Hype or Gold Mine?: Bitcoin and cryptocurrencies lure TC investors
Are cryptocurrencies a smart bet? Or are they a bubble about to burst?
Many investors were trying to answer these questions in December, when Bitcoin wrapped up an incredible 2017 with a pre-Christmas peak of $19,783 per coin. The currency had started the year priced at a more modest $800 per coin. The meteoric rise forced even cryptocurrency skeptics to pay attention.
Unsurprisingly, a few locals got in on the action.
In 2013, Christian Wyatt bought a single bitcoin. Wyatt, now an employee of local heat transfer technology manufacturer Opti Temp, had been following the currency for at least two years. He’d first encountered Bitcoin at Grand Valley State University, where he majored in criminal justice. He was intrigued by the currency from the start but unwilling to invest due to the currency’s less-than-savory reputation.
“Bitcoin got this toxic reputation early on because it was associated with illegal online transactions,” Wyatt said. “But really, Bitcoin was created by some guy who was just trying to form a currency to get away from big banks.”
Because Bitcoin is unregulated and can be withdrawn to anonymous addresses, it was a popular currency choice for internet criminals. In particular, Bitcoin was heavily associated in its early days with the website Silk Road, an online black market where users could buy or sell illegal drugs.
When the FBI shut down Silk Road in October 2013, the Bitcoin narrative began to change. The shutdown – coupled with the FBI’s seizure of more than 144,000 bitcoins – scared off many adopters and caused a sharp downturn in the its exchange rate. The government ultimately collected some $48 million by selling those coins, but the big story – at least according to Wyatt – was the slow mainstreaming of the currency.
“I wanted to see what would happen with Bitcoin now that the toxic relationship to Silk Road was being severed,” he said.
So, in November 2013, when the price was hovering around $430, Wyatt pulled the trigger and bought one.
Wyatt is still holding on to his bitcoin. He opted not to sell at the currency’s near-$20,000 peak in December, and he’s certainly not going to cash out now that the value has dipped back down to around $8,000. In his view, his bitcoin is a potential retirement fund.
“I spent $400 four years ago,” he said. “What is it to hold on to [the coin] for a little longer? Some of the predictions out there are talking about Bitcoin hitting $50,000 in the next couple years, or even hitting a million eventually. You never know what could happen.”
“You never know what could happen” is both the biggest thrill of investing in cryptocurrencies and the biggest detraction. Despite its massive 2017 increase – a 2,475 percent jump in value – it’s so far having a much less impressive 2018. As of press time, Bitcoin was trading at less than half of its December peak. Other top cryptocurrencies – Ethereum, Ripple, and Litecoin – have all suffered similarly dramatic drops.
By the beginning of February, the crypto market had reportedly lost $120 billion of its value almost overnight for reasons spanning from economic to psychological.
In December, with buzz at a fever pitch, demand hit an all-time high and created an unsustainable speculative bubble. The other factor – and the reason that buzz and demand have cooled so swiftly – is fear.
Since the beginning of January, the crypto world has been hit by one bad piece of news after another. First, South Korea announced a plan to ban all cryptocurrencies. India said it did not consider cryptocurrencies to be “legal tender or coin” and would “take all measures to eliminate use of these crypto assets.”
Jay Clayton, the chairman of the SEC, has also hinted that cryptocurrency regulations could be on the way for the United States.
Governments aren’t the only ones cracking down. Numerous banks and credit card companies — including Bank of America, Capital One, Citigroup, Discover, JP Morgan, Lloyds Bank and Virgin Money — have banned customers from buying bitcoin with credit cards.
Even people who have had success with cryptocurrencies are saying that new investors should tread carefully. Nick Bosio, a senior at St. Francis High School, turned $1,450 in Ripple XRP into $11,000 between October of last year and early January. He’s now invested heavily in Litecoin, but he didn’t get involved with cryptocurrencies at all until he had thoroughly surveyed the market.
By watching hours upon hours of YouTube videos, Bosio learned the basics of crypto, from the top currencies to the trading methods. He also learned a crucial lesson: Don’t always believe the hype.
“You see a lot of fake news,” he said. “Someone could make up a news article or a video and use it to manipulate the market. So, watching these YouTubers and news sources, you would see them ‘pump and dump.’ There was this coin called Neblio, which was created a couple months ago and was supposed to be the rival to Bitcoin. The coin went from $8 to $50 overnight. And then it collapsed.”
What happened? According to Bosio, the people hyping Neblio were doing it for their own personal gain. They weren’t trying to help investors by giving a tip on a promising trend. Instead, they were working to inflate the price of a coin they had invested in (“pump”), after which they would sell off their coins to make a quick profit (“dump”). As a result, the people who bought into the hype on Neblio ended up with a coin worth significantly less than what they bought it for.
Facebook is doing its part to kill the crypto fake news trend. At the end of January, the social network announced that it would ban all advertising for cryptocurrencies and ICOs, or initial coin offerings. Facebook product management director Rob Leathern said that many companies advertising in this space “are not currently operating in good faith.”
Bosio’s strategy is to bet on coins that are better established, with longer histories and more stability. That list includes popular coins like Bitcoin, Litecoin, Ripple and Dash. Unsurprisingly, these coins tend to be in higher demand, which means they also cost more.
There’s one other issue, too: taxes.
In 2014, the IRS issued a notice that crypto coins would be treated as property for taxation purposes, rather than as currency. As a result, every single transaction completed with a cryptocurrency is technically a payment made in property. All payments made in property must be reported to the IRS.
Gains from cryptocurrency investments are also taxable. If you bought Bitcoin in January 2017 for $800 and sold it when the currency peaked in December, you have to report the $19,000 profit as income. If you bought Bitcoin in 2013 and sold it in 2017, you need to report the earnings as a capital gain. Either way, the government wants a cut.
The Cryptocurrency Glossary
- Altcoin: Any cryptocurrency launched following the success of Bitcoin. Generally, crypto users consider any coin other than Bitcoin to be an altcoin. Most altcoins follow the basic rubric set by Bitcoin, which means they are open source, decentralized, peer-to-peer, driven by blockchain and feature a mining process. Popular altcoins include Ethereum, Litecoin, Ripple XRP and Dash. In most cases, altcoins are purposed to improve upon Bitcoin in some way.
- Bitcoin: The first-ever cryptocurrency without a central bank or regulator. Initially released in January 2009, it was created by a still-unknown person under the pseudonym Satoshi Nakamoto.
- Blockchain: A digital ledger in which most cryptocurrency transactions are recorded and stored. The blockchain is secured by cryptographic means but is publicly accessible to everyone. Instead of being stored on a single computer or server, blockchain distributes data across a peer-to-peer network. The technology makes it impossible to edit data after it is stored, which means there is a complete, chronological record of all blockchain cryptocurrency transactions. Bitcoin is often erroneously labeled as an “untraceable” currency, but blockchain makes it so every transaction is tracked.
- Coinbase: The most popular digital currency exchange. Users can use Coinbase to buy and sell Bitcoin, Ethereum and Litecoin.
- Mining: The process of validating cryptocurrency transactions in the blockchain. This process requires a great deal of energy, computing power and effort. For their effort, miners are often rewarded with new units of cryptocurrency. The effort required to mine cryptocurrencies also limits the number of people who can do it, which means the currency grows steadily and doesn’t get devalued.