Lessons Learned From My Seven-Year Journey Down the Cryptocurrency Rabbit Hole
Hodl is an intentional misspelling of the word “hold,” which is used among cryptocurrency enthusiasts when encouraging traders to resist the urge to sell one’s holdings in response to market fluctuations. — Know Your Meme
I started buying Bitcoin around $7/BTC and Ether around $1/ETH. One of the most common questions I get is, “What attracted you to Bitcoin?”
The short answer is that I was fascinated with the concept of a global, decentralized, digital currency issued and managed by a peer-to-peer network.
I wanted to understand how, and if, such a radical concept could work. The more I learned and observed, the more I gained confidence in the experiment’s value and chances of surviving.
I’ll admit, I sometimes get exhausted when people question me about my interest in cryptocurrency but, at the same time, I also recognize the value of shedding light on my thought process.
This piece is my first serious attempt to accomplish this goal.
First, some of my biographical background:
My Father was a highly introverted scientist who studied electrical engineering and applied physics at Caltech and Stanford.
He had me tinkering with computers at an early age and helped me develop a passion for exploring new forms of technology. He introduced me to classic science fiction literature (Foundation, Dune, etc.) that sparked my fascination with speculating about the future.
My Mother is an extraverted immigrant from Southern Africa with a passion for social issues and a deep practical understanding of the challenges facing citizens in the developing world. She helped instill in me a sense of compassion for the victims of political corruption.
I had a privileged, though emotionally turbulent childhood, largely as a result of my parents divorcing at an early age. I did fairly well in school, but was often bored with math and science classes. I enjoyed history, english, economics, and writing for the high school paper.
While I had no concrete career goals in high school, I aimed to attend the highest ranked college possible. I had vague notions of “making the world a better place,” possibly through a career in diplomacy or law.
In my sophomore year of high school, my own world was flipped upside down when I learned my Father had been diagnosed with colon cancer. And in my freshman year of college (I decided to attend the University of Southern California), I was told he had less than six months to live. Thankfully, he managed to successfully fight the disease for a few more years.
My Father’s cancer eventually metastasized, and on October 25, 2011, he passed away. He left behind a sizable estate with a substantial mortgage (that he had never mentioned to me), some unpaid debts and tax obligations, and no will.
It was a numbing experience. He and I weren’t on great terms in the months leading up to his death, and as soon as he passed I was flooded with responsibilities. Within hours of his passing, a “friend” of his was questioning me about some of his assets that had allegedly been promised to them. There was no time to grieve.
After going through the required probate process to settle the estate, and making a failed attempt at re-financing the mortgage, at age 22, I sold the house that I grew up in. I was left with just short of $1 million after paying off the mortgage and debts. I then returned to college to finish my degree.
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution” — Bitcoin White Paper, Satoshi Nakamoto (2008)
2011 was a life-changing year in many ways. It was also the year that a Forbes article introduced me to Bitcoin. At the time, I was following Ron Paul’s 2012 presidential campaign. His political views got me interested in a variety of topics that likely served as inspiration for creating Bitcoin, including Libertarianism, the history of money and banking, and Austrian Economics.
I was intrigued by the theory that central banks distorted the economy and exacerbated financial bubbles and crashes by issuing large amounts of money not backed by tangible goods, and manipulating interest rates.
The 2008 financial crisis caused a significant loss of trust in financial institutions such as banks and central banks, especially among millennials, many of whom (myself and my friends included) saw their parents lose their homes, careers, and livelihoods.
Given Bitcoin’s disruptive nature, complete failure or massive adoption seemed like the only possible long-term outcomes for the technology. After nearly a year of reading and learning, I took the plunge and purchased a few hundred dollars worth of bitcoin in the summer of 2012.
I frequently hear the question, “Didn’t you feel like you were taking a major risk?” My typical response is “Not really,” but the truth is a bit more complicated.
I was never concerned that demand for Bitcoin would disappear. It seemed clear to me that it would appeal to individuals who felt strongly that citizens should have the option to transact and store value in a currency not subject to manipulation by central banks.
At the same time, as I learned more about the history of public-key cryptography and previous efforts at creating digital cash, I also saw how Bitcoin would appeal to cypherpunks who had been trying to build digital money systems based on strong cryptography for decades.
Plus, the developers and community were diverse, passionate and incredibly dedicated.
Since the supply of bitcoins is limited by code, the law of supply and demand ensured that the price of a bitcoin would increase exponentially if adoption of the Bitcoin network became widespread across the globe.
So, I saw two major risks:
- A catastrophic technical failure of the Bitcoin network.
