Illustration by Vanity Fair; Photo by Chris Ratcliffe/Bloomberg/Getty Images.
Should I buy bitcoin?
As a technology reporter, the questions I receive from random people at
birthday parties, say, or seatmates on a plane, are usually emblematic
of what is going on in the digital world. (And, increasingly, the real
one, too, for that matter.) Not too long ago, the predominant question
was Should I buy the new iPhone? Then it became Do I need to be on Twitter? or Do I need to be on Facebook? or Do I need to be on Snapchat? (That question has since come full circle to Should I quit Twitter and Facebook?) These days, the question I hear the most—well, besides whether Twitter should ban Trump—is Should I buy bitcoin?
I usually respond with the story of Laszlo Hanyecz. If you’ve come within 500 feet of bitcoin,
or any other cryptocurrency, over the past few years, the name alone
will make you cringe. Back in 2010, when the currency was in its
infancy, Hanyecz went “mining” for bitcoins for a few months and
collected 10,000 of them; he subsequently traded them, in what would be
the first cryptocurrency transaction in history, to a guy who bought him
two Papa John’s pizzas with a couple sides of that tasty, buttery
garlic sauce. Back then, Hanyecz’s bitcoins had no value, and the $30
value of two pies and an accoutrement made his individual bitcoin units
worth 0.003 cents apiece. Today, at their current market valuation,
bitcoin units are worth around $5,800 each, which means Hanyecz’s 10,000
bitcoins would be worth around $58 million. “It wasn’t like bitcoins
had any value back then, so the idea of trading them for a pizza was
incredibly cool,” Hanyecz told me in 2013, when bitcoin was already valued at $1,242 each. “No one knew it was going to get so big.”
For
a lot of people on the periphery of this technology, the extraordinary
rise in bitcoin’s value has become cause for alarm. The Web is littered
with news articles, blog posts, and white papers warning that bitcoin
and its sibling currencies are worth nothing, and the rise and fall of
the currencies’ worth, which can fluctuate by billions of dollars a
minute, certainly backs that up. But while Jamie Dimon and other bankers might scoff at these digital currencies, Silicon Valley is extremely bullish. There’s a reason, too: if Dimon had invested in bitcoin when he first called it a joke, in 2015, he would have received a tenfold return on his investment.
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There
are a number of reasons why bitcoin and cryptocurrencies are doing so
well right now. One of the more plausible scenarios was outlined this
week in a very clever post written by Adam Ludwin,
an investor and co-founder of Chain.com, a bitcoin developer platform,
which argues that bitcoin is an entirely new asset class, similar to
equities and bonds, and that “bitcoin is capitalism, distilled.” The
“capitalism” part of the sentence helps explain why some in Silicon
Valley are so specifically exuberant about it right now. “In the
short-run, there will be extreme volatility as FOMO competes with FUD,
confusion competes with understanding, and greed competes with fear (on
both the buyer side and the issuer side),” Ludwin wrote. “Most people
buying into crypto assets have checked their judgement at the door.”
This
gets someone like me a bit nervous about what cryptocurrencies could
end up doing to society in the long run. Silicon Valley culture is
largely fueled by people who love to decimate industries that don’t
work, often without any thought of how the disruption could lead to
other negative results happening in society (see the recent social-media
debacle around the election ). In typical Valley fantasy, people are
seeing only the positive potential with bitcoin, not the potentially
ugly outcomes when humans molest it for their own interests.
One of the many factors currently fueling the ascent of bitcoin is the rise of initial coin offerings,
or I.C.O.s, where some lucky investors are reaping astounding returns.
You can think of these like a traditional initial public offering, or
I.P.O., but without the layers upon layers of regulation and government
bureaucracy that come with a company going public. With an I.C.O., a
start-up raises money for a new venture by selling “coins” that are very
similar to shares of a public company. The coins then rise and fall as
the company’s value oscillates. In 2014, when the founding of a new
cryptocurrency called Ethereum was announced, it raised $18 million by
selling a new digital coin called “Ether” for 40 cents per coin. Today,
Ethereum has a market cap of around $30 billion. So if you had spent
$100 on Ether during the I.C.O., you would have made $74,900 in profit.
