Considering Betting on Crypto Currencies?
you’d better have white knuckles!
Alex Hargrove, J.D.
You better have white knuckles, is my advice. And if you’re married or otherwise share financial resources with your partner, he or she better have the same, I know this all too well. Married, three children, and an ambitious and career driven spouse. I find myself in a position with a little bit of arguably disposable income and decide to make a $3000 investment in Bitcoin during the madness that was ensuing a couple months ago. (Arguably it’s not really stopped since then; only the stories have changed. But that’s another topic.)
Back to the matter at hand, you learn a lot about your appetite for risk — and you and your spouse’s collective appetite for risk in my case, — when you lose half your money in a matter of days. Fortunately, risk — for us at least — was nothing new.
I developed the product and cofounded net law along with my father, his longtime partner (at the time), and an extremely sophisticated, and incredibly wealthy, Angel investor by the name of Davis Marksperry, the same Davis Marksperry whose name the College of engineering at the University of Kentucky bears.
Returning to the story, we were borderline ready to pull the trigger on eating our losses and cashing out what we had left. We hung in there, though. And surprisingly became quite comfortable with the price we paid and the long-term prospects.
I think the key, and what I would recommend to anyone who is not already planning to do so, is to be sure your significant other knows that this is an extremely volatile market, and that it is highly likely that she will lose half her money in fewer hours than it took her to earn in years.
In our case, our patience appears to be paying off as the cryptocurrency markets are finally making what appear to be a turnaround.
So why did I invest, and why am I considering investing even more?
- The Hype Machine is Here to Stay
Simply put, I don’t see the hype machine going anywhere. The stories will change for sure. But ultimately, you’re investing in a technology and system of rules that foster transparency and privacy, and one should not be pulled by the daily fluctuations and weekly rollercoaster that hallmarks the cryptocurrency marketplace. The fluctuations in valuation that one should be looking for are those stemming from news about changes in standards, the likelihood of consortium adoption of new methods to address the throughput problem, which method, in fact, wins out, the integrity of said method, and so on. These things impact the underlying value of the technology and for us should be the subject of study in taking what either amounts to a calculated risk or a roll of the dice, depending on your perspective.
- Bitcoin was Not the First Virtual Currency
Although last December was my first foray into the cryptocurrency market, I played an active role in the trade of e–gold over a decade ago and discovered the forbearer to bitcoin known as “e-gold” during my short stint playing online poker in college. After realizing how annoying it was to go through the process of funding an account, I decided to establish a business to provide e-gold to others like myself who had found the process obscure, filled with fraud, and confusing. The business ran just like Coinbase or any of the peer to peer site except that I was the only peer who was doing any lending from this site.
Did you know? Technically to engage in this type of activity in most of the United States you must be a bank. I thought about that briefly and quickly dismissed the idea of trying to come up with the million-dollar bond, team of lawyers, and capital required to start a bank. However, there was a small loophole that exempted transactions under $1000, per person, per day. Accordingly, I required scanned IDs, and a signed statement establishing the buyer’s identity. I would get a much higher margin buying larger amounts, with purchases being facilitated by a loose P2P network consisting of forums, “deal-rooms,” and many features reminiscent of what you see on P2P crypto platforms today. I would then breakdown the gold into smaller amounts and exchange for cash deposits or credit card payments from fellow gamblers, a class in which I do not consider myself a member but to whom I was nevertheless more than happy to provide this service, for a fee of course.
During those days, online reputation served as a surrogate for the later trustless systems that block chain would make possible. For example, I needed to buy $5000 worth of e–gold to then break down and sell in smaller amounts. To accomplish this, I had two options: 1) buy directly from the company in the Cayman that housed all the gold which backed the virtual currency. That was far from straightforward process and required an investment beyond the meager amount a college student like myself at the time had to invest; or 2) buy from a stranger whom I’d never meant other than discussions on sketchy online forums. One was in an option for me and most would think that I would stop there. Who in their right mind would wire a few thousand dollars to somebody they had never met expecting that that person was going to send them back $3000 in virtual currency? At the time, believe it or not, a lot of people were willing to take the plunge, myself included.
Through an online reputation system whereby sellers and buyers build reputation points through displaying the number of transactions they had facilitated, the reviews from those who had bought, scans of state driver’s license, and ultimately the community decided whether someone was legit or not. A roll of the dice to be sure, but I saw a calculated risk and went for. While reputation continues to play a critical role in the bitcoin and broader cryptocurrency marketplace, particularly with P2P sites, and arguably with the larger platforms like Coinbase, reputation is still of paramount importance in deciding whether to engage in a given transaction with the seller.
- The Government Can Seize Asset Backed Virtual Currencies
What blockchain did was to introduce decentralization and thereby remove the possibility of the US government seizing all of the underlying value, which in this case was gold (and was, in fact, seized), supporting the value of the virtual/e-gold accounts. This is, again, due to the decentralized nature of the system.
- A Trustless System Will Always Prevail Over “Middle Men Systems”
For those reasons, and simply because blockchain is a trustless system, which — I postulate — will always win out over the same but centralized system, the blockchain is here to stay. Particular applications of the blockchain, such as Bitcoin, should thus be valued based on an analysis of the underlying technology – indeed, the very code itself. (In that vein, Wall Street should consider hiring — and probably is already — senior software engineers to evaluate a coin’s relative long-term prospects as opposed to looking at charts.) Therefore, unless you are day trading, I recommend keeping your money in Bitcoin, which I believe has the greatest potential to succeed depending upon how certain problems – namely throughput – are resolved. In my personal opinion keeping your money in the market notwithstanding the major loss of value you likely suffered is a pain worth suffering when the long-term prospects have shown no sign of a cap and the ultimate value is going to be determined by the value delivered by the particular applications of blockchain technology.
Alex J. Hargrove, J.D.
Alex Hargrove is an executive with six years experience overseeing millions of dollars in product development largely in the legal (estate planning), financial services, and banking sectors. Co-founder, CTO, and Member of the Board at NetLaw, a legal-tech startup that is currently raising money at a $40+ million valuation. www.netlawinc.com