I was at a potluck Sunday night, standing in a circle of 20- and 30-somethings living in Brooklyn, when the topic of Ethereum came up. Ethereum is a Bitcoin-like platform with a digital currency called Ether that has fluctuated in value since hitting a high of around $400 in June before dropping to $130 this week. “I lost $700 on this shit,” said a friend who works as a video editor, pulling out his phone to check the latest price.
“Oh no,” I said.
“I bought some too,” said another friend, who worked in Vice’s digital video department.
“No, no, no,” I said.
“I bought some just to check,” said another, who also works in Vice’s video department.
“No,” I said softly.
“It’s fun,” said another person who doesn’t work at Vice.
This was not the first time Ethereum came up in casual conversation. A few weeks ago, I was at a bar when a friend mentioned to me that he bought about $700 worth of Ether after reading something about it on a blog. This friend is a documentary filmmaker who lives a modest life and does freelance video editing to pay rent. So I was surprised that he invested in a digital currency. “I didn’t invest more than I would be willing to lose,” he assured me.
Why are all my friends investing in a digital currency that currently has all the classic signs of a giant bubble? Let’s first consider the history of Ethereum. It was designed by a 24-year-old programmer named Vitalik Buterin, a Thiel scholarship recipient now living in Singapore. Ethereum is more complex than Bitcoin: it includes a programming language, an Internet contract trading system, and a digital currency called Ether. It was highly publicized by programmers before a simple version of the network was launched in July 2015. Ethereum was so anticipated that it raised $18 million — yes, in real money, for an element of a system that did not yet exist — online “public sale” in 2014, in which Buterin and his team pre-sold Ether in exchange for Bitcoin. People who purchased received Ether tokens that would theoretically be usable to pay for transactions, such as negotiating a contract, once the Ethereum network launched.
At the time, Buterin warned people not to speculate on Ether. “Ether is a product, NOT a security or investment offer“Buterin wrote in a blog post. announcing Ether presale, underlines his. “Ether is simply a useful token for paying transaction fees or for creating or purchasing decentralized application services on the Ethereum platform.” In other words, Ether is supposed to be exchanged for computing time on the Ethereum network, similar to how programmers buy keys from Amazon in exchange for server power and storage on its services platform cloud.
Of course, speculation still took place. Ether is traded on most digital currency exchanges, such as Coinbase and Kraken, and can be purchased for bitcoin, US dollars, and other global currencies. It was worth $1.35 in September 2015, according to price tracker ethereumprice.org, and its value increased until earlier this year, when it began to skyrocket. On March 1, it was $15.91. On April 1, it was $49.96. On May 1, it reached $79.79. And on June 1, it stood at $228.64. People started talking about the “flippening,” the day the value of all Ether on the market surpassed $34 billion worth of bitcoin. Again, this is supposedly a real dollar value for what is essentially a Chuck-E-Cheese token.
For weeks, I’ve been trying to understand what’s driving this bubble. Who was paying maybe close to $400 in real money backed by the U.S. government — or even bitcoin, which is another stateless digital currency but has been around at least since 2009 and can be used to buy real things — for a currency digital technology that came out of nowhere and whose internal functioning is extremely dense for non-technical people?
Could the answer be… my friends? My friends and people like them – under 35, college educated, internet savvy and money conscious – are inflating the Ether bubble. They became aware of it through word of mouth or by reading the newspapers in recent months. They understood the risks of investing, but felt optimistic enough to spend hundreds of dollars on something that seemed to promise a chance of profit. After all, it is easier to invest in Ether than in regulated markets like the stock market or Silicon Valley, and the promised returns are attractive.
There are many exciting possibilities around Ethereum, which, like Bitcoin, is built around a blockchain – essentially a distributed ledger in which all users on a network check what others are doing. Ethereum could theoretically power everything since artist-run music stores to crypto voting, for example – but this requires strong buy-in from programmers, entrepreneurs and actual users of the system, rather than from people just speculating on the currency. The only explanation for the rise in prices is that new people suddenly entered the economy and increased demand. I believe these speculators are non-technical people who are savvy enough to understand the basics of Ethereum but not the nuts and bolts, who have money to spare, and who remember people’s stories. get rich with Bitcoin.
The exact number of people who have made money from bitcoin is unknown, but there are dozens of documented stories of those who mined or invested in bitcoin when it was cheap and held onto it for quite a while. long time to make substantial profits (some of these stories are in New York Times the book by journalist Nathaniel Popper, Digital gold). I asked my friend if the tales of Bitcoin millionaires were a factor in his decision. “Oh, sure,” he said. “100 fucking percent. Several people I know made a lot of money in June or whenever this shit got crazy. The editors we interviewed said the same thing: they thought Ethereum could be the next bitcoin and didn’t want to do it. miss again.
Buyers act on hype and intuition
As for whether he understood the technical side of Ethereum, he admitted that he didn’t fully understand all of the concepts. “I certainly tried to do it,” he said. “I’ll be honest, I’ve really tried to understand blockchain in general and it’s still way out of my wheelhouse.”
As a technology journalist who has covered Bitcoin’s many booms and busts and witnessed the rush of speculators buying it every time it hit its peak, the idea that my friends were spending money on some trendy internet technology that they didn’t completely understand stressed me out. out. jokingly ask the question on Quora: “How do I get my friends to stop buying Ethereum? ” which actually garnered five responses and dozens of votes. Most of the answers said to let my friends decide what to do with their money, which is fair and basically what I do anyway.
There was one person who was bearish on Ether: Zac Sand, who had received 12 upvotes at the time of writing. “The banking kleptocurrency Ethereum is designed to fool idiots who think ‘all digital money is the same,’” he wrote.
Ether peaked on June 13 at $395.13, then began to decline. Ethereum could end up having the longevity of Bitcoin, and the upside potential of an investment in Ether is certainly higher than that of traditional, regulated investment vehicles like stocks or startups.
I’m not saying that Ethereum won’t be great, or that the price of Ether won’t rise again, or that you shouldn’t invest if you have a few hundred dollars you’d like to creatively get rid of , and I’m not qualified to give investment advice. But the fundamentals of the asset – Ethereum’s codebase – cannot justify the price, because buyers of the asset do not have the ability to evaluate these fundamentals and are essentially acting on the basis of a hype and a hunch. Additionally, Ether was not intended to be an independent currency; it’s a way to incentivize a distributed network of programmers to write applications for Ethereum and keep the network running. And finally, people rushing into Ether seem to be violating the most logical investment principle, which is buy low, sell high. When you buy expensive, all you’re doing is making other people rich.