Cryptocurrencies & NFTs: A New Type of Investing
When people think of investing, the first things that come to mind are usually stocks, mutual funds, and bonds. These assets have been purchased by people for many decades and, for the most part, the returns on these investments have been quite impressive.
Over the past 40 years, the S&P 500, an index which tracks the stocks of the 500 largest publicly traded companies in the United States, has increased at an average rate of over ten percent per year. Simultaneously, returns on ten-year treasury notes and government bonds have historically exceeded 2-4 percent over these same four decades, and these bonds are widely considered to be one of the safest investment options that exist in the world.
These types of investments, however, are becoming less and less popular among younger portions of the U.S. population. Today, people are turning to far riskier investments, including cryptocurrencies, non-fungible tokens (NFTs), and “meme” stocks, as they seek fast and exponential returns on their initial investments.
Cryptocurrencies like Bitcoin, Ethereum, and Dogecoin, have all experienced exponential growth over the past 12-14 months. Since March 2020, Bitcoin’s price has risen from $5.2 thousand dollars to just under $50 thousand dollars, as of April 25, while Ethereum’s price has risen from roughly $130 dollars to over $2.3 thousand dollars during the same period.
Dogecoin, however, has had a far more exponential rise than these other two cryptocurrencies, with its price rising from $0.002 to over $0.40 in less than one year. That is a return of just over 10,000%, meaning that ten thousand dollars’ worth of Dogecoin, purchased in April 2020, is now worth over $1 million dollars.
Although cryptocurrencies and coins have drawn a great deal of media attention over the past year, another new asset has recently emerged for purchase: NFTs. NFTs are an interesting new type of investment, and they can also be perceived as quite confusing, as many people do not know exactly what they are.
NFTs are unique and individualized digital assets, such as artworks, songs, or video clips that are created as tokens on a blockchain and then purchased by individuals. The fact that these are unique makes them non-fungible, as they cannot be interchanged as indistinguishable assets.
NFTs come in a variety of different fashions, yet the most common, recently, have been music albums, NBA highlights, tweets, and works of art. People have been paying very high prices for these tokens, with the largest sale coming in March when the digital artist, Beeple, sold an NFT for $69 million dollars.
Some people have purchased NFTs as collectors, yet many are certainly buying up these tokens in the hopes of selling them in the future and making a strong return on their investments. This is especially notable when considering NBA Top Shot, a new NFT marketplace platform on which people buy and sell NBA highlights in the form of tokens. This may seem somewhat silly, yet in late March the market capitalization of all the NFTs on this site was just under $2 billion dollars, and early investors in Top Shot NFTs have reaped massive returns.
Although many individuals have secured significant returns on their investments in cryptocurrencies and NFTs, these assets are still much riskier than traditional stocks and bonds. With that being said, these assets may have much more room to grow in a world that is increasingly becoming more digitized and innovative. There is no way to truly predict what will happen in any of these markets in the future, including the stock and bond markets, yet it does appear that digital currencies and tokens, such as Bitcoin and NFTs, are here to stay.
No matter what, only invest your money in assets that you believe in, and make sure you understand the possible risks associated with each investment you make. This article is not meant to be financial advice. Rather, it is simply an overview of new asset classes that have gained momentum throughout 2020 and 2021.
~ Sam Leathe ‘21
