What Is a Paper Millionaire?
A paper millionaire is an individual who has achieved a high net worth as a result of the large total market value of the assets they own. This phenomenon usually occurs when investors buy marketable securities that are later bid up to much higher prices on the open market.
While this creates large amounts of "paper profit," the paper millionaire's riches usually aren't safe until these holdings are liquidated and the gains are locked in. Otherwise, the gains can potentially be wiped out by a decrease in the market.
Key Takeaways
- A paper millionaire is an individual who has achieved a high net worth as a result of the large total market value of the assets they own.
- Paper millionaires are not the same as true millionaires, which generally refers to people who have more than $1 million in cash in the bank rather than in securities or other forms of non-liquid investments.
- In the 1990s during the dotcom bubble, there were many paper millionaires who invested in the Internet companies that skyrocketed in valuation, many hitting millions of dollars. If they did not sell their shares to get cash, these individuals were considered paper millionaires.
How Paper Millionaires Work
Paper millionaires tend only to be temporary ones. Only by aggregating their theoretical digital net worth, such as based on the current market value of their securities and assets, can they hit the millionaire mark.
However, it is important to note that paper millionaires are not the same as true millionaires, which generally refers to people who have more than $1 million in cash in the bank. This is because the value of the security or securities that rose so significantly as to have caused the gains can just as easily fall again in price.
Example of a Paper Millionaire
For example, consider a hypothetical investor during the 1990s technology bubble who invested in Silicon Valley's startup dotcom companies. Paper millionaires were a dime a dozen during this time period: many who invested in these booming Internet companies saw their assets and net worth skyrocket as the bubble grew bigger and bigger.
From personal investors to venture capitalists and employees with their own employee stock options, there were many paper millionaires who saw their purse strings break open as the valuation behind Internet companies continued to grow. Assuming that none of this investor's shares were sold, they would have become a paper millionaire, as recorded on the brokerage statement, despite having very little cash in the bank.
However, once the dotcom bubble burst, technology stocks saw their share prices collapse, and former paper millionaires once again found themselves poor, owning only pieces of paper (i.e., share certificates) that were no longer worth the millions of dollars at which the market had previously valued them.
This pattern has recently played out with owners of Bitcoin, which created many paper (or blockchain) millionaires during its meteoric rise in late 2017. For those who didn't sell to lock in gains, many saw their fortunes wiped out when the price fell throughout early 2018, fluctuating since.
