return of the DAY traders
At the end of the 20th century, there was no better indicator that the dot-com bubble was about to burst than the millions of everyday people—dentists, lawyers and bank tellers—armed with cheap pcs and internet connections who abandoned their day jobs to trade newly born internet stocks like excite and books-a-million, based on the rantings in message-board posts.
token bubble traders have it even easier. middlemen, regulators and tax reporting are easily avoided. trading is 24 hours, including weekends. e-brokers have been replaced by “exchanges”—some 70 at last count—that offer “makers” and “takers” margin trading, pairs trading and derivatives, charging transaction fees that generally range from zero to 0.3%. one San francisco exchange, kraken, says it hired 100 customer-service people in may and June and has more hiring planned. “it’s been really crazy,” says founder Jesse powell. “We’ve had about five times growth in terms of new signups this quarter versus last, and last quarter was already a pretty significant jump over the previous year.”
no wonder. newly minted coins are now being crowdfunded at a rate of about 20 per month, and never before has there been an initial-offering market that has risen so fast, with such volatility.
ethereum, which has the status of Google or apple in the crypto-world, trades on average 5% or more of its $30 billion float each day, compared to about 0.5% for apple. ethereum is up fortyfold year to date, and it’s not unusual for it to move more than 10% in a day. there’s good action even in the less popular coins. rubycoin, for example, was hatched in 2014 and purports to be an untraceable savingsaccount coin that pays 5% interest. like a pink Sheet penny stock, it recently traded only $37,000 in a day, but gained 9%.
virtually all of the exchanges offer leverage of up to 5-to-1. So if you bought $10,000 of an ico like supercomputer-network coin Golem, which ran up 5,000% in its first seven months, you would have $2.5 million. not enough? leverage of up to 100-to-1 can be found.
take the case of alan aronoff, a 47-year-old San franciscan who has dabbled in the music business most of his life, playing in bands and, at one point, owning a private nightclub. in may 2016, aronoff put $10,000 into bitcoin—$8,000 of which came from a special 15-month zero-rate cash advance from
his credit card. after the bitcoin exchange he was using got hacked, aronoff defected to kraken with $8,500 in bitcoin and began leveraging his positions. he bought ether at $7 per coin in december 2016, as well as Golem and Gnosis in early 2017. he began watching the btc/usd and eth/usd markets 16 hours a day, sleeping as little as possible and barely leaving his house so that every time his gains hit certain thresholds, he could trade. “i’m kind of ocd,” he says. Within six months, he turned his $8,500 into $7.5 million—a return of 88,000%.
another new crypto-millionaire is Sean ironstag, administrator of the facebook group advanced crypto asset trading. the 37-year-old former forex trader likes to brag about his exploits: “i used to stand on rooftops and scream revolution-type shit and travel around the world,” he says, mentioning his visits to egypt and Syria during the arab Spring. ironstag trades more actively than aronoff, having scored big wins in coins like augur’s rep, Game, litecoin, ripple and dogecoin, an alternative currency based on a meme about a Shiba inu dog. ironstag netted 1,500% in dogecoin and ultimately turned $15,000 into $3 million in less than two years. thanks to a connection, he was recently invited to famed trader michael Steinhardt’s estate in bedford, new york, where he took the opportunity to educate a group of Wall Street titans about the future of finance. “an entire, like, sector of, like, archaic finance knows now they’re becoming irrelevant,” ironstag says. What’s next for ironstag? he’s launching a hedge fund and a crypto boot camp that he says will be folded into a crypto holding company he plans, modeled after berkshire hathaway.
charged with managing customer service. Carlson-wee requested that his dollardenominated salary of $50,000 be paid in Bitcoin, likely becoming the first person in the world to both earn and spend almost exclusively in cryptocurrency.
Customer service gave Carlson-wee a front-row seat to the competencies of the fast-growing company. Eventually he helped automate many of Coinbase’s routine customer-service responses and even created a sort of Bitcoin SAT, which he used to screen applicants for posi- tions, eventually hiring eight, all of them paid in Bitcoin. He then got promoted to head of risk, lowering Coinbase’s fraud rate by 75% via artificial-intelligence algorithms.
