on pricing data from CoinMarketCap on bitcoin, those same 333,333 bitcoin would be worth $4.7 billion. I'll repeat that for you skimmers... $1,000 invested in bitcoin seven years and nine months ago would be worth $4.7 billion today! That's a compound annual rate of return 622%, which compares pretty nicely to the stock market's annual rate of return of 7%.
Is this sustainable? Probably not
Unfortunately, keeping the party going after such exponential gains is going to prove tough. In no particular instance throughout history have we seen gains like this in the short-term that have proven sustainable for any extended period of time.
There are two sizable factors working against bitcoin in the near- and intermediate-term. First, CBOE Global Markets (CBOE 1.50%) plans to begin listing bitcoin futures this coming Sunday, Dec. 10, when trading commences at 5pm ET. The CME Group will also list bitcoin futures the following week. Prior to this listing, bitcoin investors could do nothing more than buy or sell bitcoin. There was no real way to make money if bitcoin went down. Institutional investors were also, predominantly, kept on the sidelines. The addition of bitcoin futures trading will allow those mostly skeptical institutional investors to flood the market with substantial downside bets. In other words, we're about to see a fair market on bitcoin for the first time ever, where either side of the trade can make money -- and CBOE Global Markets is licking its chops at being the first to offer such a tool.
Secondly, there's no guarantee that blockchain technology will be incorporated by enterprises as quickly as cryptocurrency investors believe. History has shown time and again that investors tend to overestimate the adoption of new technology, and we could be witnessing that once again with bitcoin (and other cryptocurrencies). The crypto-bubble bursting at this point would be more par for the course than a surprise, based on history.
As a skeptic, I've been dead wrong on bitcoin thus far; but history should prove me correct eventually.