On New Year’s Day 2014, history was made in Colorado. Hundreds of people lined up in the cold outside dozens of shops across the state, each eagerly waiting to be among the first to legally purchase cannabis for recreational use in the United States.

Voters in Colorado and Washington State approved the sale and use of recreational cannabis during the November 2012 election, and the first legal cannabis sales in Colorado in January 2014 represented the opening of a new, legal market for a product that had historically been exchanged only on the black market.

The creation and subsequent growth of this legal market have been driven by the public’s rapidly evolving views on cannabis. In the U.S., public opinion on the sale and consumption of cannabis have changed dramatically over the past decade. According to the Pew Research Center, only 32% of Americans oppose legalizing cannabis in 2019, while 52% of Americans opposed legalization in 2010. This dramatic shift occurred as the American public became more aware of cannabis’s medical uses, and 91% of Americans now support the legalization of medicinal cannabis.

As of November 2019, medicinal cannabis is legal in 33 states and Washington D.C., and recreational cannabis is legal in 11 states and Washington D.C. Cannabis remains illegal under U.S. federal law, a fact that makes the nascent cannabis industry a unique experiment in U.S. law and capitalism. 

As more states legalize cannabis and as more businesses enter the market, the contradictions between state and federal law grow more profound. A cannabis producer, for instance, cannot legally ship their product to a neighboring state, even if it is legal in that state, because of federal interstate commerce law. 

Cannabis producers are also largely excluded from utilizing formal banking services, which sets up a dilemma as described thus by the American Bankers Association: “The rift between federal and state law has left banks trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action.” 

There are signs, however, that the distance between state and federal law on cannabis’ legal status may be shrinking. Several bills are currently being debated in the U.S. House of Representatives that aim to combat the federal vs. state contradictions surrounding cannabis law, and there is growing bipartisanship (a word rarely used to describe the state of Washington these days) on expanding access to medicinal cannabis for veterans. There is still a ways to go before cannabis is fully legalized, but at this point, most people seem to agree it is a question of when instead of if. 

For those interested in the investment potential of this rapidly-growing sector, there are a few important points to understand.

What Is Cannabis?

The word “cannabis” comes from the plant genus Cannabis in the family Cannabaceae, and it generally refers to the medicinal substance produced from plants in the Cannabis genus containing psychoactive chemicals. When ingested or smoked, cannabis can produce an altered mental and physical state, often referred to as feeling “high.” 

Though cultivated as a medicinal treatment for several thousand years, cannabis is now being recognized by modern medical professionals for its promise in treating chronic pain, nausea, and PTSD, among many other ailments. It is also commonly used to help cancer patients manage their symptoms.

It is important to note that not all cannabis products contain the psychoactive chemicals that produce a high. CBD (which stands for cannabidiol) is one such product, and it has shown tremendous promise in treating a number of ailments – perhaps most significantly, childhood seizure disorders. Furthermore, recent research has found that in states that legalized medicinal cannabis, the number and rate of opioid prescriptions in the state decreased substantially.

The Market Opportunity in Cannabis

According to projections from The Nielsen Company, cannabis sales in the U.S. are forecast to increase from $8 billion in 2018 to $41 billion by 2025. While these projections are remarkable in their own right, they focus only on projected sales of legal cannabis from licensed sellers. 

Despite the wave of legalization sweeping the U.S., there is still a thriving black market for cannabis. In the case of California, the value of cannabis sold on the black market in 2019 is projected to be worth about $8.7 billion, while the state’s legal cannabis sales are expected to reach $3.1 billion. 

As more states move to legalize cannabis, and as public opinion continues to move in favor of broader access for medicinal purposes, there is likely to be increasing pressure on state and federal lawmakers to address the economic realities that drive black market cannabis sales. For instance, giving producers the freedom to move their products as dictated by supply and demand would decrease pressure to offload products on the black market, as well as increase overall efficiency, lowering prices and making products more competitive with those on the black market. Several states are already setting the legal groundwork for interstate cannabis imports and exports

As with any economic experiment, the rise of the legal cannabis industry is going to adjust and correct itself as it matures. In that space, however, there are tremendous opportunities for the savvy investor.

Consider, for a moment, that the legal cannabis industry does not need to invent a new product or market that product to a new group of customers in order to realize enormous growth. With the right economic incentives and regulatory framework, the cannabis industry can harness the existing economic activity of the black market and legally supply customers with a product that is already quite popular and increasingly seen as an effective treatment for various ailments. 

It is also worth noting that four out of the five top Democratic candidates for U.S. president in 2020 support full legalization of cannabis. 

How to Invest in Cannabis

Despite the legality questions surrounding cannabis as of 2019, there is still a growing market of public companies in the cannabis space that are becoming popular with investors. However, as new companies (in an effectively new industry), investing directly in these companies can be quite risky. Rather, there are a number of funds and ETFs that give investors access to this asset class with more diversification. A search on Magnifi suggests that there are a number of other ways to profit from the growing cannabis industry as a whole.

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The information and data are as of the December 4, 2019 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

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