The Crypto Craze

A young boy asks his dad, “Papa, can you buy me a Bitcoin?”. “A Bitcoin?” says the father, “What? $15,232??? $14,354 is a lot of money! What do you need $17,782 for anyway?”

As of late, Bitcoin and other “cryptocurrencies” have soared in popularity among investors with an appetite for risk and high returns, and it’s not hard to see why. Over the past twelve months, Bitcoin and Ethereum, the two largest “cryptocurrencies” by market cap, have gone up by 1,146% and 11,410%, respectively (though these numbers may be markedly different by the time you read this article). More recently, the month of January has seen a major “Altcoin” rally, where many coins with smaller market caps have generated astronomical returns. It is not uncommon for a coin to jump 500% or more in a span of a few days. Nor is it unheard of for a coin’s value to drop by 50% or more in a few hours.

It is difficult to fully understand the optimism and excitement surrounding the cryptocurrency craze without some background on the currency’s underlying mechanics. Unlike traditional currencies that are distributed by a centralized authority, cryptocurrency transactions are verified by the computational power of coin miners who work independently and without affiliation. Their computational work is then rewarded with currency, introducing new coins into the system. Recently, the market has seen the introduction of minerless cryptocurrencies in which the computers of transaction initiators perform small computational tasks in place of miners. Both systems result in a dynamic form of record keeping, the “blockchain,” in which records of past transaction are recorded and stored on numerous systems, rather than on a single database. Blockchain is notable for its resistance to fraud and technological issues and its ability to reduce costs. As of late, companies and organizations across a variety of industries – and particularly in healthcare and financial sectors – have integrated blockchain technology into their daily operations.

The undeniable utility of blockchain technology in combination with exceptional past returns has captured the attention of students at Dartmouth and beyond, enthralled by the potential profits to be made trading “cryptos.” Many have only become involved in the last few months, during which the overall market has seen its most dramatic gains to date, though some have been actively involved in the space for a year or more.

In such a highly speculative market, how are students deciding where and how to invest?  “The big sources of information for short-term trading are Reddit, Twitter, and other online forums,” says Eric Fett ‘18, who has been invested in cryptocurrencies for over a year, but has significantly increased his holdings over the past few months. “I think you would find a huge correlation between the price of a coin and the growth of its community on Reddit.” Sometimes it can take very little to send the price of a coin soaring. A single partnership announcement, key hire, or the addition of a coin to a new trading platform could raise its price by 500% or more. Sometimes, it takes no more than an unfounded – and sometimes false – rumor.

Is there a way to minimize your risk while investing in these highly volatile assets? Fett thinks he’s cracked the code. “When I go up big on a coin, I always take my original investment out when I can to hedge, so now I’m just gambling with the house’s money.” He also advocates for diversifying by buying up different coins, although he understands that the prices of many coins may be closely correlated.

Fett remains cautiously optimistic about the price of cryptocurrencies in the long term. “I don’t think the market is fully saturated yet, but when I do, I’ll trim my holdings substantially.”

Most students, it appears, would still be doing fine financially if the value of their cryptocurrency portfolios fell to zero, whether that is due to their own income or financial backing from their parents. But a small number of students have put a lot on the line to reap the ultimate rewards while the market is still hot. One Dartmouth senior recently liquidated his entire stock portfolio and put all of his money into Ripple, an Altcoin that recently doubled in value over a two week period. He then doubled down on his gamble and put his entire savings into Tron, a smaller coin which is described by its founder as a “block-based open source global digital entertainment protocol that is cross-protocol for digital entertainment”, if you can understand what that means. Tron eventually soared to nearly 10 times the value the student initially paid for his investment, but has since fallen back down near the price he originally bought-in at. But he’s still smiling, “I’ve been relying on cryptos to help me pay off my student loans, and so far it has paid off.” Another senior recently put his entire savings into a coin that was first released on Wednesday, three days before the writing of this article. So far, he has achieved a modest (by crypto standards) 10% return. “I do crazy stuff, but we’re young; this is the time to do it”.”

Despite their bullish attitudes, most students involved in cryptocurrencies do seem to understand the risks involved. “It’s not quite as bad as going to the roulette table, but I realize that I’m still gambling”, says Fett. Anish Chadalavada ‘18, who holds Ethereum and a variety of Altcoins, acknowledges that the crypto market is “the bubble of our time”. However, as we have seen, that understanding often isn’t reflected in their trading strategies. One of the common sayings among the crypto-investing faithful, Dartmouth students included, is “HODL”, or “Hold on for Dear Life”. This illustrates the widespread understanding among investors that they are holding a volatile asset, but also the possible delusion among those who believe, in the long term, that the value of their coin holdings have nowhere to go but up.

However, not all students who are interested in cryptocurrencies are just trying to make a quick buck or bask in the thrill of high-risk, short-term investing.  While the popularity of cryptocurrencies has exploded on campus in the past few months, some students have been interested in the world of blockchain for much longer, and devoted huge amounts of time and energy to learning about the technology. James Detweiler ‘18, who many consider the foremost authority on blockchain among students at Dartmouth, was particularly far ahead of the curve. Detweiler first gained an interest in blockchain in 2015, during his Freshman spring on an LSA+ in Rome. It was intellectual curiosity, not investing, that caught his interest. “I was interested in number theory, and a cool topic in number theory is cryptography. Cryptography led me to public and private key encryption, which led me to blockchain. I was hooked immediately.”

