Cryptocurrency’s Early Days
Bitcoin was invented in 2008 by a mysterious figure known as Satoshi Nakamoto. Nakamoto’s proposal was “an experiment in monetary theory; a payment system and store of value,” says Joe Lubin, one of the founders of Ethereum.
Ethereum’s cryptocurrency token, ether, differs from bitcoin in that it can integrate smart contracts onto its blockchain, making it useful as a full-service platform onto which a variety of applications can be built. Much like bitcoin, ether’s value rocketed during 2017, multiplying its value tenfold.
The price of cryptocurrencies had been volatile long before they sprang into public consciousness in 2017. Zillan once stepped away from his computer for an hour-long phone call and returned to find the price of ether had slumped. He lost $75,000.
“It was a lot of money,” Zillan says. “Yes, I could make it back, but — fuck, right?”
Cryptocurrencies are actually tokens of value. Instead of being state-backed like a typical fiat currency, such as how the dollar is backed by the U.S. Treasury, cryptocurrency relies on a blockchain—a cryptographic system of proofs forming an immutable transaction history by spreading the ledger across thousands of participating machines—as a “trust machine” forming the basis for confidence in its fidelity.
This has taken some time to be accepted; many institutional investors are wary of trusting a currency or asset that is not backed by a national institution. But in the past year, people have begun to wake up to the potential of blockchain for revolutionizing how we use money.
“I recommend everyone puts some of their money into bitcoin, if for no other reason than to have a hedge against bad fiat currency — inflation, corruption, etc.,” Draper says.
For him, that’s because cryptocurrencies are global, and are therefore not subject to the whims of political factions, but also because, Draper says, “Cryptocurrency allows us all to operate our businesses without the friction of banks or of bad government regulations.”
Perhaps it is a technological path to the future. But the fact that it is also a value token on which outside investors are speculating doesn’t appear to bother its creators much.
“Bitcoin wasn’t invented for investors; it was invented for the utility of digital money,” Lubin says. “Ethereum wasn’t invented for investors; it was invented for the utility of a decentralized application platform. I speculate that the demand for tokens will greatly outstrip the supply, so investors might be happy over the long run. But that is not the focus of what we are doing. The bottom line is there is nothing reasonable we could do to keep the price of bitcoin or ether from growing if they begin to be very broadly utilized.”
Zillan, who is still in his teens, has started a company called Cryptocurrency Financial that gives advice to would-be investors.
“Right now, only 0.1 percent of the world trades crypto,” he says. “Within the next one or two years, I think it’s going to be 1 percent. Within the next five to 10 years, I think closer to 3 or 5 percent of the world will trade it, maybe even higher. So, with all that trading volume, I think it’s almost impossible for bitcoin not to rise to $100,000.”
The technology underpinning cryptocurrencies like bitcoin and ether is solid, but there are still human vulnerabilities. The platforms on which users trade are websites as vulnerable to fraud as anything else — and have practically no regulatory framework to protect consumers. Zillan hints that he’s had problems with the available infrastructure, especially currency exchanges and trading sites. “The currencies are great, but the platforms — you gotta watch out for those.”
The Mt. Gox exchange hit headlines in 2014 when it announced that nearly half a billion dollars’ worth of bitcoin had been stolen from its platform. Mt. Gox entered liquidation, and many users who had stored their currency on the exchange lost all their money.
Smaller exchanges can “exit scam,” meaning the operators simply disappear with the money and are never seen again.
In response, some banks, including HSBC, now ban their customers from buying cryptocurrencies on credit.