The Washington PostDemocracy Dies in Darkness

‘Bitcoin is my potential pension’: What’s driving people in Kentucky to join the craze

Jacob Melin, right, helps client Jim Baker in the offices of Crypto Consulting Group in Louisville on Jan. 18, 2018. (Luke Sharrett/For The Washington Post)

He had invested in bitcoin almost two years earlier, so now Jacob Melin had a new house, a new truck, a new consulting business and a line of people coming into his office, trying to become wealthy as quickly as he had. One person said he expected to use a modest investment to "retire in 12 to 18 months." Another said he wanted to use the proceeds to start a business. And a father of two talked about paying off his own student loans and buying several acres of land — all the things he did not see a chance to do with his income as a software salesman.

"Us little guys working our butts off, we can't get ahead," Cedric Knight, 35, told Melin. "This is a once-in-a-lifetime opportunity to change my life."

Knight and others visiting Melin were pinning their hopes on a new form of currency whose potential value the world was only beginning to recognize. Millions of people around the world are chasing after fortune by investing in bitcoin — which has soared by more than 2,500 percent in value in the past two years — and other digital instruments known as cryptocurrencies.

Bitcoin and its rival currencies were not originally intended as a way to make money, only as a new and technologically savvy way to buy and sell goods and services outside the normal system of cash and credit cards. But bitcoin has been transformed into something else, a way to strike it rich for some, and for others, a hedge against a deeper anxiety about financial security and the economic future. For many, investing in bitcoin is a bit of both.

Created nearly 10 years ago by a pseudonymous computer programmer, bitcoin is unlike other kinds of money: It takes no physical form and is not issued by a government. Instead, bitcoin can be purchased on online exchanges, using checking accounts and credit cards. A publicly visible ledger called a blockchain records transactions. As a result, no one person runs the bitcoin network. It is collective and outside government control.

In Louisville, for those who believe in bitcoin, Melin, 22, is one of the most important guides. "A visionary," Knight called him. "Not afraid to step into the unknown."

Three years earlier, Melin had been attending Indiana University Southeast, commuting from his mother's house. He could not shake the feeling that he was paying for something that was not worthwhile. He was learning more from economics podcasts than he was from his classes.

So he dropped out and pulled the remaining $22,000 from an education fund his mother had set up for him. He invested in cryptocurrency. For a while, he was a college dropout working at a casino buffet, driving a $500 car and sleeping on a living room floor. But in 2017, he made $770,000, money he used to buy a three-bedroom house, a pickup truck and a cat.

Melin was not necessarily looking to strike it rich. He was looking, he said, for an alternative to the global economic system. He had started to become suspicious of that system during the 2008 financial crisis, when his mother lost her job as a computer programmer. Even as the United States pulled out of the depths, Melin saw signs that the world had not learned its lessons. He read about countries such as China over-borrowing and overspending, "building cities the size of Louisville that are empty." He read about the growing U.S. deficit and felt that politicians could not solve the problem. He was especially bothered by the growing burden of baby boomers on Social Security programs.

"I almost blame the older generation," he said. "I see these unsustainable programs. I'm going to be these people's slaves for the rest of my life."

For him, bitcoin, a currency backed by no government, was a way to shield himself from those risks. He started by buying five bitcoin, at $400 each, and then roughly two dozen more, as the price reached toward $1,000. The people who worked with him at the Horseshoe Casino were more interested in buying lottery tickets, he said, than in listening to his investment advice.

"Everybody thought I was crazy," Melin said.

Then, that started to change. The price of a bitcoin in 2017 shot up to $2,000, and then $5,000, and then $10,000, and then, briefly, nearly $20,000. Cable networks started giving cryptocurrency nearly the same attention they give the stock market. In Louisville, Internet-organized meetups that once attracted a half-dozen people filled up with 40 or 50.

In August, Melin joined a cryptocurrency consulting business, started by another early investor, Enrique Rodriquez, with the aim of guiding newcomers — holding workshops for them, teaching them the technology, helping them to avoid frauds and pitfalls. Since then, they have met the new generation of cryptocurrency buyers: retirees, the unemployed, factory workers, teachers.

"People have this perception of bitcoin as fast money," Melin said. "Because it was."

As bitcoin and its many competitors are hitting the mainstream, a once-lucrative market is turning instead into perhaps the world's most volatile — what some economists call a speculative bubble in line with the dot-com craze of the late 1990s. Investors are bidding up prices of bitcoin and its many smaller competitors and selling in a panic. Values of cryptocurrencies soar and plunge in a matter of hours, sometimes by more than 30 percent. Far away from Silicon Valley, the people riding the roller coaster swing between excitement and dread, all while gathering at local meetups, downloading apps to track their investments, and sharing tips on message boards and chat groups — one is called "Cointucky."

"Not looking good. It's falling scary fast," one investor wrote as another day began in the Louisville cryptocurrency chat group Melin and Rodriquez set up.

"Welp time to file bankruptcy," somebody said.