As fate would have it, Detweiler’s brother was living in Zurich, one of the world’s leading hubs of blockchain technology (Zug, a small lake town near Zurich, is known as “Crypto Valley”). His next visit would be one of the most transformative experiences of his life. “After visiting my brother, I was all-in, I started mining Bitcoin, experimenting with blockchain technology, experimenting with other cryptocurrencies, and it became a big part of my life.”

In addition to the intellectual richness of blockchain, Detweiler was drawn to another aspect of the emerging technology. “I’m a Physics major, and Physics is fascinating intellectually, but very few people can and want to have a conversation about string theory or black holes. Blockchain is both intellectually stimulating and widely popular – especially among college students.”

Capitalizing on the rise in popularity of cryptocurrencies, Detweiler, along with fellow students Andrew Blackwell ‘18 and Isaac Sencer ‘18, founded Dartmouth’s “Crypto Club” in 2016. Detweiler understands that a large portion of people interested in cryptocurrencies are almost exclusively interested in making money, but that hasn’t stopped him from gearing the club towards analyzing the foundations and applications of blockchain technology. The club’s meetings typically begin with a discussion of a blockchain use case, and then transition into a general discussion or Altcoin pitches from some of the group’s members. For Detweiler, it’s an acceptable compromise. “Blockchain can enable us to create a smarter power grid, or create a more equitable or fluid democracy. It could disrupt industries as large as banking, healthcare, and insurance — fundamentally altering how we transfer value in society (be it our identity, or payment preferences). I want to help people understand how transformative blockchain can be.”

Others outside of Dartmouth have taken note of Detweiler’s aptitude for blockchain technology. He was recently offered a position at a “crypto hedge-fund,” which he declined. “The blockchain-craze is in many ways analogous to the dot-com boom. People are riding the huge wave of price inflation and trying to profit off speculation.” This kind of speculative investing is not enough to satisfy Detweiler’s genuine interest in blockchain, nor his ambition. “I would rather create something that challenges the status quo.” He’s thinking of doing just that. Whether it will be integrating blockchain technology into the renewable energy space, or building a more equitable and efficient financial system, Detweiler wants to take part in what he sees as the most significant technological advancement since the Internet.

Interest in Cryptocurrency is not limited to startups, traders, and the corporate world. Slowly but surely, the study of cryptocurrencies has permeated from web forums and startups into the academic arena, with some professors gradually embedding the topic into their courses and research. Students, unsurprisingly, are following suit, writing papers and conducting research on blockchain technology and cryptocurrencies across a variety of departments. Many are less optimistic than those with huge financial exposure. Mike Perkins ‘18 is writing his thesis for the Quantitative Social Sciences (QSS) department on Bitcoin. Perkins, like Detweiler, cites his family as a main reason for his interest in cryptocurrencies. “Bitcoin, Altcoins, and blockchain technology were consistent topics of discussion around my family’s dinner table and amongst my peers at Dartmouth. Through these conversations, I came to the conclusion that the epidemic spread of crypto-mania is, at least to some degree, irrational.” Although Perkins believes that many cryptos have some underlying value, he doesn’t think that has much to do with the recent rise in prices. “Blockchain technology undeniably offers benefits that are unattainable using traditional currencies, but for a large portion of crypto investors, these benefits are ill-understood and irrelevant. The seemingly unstoppable rise of coin prices is the only driver of investment.”

While Perkins is one of many who are incredulous of the crypto market’s meteoric rise, little hard data exists to suggest that Bitcoin and other cryptocurrencies are in a bubble. Perkins is hoping to help tackle that issue in his thesis, which investigates whether the underlying benefits of Bitcoin operate as drivers of the coin’s adoption. Building on Garrick Hileman’s Bitcoin Market Potential Index, which assesses which countries have the greatest potential to see Bitcoin adoption, Perkins will use country-level data on inflation, black markets, remittances, technology penetration, and financial crises to evaluate the extent to which each of these motivate citizens to seek information on and use Bitcoin. “Each of these variables relate to the value proposition that Bitcoin offers. If there is no relationship between, for example, remittance fees and Bitcoin adoption, that would indicate that this benefit is not currently reflected in Bitcoin’s price.” Although Perkins is less than optimistic about the future of cryptocurrency growth and the current speculative environment, his research reveals the field’s fascinating complexity and academic importance.

It can be easy to point to the fervent optimism and less than well researched investment theses of many novice traders and discount the crypto-craze as a meaningless bubble. At the same time, it is difficult to overlook the innumerable uses of blockchain, the concrete utilities of cryptocurrencies, and the asset class’ infiltration into mainstream society. Bitcoin and the like have deeply and profoundly changed how people view investing, data storage, and money as a whole. They have already impacted many in the Dartmouth community, and will continue to do so in the future. Hopefully, for many students, those future impacts won’t include a complete crypto market meltdown.