- Government bans or heavy-handed regulation that would prevent or discourage people from using the network.
In December 2012, I had to write about an emerging technology for a course at USC. Not surprisingly, I chose Bitcoin. I learned that WordPress was embracing the digital currency and the European Central Bank had written a lengthy research report on “virtual currency schemes” that suggested Bitcoin might gain widespread adoption in the distant future. My confidence in the experiment’s ability to transform our world increased.
My concerns surrounding regulation were largely addressed in 2013 when the U.S. Senate Banking Committee held hearings on digital currencies.
The overall attitude from lawmakers and government officials was surprisingly positive, and it was clear that there would be no overt efforts to prohibit use of the technology from Congress or regulatory/law enforcement agencies.
The market also appeared to view this as positive news as the price skyrocketed to over $1000/BTC in the months following the hearing.
Then, in February 2014 reports began surfacing that bitcoin had been stolen from the world’s largest exchange, Mt. Gox.
This marked the beginning of a rapid decline and bear market that lasted for several years. The price didn’t reach $1000 again until January 2017.
As the price crashed and the bear market dragged on, I saw opportunity rather than cause for concern. The media and general public were panicking, driving the price down because they believed “Bitcoin had been hacked” but, in reality, Bitcoin’s core technology had not been compromised.
The decentralized Bitcoin network did not rely in any way on Mt. Gox, and people had no issues sending bitcoin to each other with user-controlled wallet software during and after the attack.
Mt. Gox was simply the most popular way to trade traditional currencies for bitcoin, so the hack of its centralized infrastructure, completely separate from the peer-to-peer Bitcoin network, was just a major setback from a public relations and mass adoption standpoint. Until new exchanges emerged, it was a bit more difficult for people to exchange dollars, euros, or yen for bitcoin.
Between 2013 and early 2016 I gradually put tens of thousands of dollars into bitcoin. The majority of my wealth was held in a well-diversified portfolio of traditional assets including stocks, bonds and cash. It would have been frustrating, but not catastrophic, to lose my bitcoin or watch the price collapse.
The bubble of late 2013 and subsequent crash was an emotional experience but, over time, I have become accustomed to the volatility and these days I am rarely phased.
Into the Ether
I had been watching the Ethereum project since it was announced in 2013, but didn’t start really digging in until I listened to Joey Krug explain his team’s decision to build their prediction market, Augur, on Ethereum instead of Bitcoin.
Bitcoin was created to serve as secure digital cash and a peer-to-peer payment network. Bitcoin’s blockchain is a data structure (a chain of transactions grouped into blocks) that records every transaction ever made and plays a key role in the system’s functioning.
Ethereum has its own blockchain and was created so that developers could build decentralized applications (DAPPS) that don’t require a central server to run and instead are executed on a distributed “world computer.”
Once Ether (the cryptocurrency required to run programs on the Ethereum network) started trading on public exchanges, I began accumulating it, with my lowest purchase being at $0.87/ETH. From late 2015 through late 2016 I started converting significant amounts of Bitcoin into Ether. All of my ETH was purchased in the $1-$20 range.
Projects like Augur, Golem, BAT, and MakerDAO, each fueled by their own (Ethereum-based) native cryptoassets, have demonstrated Ethereum’s potential utility as a platform for running DAPPS and a fundraising vehicle for open-source software projects.
Rollercoaster to the Moon
“To the Moon” is an exclamation used when cryptocurrency prices are rising off the charts. — Business Insider
In late 2016, cryptocurrencies entered another bull market. Until this point I had only sold a small percentage of my holdings. In early 2017, I began selling larger sums as cryptocurrency started to make up a substantial portion of my portfolio.
From the beginning of 2017 to the peak of the massive bubble in late 2017/ early 2018 (BTC ~$19,000, ETH ~$1,400), my net worth ballooned from an amount in the six-figure range to one in the low eight-figures.
I had been financially secure since selling the estate in 2012, but it was still life-changing to realize that I could live purely off of my investments if I made wise decisions. I sold large chunks of BTC and ETH in early 2018, near the peak of the most recent bubble, diversifying into real estate and cash.
1. Money can’t buy happiness
By standard measures, I have “succeeded” because I’ve substantially increased my net worth. However, I don’t feel as if I’ve accomplished much.
Researching cryptocurrencies takes a lot of time, but doesn’t feel like work, and I haven’t provided significant value to anyone besides myself, my immediate family, a few startups, and the charities to which I’ve donated.
Success is best measured by emotional-state, quality of relationships, and having purpose in life, not the by the number of digits in your bank account. My obsession with cryptocurrencies has contributed to me neglecting these areas, and I’ve paid a high price.
