It all started with a text message. A friend of mine sent me a message that read: “Buy as much Bitcoin as you can afford. Until you can’t afford to buy anymore.”
I had been watching cryptocurrencies for about a year, in amusement. As a finance professor I was initially skeptical. Everybody in the financial world was. I had initially heard of Bitcoin a number of years ago, while a Ph.D. student, and didn’t think much about it until early last year.
By that point the “currency” had weathered the initial storm of being a new form of “asset,” and seemed to be surviving. Coming into 2017 it was valued at an astounding $1,000, but, in the financial community many assumed it wasn’t worth anything, and had no chance of continuing to increase in price. As I discussed it with financial professionals, the general consensus was that it was a cute idea that had no chance of succeeding.
By last summer the “currency” had really picked up value and was trading at around $2,500, two and a half times its value at the outset of the year. To understand the magnitude of this return, you have to look at normal returns in the traditional financial assets. As an example, over the past 100 years a “normal” average return for a public company is around 9%, per year. For small, young companies, returns are closer to 11%, a year. Investors stay in the market for years, sometimes as long as a decade, to double their money. Here was an asset that was producing a decade’s worth of returns, in less than six months. It started to get my attention.
I had been watching the crypto market for some time. But, I decided to dig a little deeper in my research. I was surprised by what I found. Underneath all of the talk of the “coins,” I found real technological ideas Apparently, while Bitcoin represented some form of a new asset class, its real story lied in the Blockchain technology that powered it. I didn’t realize that the coin itself is an outgrowth of a type of computer coding and structure that could change how the internet works.
About the time that I started to learn about the potential this new technology had, I noticed that I was hearing about Bitcoin a lot more in both mainstream media, and financial, circles. At first I thought maybe it was just that I was noticing chatter around Bitcoin more because I was doing more research on the currency. Sorta like when you decide you want a new red sports car, and suddenly you start noticing all of the red sports cars around you everyday.
But by mid-October I was starting to realize that I wasn’t the only one who was getting interested in cryptocurrencies. More and more, Bitcoin was in the news. And colleagues and students began asking about it as well. The more I looked into it, the more I realized that a change was underway.
Bitcoin was going mainstream. This isn’t just important from the standpoint of what people think of cryptocurrencies, although that is certainly true. But, it also meant that the demand curve for Bitcoin was shifting. From an economic standpoint, major changes were happening that stood to make cryptocurrencies a major force in our finances, both as a technology as well as in terms of an investable asset class.
By early November it was pretty clear that Bitcoin, and other cryptocurrencies, might be investable assets. At a minimum, I became convinced that the world was beginning to accept them as an investment, and their prices were going up. Fast. I was still not convinced that these new assets were true “currencies.” The definition of a currency requires that the asset have two characteristics. First, they must be a store of value. Second, they had to be exchanged. Where Bitcoin may fit into this definition is a topic for a future discussion. But, for now, I was convinced that, even if they didn’t represent a long-term store of value, they were likely going to be a good store of value for the near future. And if they were “going mainstream,” the shift in the demand curve would likely cause their prices to go up, a lot.
That was what prompted the text to my friend. Even though neither of us bought Bitcoin, or any currencies then, my message marked the point where I was willing to stick my neck out there and tell someone that I thought these would be a good investment, at least over the next year. The text also represented a significant point in my study of cryptocurrencies. To this day, Kevin and I lament the fact that we could have bought Bitcoin at $7,459.69. Since then, just two short months ago, the currency has nearly tripled in value, and has settled with strong support at a value of twice what it was on November 8th. At times it feels like it is the “fish that got away.” But, after six months of research related to this new asset class, I am confident that this represents a rare instance when everything changed. Its a new financial world, and the opportunities are unlike anything anyone could have imagined.
A lot has happened since November, and I have had to learn about cryptocurrencies from the ground up. This blog is where I will discuss my casual dabblings, and academic research, into this new world of cryptocurrencies.