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 he or she owns. 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.
BREAKING DOWN Paper Millionaire
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 startup dotcom companies. Assuming that none of this investor's shares were sold, he or she 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.