Anyone searching on YouTube for a video about crypto currencies is inundated with tutorials and success stories of young people who have become billionaires in a couple of years thanks to bitcoin. Not entirely surprising, research shows that crypto currencies are mostly bought and traded by consumers aged between 18 and 35 years. These are the millennials and Gen-Z, the generations that grew up in the digital era and for whom online money is not new and investing in crypto currencies is the perfect piggy bank. After all, what return does money in a savings account generate?
Let us see what cryptos actually are, how they work, what we can do with them and the dos and don’ts for new investors. We asked TU Delft students and crypto fanatics Marco and Krzysztof.
‘Elon Musk just bought USD 1.5 billion worth of bitcoins through Tesla,’ wrote Marco (22, surname known to the editors) enthusiastically before the interview. Marco has been completely addicted to Bitcoin for two years. “From the moment I started reading about it and talking about it with other interested people, I became more and more convinced of its potential.” He spends every free minute on the digital coin. “I wanted to know everything there was to know about it.”
He works on it less intensively now, though he is still just as fanatical. “I check the market a few times a day. If the exchange rate is very volatile (fluctuations), I am glued to my screen like before.” He laughs. “This happened during the last exam period. It was not good timing.”
Given its dynamic character, crypto currencies are often described as a rollercoaster. Price differences of 20% in one day are not unusual. Marco explains that “The price of bitcoin rose within one week by more than 55% (+ EUR 12,000) at the beginning of January, to then drop dramatically.” He is not unnerved by such fluctuations and believes that it is all part of the game. He expects that bitcoin will be worth even more in the long term.
‘Bitcoin is even rarer than gold’
“Bitcoin is finite and this makes it rare.” Marco is referring to the maximum number of coins that will be produced, 21 million. At present, 80% of the total number of coins are on the market and it is expected that all 21 million bitcoins will be in circulation in 2140. “This makes bitcoin rarer than gold. You can always dig for gold but you cannot produce any more bitcoins as this was programmed in advance by the person who thought up Bitcoin.”
The pseudonym of the person or group who came up with Bitcoin, a digital coin built on blockchain technology, in 2008 is Satoshi Nakamoto. “See blockchain as the accounting system for all bitcoin transactions,” explains Marco in simple language. “The accounting system consists of a list that is compiled from blocks of information. If a bitcoin is added or is traded, all the computers register that new information.” A transaction line is created every 10 minutes and is only then officially added to the accounting system – the blockchain – when all the computers have registered the transaction as such.
Marco says that “This makes it the safest and most transparent payment system in the world. Every transaction is checked by hundreds of thousands of computers and is public for everyone to see.”
‘You can print more money, but you cannot print more bitcoins’
Apart from being transparent, Bitcoin is also decentralised and this avoids the whole system from failing should one part of the network not work. This makes the network more robust, says Marco. “Apart from this, the network is trustless. There is no middleman like a bank when you do a transaction. This makes payment a lot more efficient than the current system.” The network is a democratic system in which everyone that is part of it has decision-making power. This avoids rules being changed such as increasing the maximum number of bitcoins. Marco adds, “You can always print more money, as they are currently doing in the United States.”
The Government there has printed money to pay out billions of dollars on corona support in the form of stimulus checks worth hundreds of dollars to people who qualify for extra welfare payments. This pushed up the total amount of money enormously. It can lead to inflation, a reduction in the value of money.
Marco explains that “As money is worth less, consumers look for alternatives to limit the loss in value. This is one of the reasons why the exchange rate of bitcoin and the value of shares have gone through the roof this year. Bitcoin and shares cannot be printed. It is a good place to keep your capital in times of inflation.”
Extra money is printed, bitcoins are mined. The coin is mined from a huge amount of data and this uses a lot of processing power. “Simply put, mining is recording transactions that are done in the Bitcoin network on the blockchain. In exchange, the miners receive reimbursement in bitcoin.”
Each transaction takes the equivalent of more than 600 kilowatt hours of electricity
Mining is far from environmentally friendly as each transaction takes the equivalent of more than 600 kilowatt hours of electricity. An exchange rate of EUR 39,000 takes about 121.36 terawatt hours a year. This is more than the entire countries of Argentina (121 terawatt hours) and the Netherlands (108.8 terawatt hours) use in one year, calculated the University of Cambridge. This could even be higher as the bigger the network, the more complicated the calculations and the more processing power and energy is needed.