"Now we are bouncing!" another wrote, hours later.

Then, at the end of the day: "Here we go boys. Hang on tight."

Find out what Bitcoin is, how much it's worth, and the multiple controversies surrounding the cryptocurrency. (Video: Jhaan Elker/The Washington Post)

'It's a weight on me'

Knight, the software salesman, figured that cryptocurrency was worth a gamble because he saw no better way to rapidly improve his life. He enjoyed his job — his company ranked him as one of the top sales representatives in the region — but he was with his fourth employer in a decade, and the pay, about $90,000 per year, left him feeling stuck in place. He had a wife and two children. He was only slowly saving for retirement. Unlike his father, he did not have a pension.

"Bitcoin is my potential pension," Knight said.

He also had a $600-per-month student loan payment, an obligation he figured he would still be paying off in 20 years. He had come to believe that Americans were too reliant on debt.

"They tell you to go to college, get your education, then you'll have a six-figure job," Knight said. "I know so many people working at Starbucks with all this education. I was one of these people that was told, 'Go into debt, and then pay us for the rest of your life.' It's a major concern. It's a weight on me."

After a friend mentioned crypto­currency on Facebook, and after talking with members of his gym and meeting with Rodriquez at a coffee shop in December, Knight decided to dive in. Right after Christmas, he bought $300 in cryptocurrency. Then $250. Then $100.

He tried to gather spare money whenever he could and cut down on meals at restaurants, instead packing couscous for his lunches. He reminded himself of how his life might look in five years. "I could be writing a check to pay my house off," he said. "That's the excitement I have."

"It's new territory," Knight added. "So many unknowns."

Trying to predict the future of bitcoin has only grown more complicated in recent months, because digital currencies are being launched almost daily. They have names such as litecoin, steem and EOS, and for Knight, it was these that were the most attractive. As he began investing, he noticed one particular currency surging: mintcoin, which cost about a tenth of a penny. On Jan. 7, he bought 25,000 mintcoin as the value was starting to soar.

Then he tried to ride the wave. The day was just starting, and Knight kept refreshing his phone, charting his progress. The currency's value climbed a bit more. A few hours passed. He had made $268. He told his wife. He watched YouTube videos about other currencies. And then, just before he went to bed, he noticed the value of mintcoin start to tumble. It was down 15 percent. It was down 30 percent. "The anxiety," Knight said, shaking his head.

Finally in the morning, when his profit was wiped out, he sold his 25,000 mintcoin, recouping only the money he had put in. He told himself he had made a mistake.

By mid-January, he had invested a total of $1,500 in cryptocurrencies and seen the value dwindle by about $100. He texted Melin a cartoon — a dejected man holding his head in his hands. The caption read: "When you bought a crypto coin an hour ago and it still isn't up 1000%."

Gaining, losing and hoping

The day after receiving that text, Melin woke up and looked at his phone. The cryptocurrency market was sliding again — but this time more sharply. Melin had lost more than $100,000 overnight. "A bloodbath," he said.

When he arrived at his two-room office suite in the Louisville suburbs, the first meeting of the day was with Knight.

Knight had arrived to pitch the office on some software for small businesses, but after he was finished, he turned to Melin and said he thought he had been taking the wrong approach with his investing. Melin agreed; newcomers often tried to find a shortcut to a payday.

"Yeah. I don't do day trading," Melin said.

Knight nodded.

"I got my butt burned," he said.

But then Melin tried to put it in perspective. Everything happening now — the ups and downs — were still minor compared with what might still come, he felt. The global economy was humming along; what if it fell into crisis? Cryptocurrency would boom as never before. This was still an early way to get in.

"What crypto allows is for the masses to be venture capitalists," Melin said.

"And guys like me, I'm not in the loop," Knight said. "This is my chance."

"My thinking, everybody should be in this to some extent," Melin said. "You have it as an insurance against the traditional market."

They parted ways and continued to watch the market. Melin met with two other new investors, one who said he was so excited by digital currency that he was barely sleeping. At 3:30 p.m., Melin checked his crypto account. He held $473,000 in currency. Twenty-five minutes later, he checked again: It was down to $445,000. At 4:47 p.m., he checked again. It was down to $428,000. Then $412,000. He walked into his company's other office, filled with a few part-time analysts he had hired. They were looking at charts, all pointing down. "I'm sick of staring at screens and feeling sad," one of the analysts said.

Melin said these swings are part of the deal.

"It's a great time to buy," he said. "Right now. A great time."

Knight, meantime, went home, cooked dinner and then decided to reopen one of the eight cryptocurrency apps he had downloaded. His account had fallen nearly $500 on the day — his initial $1,500 was below $900 — and he said he was "freaking out." But then, he thought about what it meant to be a cryptocurrency investor. There would be days such as this. But there might be better days, too — much better days. If there were, he did not want to miss out.

"I'm almost afraid not to take the chance," he said, and soon, he added $260 to his cryptocurrency account.