2. Financial bubbles are scary
In late 2016, I wrote that Fear of Missing Out (FOMO) would be a significant driver of cryptocurrency adoption, but was shocked when I saw this start to play out during the most recent bubble that peaked in December of 2017 (BTC)/January of 2018 (ETH).
It was disturbing watching people risk money purchasing an asset that they had no intention of trying to understand. There were even reports that people were taking out mortgages and using student loan money to purchase bitcoin.
The prolonged euphoria of a financial bubble is unlike any drug-induced high. It can last for weeks, months, however long the madness of the crowd persists.
I believe that regulators have an important role to play, primarily in terms of educating consumers on the benefits and risks of the technology, and going after blatant scams.
3. The Bitcoin experiment has already succeeded
Bitcoin has already surpassed many of my wildest expectations. Peer-to-peer digital cash works and now that tens of millions of people have gotten a taste of it, the concept is here to stay. We have a blueprint for the public payments infrastructure that the public internet needs.
It has unleashed a tidal wave of innovation and caused governments, central banks, and corporations across the world to start exploring ways of enabling faster value transfer, and building systems to serve the billions that currently have no access to basic financial services.
4. It’s risky to not hold any cryptocurrency
Anyone with disposable income and the freedom to make high-risk, long-term investments should take a careful look at recent developments in cryptocurrency. Yes, they are volatile, and could theoretically go to zero, but the potential upside is enormous. Do not invest more than you can afford to lose, and you will not lose more than you can afford.
A recently published study by two Yale economists concludes investors should consider holding 1–6% of their portfolio in cryptocurrency. Yale’s endowment recently invested in two cryptocurrency focused funds.
The owner of the New York Stock Exchange (ICE) has launched a startup, Bakkt, whose goal is to make Bitcoin a sound investment for the world’s large financial institutions. Partnering with heavyweights such as Microsoft, The Boston Consulting Group and Starbucks, Bakkt will develop products that, for example, help investors add Bitcoin to their 401ks and IRAs and allow consumers to convert their digital assets into U.S. dollars for use at Starbucks.
TD Ameritrade has invested in a cryptocurrency spot/futures exchange, and Fidelity Investments (responsible for over $7 trillion in assets) is launching a platform dedicated to bringing cryptocurrencies to institutional investors.
It seems ironic that traditional institutions are playing such a significant role in leading the charge of adoption, and I have mixed feelings.
On one hand, it’s a good sign for speculators concerned with the price of bitcoin measured in U.S. dollars, and gives cryptocurrency “legitimacy” in the eyes of the general public. On the other, it seems unlikely that these institutions share the philosophy and motivations of Bitcoin’s creator(s) and early adopters.
It seems absurd to think that such highly respected and regulated financial institutions would be building infrastructure to support ponzi schemes with no value or potential utility. If previous bubbles were fueled without their participation, what might happen now that they have skin in the game?
5. Technology doesn’t solve problems, people do
I started my journey down this rabbit hole because I was disillusioned about the health of our political and economic institutions. I doubted their capacity to mitigate the societal disruption that is an inevitable result of large amounts of wealth accumulating in too few hands.
I naively imagined that once Bitcoin demonstrated staying power, average citizens would embrace it, ushering in a new era of currency competition and lively productive discourse about the nature of money and the role of central banking in our economy.
Despite the fact that millions of people are using Bitcoin, a good majority of the general public still see it as a scam or a tool for speculation, not an innovative and disruptive technology.
I didn’t anticipate that bitcoin’s price would reach such astronomical heights fueled by speculation before it had achieved some level of widespread usage as a currency.
Seven years later, and I’ve recognized how misguided it was to place so much faith in cryptocurrency. Decentralized, technology-based networks are not immune from tribalism and divisive politics. There are serious technical and psychological barriers to overcome before cryptocurrency can enjoy mainstream adoption.
That said, cryptocurrency has helped people and will continue doing so: Venezuelans are using it to protect their savings from hyperinflation, Turks to avoid the impact of the country’s currency crisis, and Africans are looking for online coding and bounty work paid in cryptocurrency to escape poverty.
But systemic societal issues — like the negative effects of extreme wealth/income inequality and political corruption, or the dangers that come with the centralization of power — cannot be solved simply by engineering new forms of useful technology. We must account for the powerful influence of psychological biases and social conditioning.
I will continue studying cryptocurrency and blockchain-based technologies, they are incredible innovations with enormous potential to help solve real problems.
But now I do so with the bigger picture in mind, striving to develop a holistic understanding of the problems facing humanity and solutions being proposed across a variety of domains.