Marco knows the figures and the objections, but pleads for some nuance. “A lot of mining is done with residual energy. The Ukraine has plans to set up a few large mine farms – sites where several computers mine cryptos – close to nuclear power stations. The energy that is not used there will be diverted to the farms. This is energy that would otherwise be lost. Further, bitcoins do not need bank buildings as it is decentralised. This means that there is no real estate, no additional raw materials needed, no staff and no travel.”
Good, so Bitcoin does not need banks. Equally, there is no physical coin. Is this safe? What is the chance that the accounting system, the blockchain, is hacked? “That is virtually impossible,” assures Marco. “You would need so much processing power and energy to do this that it is inconceivable.”
In 2014, hackers stole USD 2.6 billion worth of bitcoins
“What you can do though, is hack crypto wallets. These are online wallets where consumers keep their crypto currency.” And this has already happened a few times. In 2014, hackers stole USD 2.6 billion worth of bitcoins from Mount Gox, an online broker (a mediator or platform that facilitates trade). And in September of last year, another EUR 4.25 worth of cryptos were stolen from the Eterbase platform. Apart from bitcoins, two other currencies were stolen, ethereum (ETH) and ripple (XRP). These coins are better known as altcoins, or alternative crypto currencies.
“Altcoins build on the success of Bitcoin, but are slightly different and attract other, new users,” explains Marco. “They are coins that represent various products. Some altcoins are faster in terms of transactions than bitcoins which makes them more suitable as a method of payment.”
Marco says that there are thousands of altcoins in circulation, though they are not all equally reliable. “As a rule, small coins can become more valuable more quickly, but there is a risk that they are worthless within a year.” He advises people to do their homework thoroughly before putting money in altcoins. “Some of these coins take advantage of the crypto hype, so always read the organisations’ white papers that explain their plans for the coin.”
- One of the biggest altcoin scams was One Coin, established by Ruja Ignatova, who called herself the Crypto Queen, in 2015. She told people that she had invented a crypto currency that was even better than the bitcoin and she persuaded millions of people to invest billions. Two years later, it transpired that the coin was nothing but lies. Ignatova disappeared off the face of the earth and is being searched for by various agencies including the FBI.
Dos and don’ts
While Marco mostly concentrates on bitcoins, Krzysztof (22, surname known to the editors) spreads his investments. His portfolio consists largely of altcoins such as ethereum, ripple and stellar lumens. “Once in a while I sell some and buy new coins that have growth potential.” Up to now, he has invested about USD 100 of his own money and, on top of that, has earned extra coins by taking coin tutorials. “You earn cryptos for watching videos.”
He keeps some of the coins he ‘earns’ and trades others. “This is a useful tip. Reinvest your gains in a different crypto. And if you have the chance to earn some ‘new’ coins, for example by watching coin tutorials, do it! You never know what you may earn from them in the future.”
‘Only invest what you do not need. Do not invest your study loan’
Still, better safe than sorry, warns the financial advisory institute Nibud. It too sees increasing interest in investing in shares and crypto currencies. “We advise people to learn about investing. It can be a good way to retain capital, but it is risky,” says Nibud researcher Marcel Warnaar on their website. To avoid financial problems, the Nibud recommends only investing money that you do not need. It is also important to always keep enough money to cover the necessary costs in the near future. Warnaar says “Another recommendation is to not invest loans and be critical. Only invest in things that you understand. If you do not want to run any risks, there is nothing wrong with putting money in a savings account.”
Krzysztof too recommends only investing what you do not need. “Don’t invest your study loan,” he says. Marco agrees. “Risk management is one of the most important aspects in trading, the buying and selling, crypto currency. Delve into the material and recognise when you should stop a trade. When I just started I took a lot of risks. If you want more and more, you will make mistakes. That’s all part of the learning curve.” He suggests first learning the ropes with a small amount. “If you have a little money left at the end of the month, invest that instead of putting it in a savings account.”
They do both agree that it is a good idea to invest. After all, you never know. Marco laughs, “thanks to bitcoin, I can graduate with no study debts.”
- Students who want to learn more about trading and investing in both crypto currencies and shares can join the Delft Investing community. Here, experienced students share their knowledge, tips and tricks in trading and investing.