Illustration: Tomi Um What to know about the crypto-craze before it implodes.
It’s a lazy Sunday morning away from my family, I’m sitting in a hotel room in Montreal, and I’ve got $160,000 in my pocket. Or, rather, my “pocket.”
I’m staying in the neighborhood known locally as the McGill Ghetto, thanks to its proximity to the city’s famous university. My room is large — with a kitchen and living area — but not fancy.
The money is tied up in cryptocurrency — and I’m not ready to cash out.
With a few mouse clicks, I could liquidate my positions and transfer the proceeds (minus fees) into my bank account overnight. After paying capital gains tax, I’d have six figures in legally earned legal tender.
But here’s the rub: Twenty-four hours earlier, my portfolio was worth less than $80,000. Overnight, one particular cryptocurrency — a low-cap privacy coin called Verge — caught fire with the Asian markets.
By the same time tomorrow, that $80,000 might evaporate. Or it may double again.
Related Stories Do You Really Know What Bitcoin Is? 6 People on How They Spent Their Bitcoin Fortunes Welcome to the wild world of cryptocurrency, an impossibly young global financial market that runs 24 hours a day, seven days a week. Especially in recent months, the media has become feverish over bitcoin, ethereum, and Initial Coin Offerings, as breathless reporters publish stories of college seniors turned millionaires thanks to tiny investments made during their freshman years.
The reality is far less romantic. For every 1,000-times windfall, thousands more investments have gone south, wiping out trading accounts and nest eggs.
As a bitcoin enthusiast since 2013 and casual crypto trader since 2015, I’ve had my share of euphoric wins and heart-crushing losses.
But I’m also a grown man with a family — I don’t Google sports cars when I’m ahead; my dreams involve 529 plans and down payments.
And yet, I’m just as susceptible to wide-eyed greed. Sitting in my hotel room in Montreal, I could have cashed out at $160,000, pocketing enough to cross “college funds” off my to-do list. I could have cashed out, returned to Brooklyn with the better part of a down payment in hand.
Instead, I told myself, that half-penny coin has more room to run.
“Forget down payment ,” I thought, watching 0.5 cent turn into 0.6 cent on my phone, translating to another $16,000 gain. “Let’s go brownstone shopping with cash.”
That’s not how this story ends, of course. It’s true that a well-placed $3,000 can become $160,000 seemingly overnight.
But, as many are learning the hard way, every crypto investment can just as easily evaporate in the time it takes to hit “refresh.”
Bitcoin was created in 2009 by the pseudonymous Satoshi Nakamoto, by all accounts a pioneering genius in the field of computational cryptography. His invention was meant to be used as an unhackable, untraceable currency operating beyond government oversight. Though bitcoin tickled the dreams of many technolibertarians who’d long wanted the internet to function as a utopian digital space, it’s another of Nakamoto’s innovations that gave rise to the cryptocurrency revolution: encrypted, decentralized networking.
The particular way that Nakamoto achieved that is a little complicated, but put as simply as possible, bitcoin runs on a network with no central server. Rather, it’s a network of computers, called miners, that work both collaboratively and competitively. Before any bitcoin transaction is made, it must be validated and confirmed by a consensus of these computers.
This decentralization was bitcoin’s true innovation.
It’s given rise not only to 1,300 bitcoin clones and descendants, but an entirely new industrial sector known as blockchain technology.
Within a few years of its launch in 2009, bitcoin became less important as a currency than as a commodity, not unlike gold. You can still buy things with bitcoin (and gold, too, for that matter, sort of), but it’s become an investment vehicle for most buyers. Why invest in a virtual currency with no “real” value? Because $2 spent on bitcoin in December 2011 is today worth more than $18,000 — and many believe that bitcoin’s highest prices are yet to come.
At the same time, the clones, knockoffs, and descendants arrived.
Because bitcoin is open-source, anyone can copy, modify, and redeploy its source code for their own purposes.
That’s precisely what happened, starting with the introduction of Namecoin ( $NMC ), a bitcoin offshoot, in 2011. Since then, more than 1,300 new cryptocurrencies have been launched; most, but not all, are traded freely on various cryptocurrency exchange platforms.
They are known as “altcoins” — or, alternatives to bitcoin. Some, like ethereum ( $ETH ), are fast becoming household names; others are more obscure, known only in cryptocurrency circles, with names like Siberian chervonets ( $SIB ), florincoin ( $FLO ), and augur ( $REP ). Despite not having any physical value, these altcoins are easily converted into real money; buying them is legal in most countries, including the U.S.
In theory, every coin and token has its own raison d’être.
For example, no fewer than five cryptocurrencies ( $POT , $THC , $CANN , $CCN , and $CNNC ) are competing to fix the legal cannabis industry’s banking problems; pinkcoin ( $PINK ) wants to become a ubiquitous micro-tipping service for nonprofits; foldingcoin ( $FLDC ) rewards participants in Stanford University’s Folding@home disease-research project. We also have two Trump coins ( $TRUMP , $PRES ), one Putin coin ( $PUT ), and dozens more that are too racist or vulgar to bother mentioning.
At a glance, crypto most closely resembles foreign currency trading, and cryptocurrency pairs are bought and sold using dashboards that would be familiar to any E-Trade user.
When you trade BTC-ETC , for example, you’re buying and selling ethereum against bitcoin. Non-BTC pairs exist — ethereum-monero , reddcoin-doge — but most traders prefer to trade against BTC, measuring their returns in bitcoin until it’s time to cash out and convert to dollars, euros, renminbi, won, or yen.
But crypto actually moves more like the stock market — a completely unregulated stock market. Prices bounce wildly with rumors and announcements; insider tips are exchanged in private chat groups; pump-and-dumps are organized by whales at the expense of naïve newcomers.
For day traders, keeping up with the news can quickly become a full-time job.
Consider my Verge position, for example. Sometime in 2016, I noticed an unusual amount of Twitter chatter about $XVG, its trading symbol. I spent an hour researching Verge — it was formerly known as DogecoinDark; it had recently rebranded and relaunched under the new ticker symbol; its primary purpose was facilitating anonymous transactions.
I happen to believe that there’s a strong future for privacy-oriented cryptocurrencies, so I became more interested in Verge. One of many “low-cap coins,” it was very cheap at the time: For $530, I bought 5 million. When the price dipped two weeks later, I bought another 5 million for $300.
Over the next few months, Verge would catch the attention of more traders, which led to more Twitter buzz; the price climbed slowly. I bought 6 million more.
Sometime later, sitting in that hotel .
