DELVING INTO THE MINES

May 3, 2018

How cryptocurrency has been making young people very rich very quickly

Words by Alec Slovenec Illustration by Mark Tabar

 

Picture this: It’s 2010, and you come across a strange new internet fad. You don’t fully understand it, but it sounds cool. People online have been calling it “the future” and claiming it will replace money. Wow! So you spend your hard-earned $100 allowance on this so-called revolution. You forget about it, and life moves on.

Fast forward to December of 2018.

You see the headlines. You check back on your investment you made eight years ago. Your investment is now worth millions of dollars.

Welcome to Bitcoin.

You’ve almost definitely heard of it, perhaps from your friends on Facebook or from someone in one of your classes. Bitcoin has infiltrated the media and sparked the interest of millions worldwide. But what exactly is it?

Bitcoin is a cryptocurrency, which means it is a money that is not controlled by a government or any central entity, but rather a complex system of code known as “blockchain technology.” This means Bitcoin cannot be hacked or inflated. An article from Techspective discusses Bitcoin’s security:

“Bitcoin itself is almost impossible to hack as the blockchain technology that forms the basis of the currency is constantly under review by other Bitcoin users. This means that it is no more at risk than other payment methods such as PayPal or traditional credit cards.”

Since its creation in 2009, Bitcoin has been gradually gaining value as more people started to use it. According to an article on Investopedia, there is a limited amount of Bitcoin available. The demand for Bitcoin has increased, causing its value to soar. If you bought $50 worth of Bitcoin a few years ago, you could sell it today for thousands.

Ezry Bennett, a sophomore studying accounting at Kent State, was one of many students who was attracted to cryptocurrency’s magnetic pull. Bennett first became interested in cryptocurrency in the summer of 2017 when some of his friends began telling him about it. He knew he had to get involved when two of his friends, after investing a few hundred dollars into a cryptocurrency called “Nano,” suddenly became millionaires.

“When I turned 18, I just kept watching it for the first semester,” Bennett says. “I watched it as my friends became millionaires, and I went, ‘Okay, I want in on this.’”

This pattern of hearing someone got rich quick, buying into cryptocurrency and spreading it to the next person had an enormous domino effect that rippled worldwide at lightning speed. This enormous flux in popularity was why Coinbase, a cryptocurrency trading app, rose to the No. 1 most downloaded app on the iTunes store in December, beating out Facebook, YouTube and Snapchat, according to Business Insider’s article, “It’s Bitcoin mania: Twice as many people downloaded Coinbase as Instagram last week.”

“I think what tends to happen is people start to make money, and then somebody else starts to say, ‘Hey, that guy’s getting rich and I’m not,’” says Steve Dennis, the Firestone Chair of Corporate Finance at Kent State. “That’s a very powerful force. Somebody else is getting rich and I’m not, so I need some of that.”

2017 was a golden age for cryptocurrency. In March of last year, each unit of Bitcoin was worth about $950. By mid-December, it had become worth over $19,000, which is about a 2,000 percent increase. If you had any money in Bitcoin, you multiplied every dollar you had invested by 200. Ever since, it has caught the attention of starry-eyed students looking to make a quick buck. This was around the time Bennett began to make his own investments in cryptocurrency and very quickly saw profits.

“I asked my granddad for some money to invest and he started me of with $100,” Bennett says. “Four days later, I turned that into $300. And so he gave me $1,000 and I turned that into, like, $3,000. And then he gave me $5,000, and that’s what I’m still working with right now. If things go as planned, by the end of March I could be looking at around $17,000 depending on how things go.”

Part of its success can be credited to how easy the buying process is. Purchasing Bitcoin is as straightforward as buying anything else online and can be done on any smartphone or laptop. This ease of access has allowed the coin craze to rise as quickly as it has. There are a few different cryptocurrency apps, but the most popular is CoinBase.

“Being able to make transactions on your phone…you can just send basically a text message to make purchases.” says Daniel Hawes, an associate professor in Kent State’s Department of Political Science. “It’s futuristic. It’s appealing, especially to young people.”

Hawes has dabbled in Bitcoin investments with his son. Last year, he invested $250 into Bitcoin, and now has about $1,800; he essentially made about $1,500 for clicking a few buttons on his phone.

The app allows any user to spend any amount of money and convert it into Bitcoin, as well as other cryptocurrencies such as Litecoin and Ethereum. Because the value of cryptocurrencies is constantly changing, so is the exchange rate. One day, $100 could buy .01 Bitcoin. The next, it may only buy .005 Bitcoin.

While cryptocurrencies are mostly only accepted online, some local businesses are starting to accept Bitcoin as a legitimate form of payment. In downtown Kent, Wild Goats Cafe accepts Bitcoin as of late 2017. However, manager Justin Rogers claims there have only been two transactions involving Bitcoin since the restaurant started accepting it. Many corporations have also begun accepting it as payment, including Subway and Microsoft.

However, its constant flux in value may hold it back from being used as money; as of now, most use Bitcoin more as a speculative investment scheme. What was created to be an alternative to the dollar now resembles a volatile stock market, and even experts on finance have been left stumped.

“I don’t know where it’s going to go now,” says Jayaram Muthuswamy, an associate professor from Kent State’s Department of Finance. “If we finance professors knew all we claimed to know, we’d be very rich. But we don’t.”

Muthuswamy, while unsure of its future, is very skeptical of Bitcoin. He predicts while it may possibly rise to even higher levels, it will eventually “crash and burn.” Dennis, like Muthuswamy, speculates that the cryptocurrency market is a bubble. This means that the value of it will keep rising until it peaks, and then it will “pop” and dramatically drop in value very quickly.

“Could it be $30,000, $50,000 or $100,000 in two years, five years or 10 years?” Dennis asks. “Sure it could. Absolutely. But I have seen enough bubbles to know that this looks like a bubble. I can’t tell you it is a bubble, but I can tell you it smells like a bubble. Anything that goes straight up, [hyperbolically], is typically headed toward a bubble.”

Even Bennett, who believes in the power of cryptocurrency, expects the Bitcoin craze to fall, at least temporarily.

“People are investing irresponsibly right now,” Bennett says. “Because everyone is Bitcoin-crazy right now. They went Bitcoin-crazy after it hit $20,000. But the thing is, you could see its death coming from a mile away.”

After its unprecedented rise in value during December 2017 and early January 2018, Bitcoin and other cryptocurrencies have been on a steady decline. However, it has proven to be an unpredictable market, and it could pick back up in the future. Bennett estimated that it might take a few months for the market to see any real growth, but he asserted that cryptocurrency is “here to stay.”

As enthusiastic as Bennett is about cryptocurrency, he has witnessed his fair share of tragedy from it. After a long string of emails discussing cryptocurrency, he had one final message.

“My friend lost $200,000 in the process and tried to take his own life last night,” Bennett says. “Another friend lost $150k and now has to return to living with his parents. Moral of the story: Play it safe.”