By last September, he had quit and launched his crypto-only Polychain Capital with $4 million in funding from investors like Jack Herrick, founder of Wikihow, and Garry Tan, a former Y Combinator partner. Since most venture capital and hedge funds are precluded from investing directly in highly specu- lative assets like cryptocurrencies, Carlson-wee worked instead with the likes of Andreessen Horowitz, Union Square Ventures, Sequoia Capital, Founders Fund and Pantera Capital, as his three-plus years at Coinbase made him something of a sage in this space.
Accordingly, while the crypto-asset movement espouses a democratization of nearly every aspect of business, life and wealth accumulation, like the “friendsand-family” allocations of the dot-com bubble, most of Carlson-wee’s 13 investments to date have been made before the ICO, at a significant discount.
His investments include emerging industry-standard Ethereum and the decentralized supercomputer scheme Golem, as well as Augur, a predictionmarket coin that Carlson-wee prefers to Gnosis; 0x, a cryptocurrency exchange protocol that will allow for decentralized coin trading; and Tezos, an Ethereum competitor. “With Tezos, you can formally verify contracts whereby you essentially prove that the contract does what it’s intended to do,” says Carlson-wee, looking out from more than 40 stories over the city, wearing a skull-emblazoned black T-shirt, track pants and a flat-brimmed rhinestone-adorned baseball cap.
He’s taking a longer-term venture approach rather than wantonly trading coins, but in a market frenzy advanced knowledge and preferential treatment translate into extraordinary gains.
So where do we go from here? Carlson-wee is one of the few who can articulate a vision. He believes that base-layer protocols and infrastructure such as data storage and computing-power ser vices will be built first. “I could see a future where computers, instead of having their own internal memory, their own bandwidth, their own internet connection—and your own home computer, the CPU and GPU cycles on your device—all of that could be outsourced on a per-use payment basis using tokens,” he says. “You could pay for every packet of internet you want, every cycle you want and every piece of storage you want in real time, instead of those things being on everyone’s device
and unused most of the time.” In other words, cloud computing meets the sharing economy meets the Fed.
Maybe. But before that happens, a lot of folks get hurt. Technically speaking, at least in the U.S. these “equity” coins aren’t securities so long as they are partly utilitarian and are not dependent on any particular party to succeed. It’s sort of like taxi medallions or golf-club memberships. Some token developers have attempted to sidestep the issue of whether their coins are actually securities by basing operations in places that have low taxes and looser regulations, like Singapore, Gibraltar and Zug, Switzerland.
Unsurprisingly, insider trading and dirty deals are flagrant. One coin-offering creator told Metastable Capital’s Naval Ravikant, the CEO and cofounder of Angellist: “If you agree to buy tokens at the ICO and support the price, then 30 days later, we’ll secretly sell you any leftover tokens at a lower, pre-agreed price,” recalls Ravikant. That’s a felony on Wall Street. In the cryptocurrency Wild West? “These are the kinds of deals being cut left and right.”
The SEC has said that it expects this industry to protect its investors, but given its Keystone Kop track record before and after the subprime meltdown, it’s hard to see it effectively regulating a world of functional currency. “The scams are very subtle and very sophisticated unless you’re willing to read the source code,” Ravikant adds.
And even if regulators did read the code? “If my bank account [in the U.S.] gets shut down, I can’t just open up a Russian bank account and start using my bank credit card to go about my day buying Starbucks,” Carlson-wee says. “But if my Bitcoin wallet provider gets shut down, I can shoot that bitcoin overseas so fast—literally in one minute—it’s like, ‘Okay, now that Bitcoin is in Russia, and now I’m going to participate in this crowdsale from the Russian exchange and store these tokens on a
Russian wallet. . . . So on a global scale, trying to regulate these things is like Whac-a-mole.” Ditto trying to collect taxes (see box, p. 68).
So buckle up for more blowups, more Mt. Gox-type fiascoes and tens of billions in losses for the people who are gambling in an area where there is precious little to protect them. The smart money, meanwhile, should do fine, vul- nerable only to its own hubris. “Everyone’s like, token sales are complete madness right now,” Carlson-wee says. “I don’t think we’ve seen anything relative to how big this could be.”
Alan Aronoff: From $8,500 to $7.5 million in six months thanks to digital coins and a dose of OCD.