As Nathaniel Popper detailed in The New York Times earlier this summer, I.C.O.s have been generating billions of dollars in returns for some—and a lot of scams, too.
The
lack of regulation in the cryptocurrency world, after all, means that
there is a lot of fraud, extreme volatility, and coin values can jump up
or down in mere seconds. Someone I recently spoke with who works with,
and monitors, the crypto I.C.O. markets pointed out that some of these
I.C.O.s feel awfully similar to the Dot Com public offerings of the late
90s, where the public was buying into nothing
and ended up with exactly that when the entire market came crashing
down and trillions of dollars were wiped off the stock market. In China,
I.C.O.s became so troubling that they were banned earlier this year. In
September, the People’s Bank of China issued a blunt statement saying that this practice was
“illegal and disruptive to economic and financial stability.” I.C.O.s
in China were occurring at an astounding rate, with one report claiming
that more than $750 million was raised in I.C.O.s in July and August
alone. A lot of people think the ban by China is temporary, slowing the
dizzying speed of these offerings.
As a
result of all the movement in the cryptocurrency market over the past
couple of years, there are a lot of options out there for people who
want to try their hand in crypto-investing. There’s bitcoin, the first
and most well known of all the currencies, which currently oscillates in
value at around $5,000 a coin. I’ve heard predictions all over the map,
from bitcoins one day being worth as much as $500,000 each to units
being worth absolutely nothing if a better coin comes along. (My
personal prediction is that they will continue to rise for at least the
next couple of years.) Ether had remained relatively flat until earlier
this year when it spiked in value to over $350 apiece. (It’s since
fallen to $300 each.) The current coin du jour is called Litecoin, which
is getting a lot of attention because it’s still priced relatively low,
at around $55 each, and is expected to rise considerably over the next
year or so on account of new features that will be added to enable more
privacy options. Then there are a slew of other coins to explore,
including Monero, which is an open-source currency that was developed in
April 2014, but which spiked this year after the illegal drug market
AlphaBay was taken down. Monero, unlike other currencies, is truly
anonymous, making it the perfect currency with which to buy and sell
drugs, guns, and other illegal contraband on the Dark Web. If you look
at the World Coin Index
Web site, you can see a long list of other coins and their values over
time, including Ripple, Bitcoin Cash, Qtum, NEO, Nav Coin, NEM, and a
number of other coins.
For Silicon
Valley, betting on one of these early can mean profiting beyond all
imagination, exceeding even the famed 1,000x start-up returns from
companies like Facebook and Uber. Earlier this summer, I interviewed Tyler and Cameron Winklevoss, the twins who co-founded The Facebook with Mark Zuckerberg,
and they are now obsessively investing in cryptocurrencies. In a
settlement with Facebook, the two brothers were awarded $60 million, but
to hear them talk about it, it appears their investments in bitcoin and
other currencies are going to reap a far bigger return over time. I’ve
spoken with countless other people about the current state of bitcoin
and cryptocurrency, and I’ve heard two truths that seems consistent. No
one—and I mean no one—knows exactly which digital currency will be
successful in the future. It could be bitcoin, it could be Litecoin, it
could be something that hasn’t even been created yet. But, the other
resounding feeling is that these currencies are here to stay in one form
or another and there is nothing anyone can do to stop them. Which
brings me back to that question that I’m often asked these days: “should
I buy bitcoin?”
There’s
an old saying in real estate that “you shouldn’t wait to buy, but
rather you should buy and then wait.” That’s the way I feel about these
cryptocurrencies. If you’re looking for a quick and dramatic financial
boost, realize that you could probably get similar odds by buying a
plane ticket to Las Vegas, walking into the first casino you see, and
putting all your money on black or red. But, if you’re willing to wait
it out, there’s a chance that your investment in a cryptocurrency could
make for an impressive return over time. Just be prepared to go it the
long haul. Or at least until the price spikes tomorrow.
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