- The Rise and Fall of Bitcoin Billionaire Arthur Hayes
- SHARKS AND LAMBOS
- THE TANGLE IN TAIPEI
- Bitcoin Rises Above ,000. Where Does It Go From Here?
- Big Companies Are Buying Bitcoin
- Institutional Investors See Bitcoin as an Inflation Hedge
- PayPal Makes Bitcoin Easier to Own and Spend
- Could Bitcoin Become the New Gold?
- The Final Word on Bitcoin: Buyer Beware
The Rise and Fall of Bitcoin Billionaire Arthur Hayes
BitMEX incorporated in the Seychelles, a move that allowed the start-up to move fast and minimize its tax exposure while Western governments struggled to even understand—much less create a way to govern—the newfangled financial instruments and market that BitMEX was building. In a 2015 investor presentation, Hayes made the point that “Bitcoin derivatives are completely unregulated worldwide…. Regulators are still trying to tackle the exchanging of fiat and Bitcoin.”
That might have been magical thinking. “There were no rules in the beginning, and [governments] weren’t interested in articulating the rules,” Chu remembered. “You would go to [them] and ask for guidance and get nothing.
‘Is this illegal?’ No answer.” It was only after the fact, he said, that cryptic strictures emerged to police crypto—usually in response to some infraction that had not been previously articulated by regulators.
But where Chu saw chaos, Hayes saw opportunity.
For nearly a year after its launch, BitMEX’s business was flat. “Some days we had no trades,” Hayes remembered. “No one bought or sold.” The fees from trading on the platform barely covered the server bill, which Reed paid with his credit card.
While Hayes and Delo stayed in Hong Kong, Reed got married and moved back to the States, settling in Milwaukee, where he operated coworking space.
The time zone difference, however, worked in their favor: Reed and Delo, in signature start-up fashion, took turns being “on call,” addressing customer support issues 24/7.
The company’s fortunes changed when, in late 2015, it started offering customers 100x—five times as much leverage as its closest competitor.
Political volatility the following year, with Brexit and the election of Donald Trump, increased crypto’s trading volume. Come 2017, BitMEX had to bring on 30 employees to cope with the explosion in trading.
The firm moved into new office space, which it would soon outgrow.
By 2018, BitMEX had become a high-stakes bazaar, moving billions every day. During one of our meetings, Hayes commented, “We are the biggest trading platform in the world, by volume. That’s anyone who trades a crypto product.” BitMEX, he said, was one of the “most liquid exchange[s] in the world, regardless of asset class.
” By that measure it was in the same league as the NASDAQ as well as the New York, London, and Tokyo stock exchanges. Within four short years Hayes’s scrappy casino had become, in gambling terms, the house.
(Since the indictment was unsealed in October, BitMEX has taken a huge hit; its market share and trading volume have dropped precipitously.)
SHARKS AND LAMBOS
In May 2018, on the opening day of Consensus—the crypto world’s equivalent of the Consumer Electronics Show—Hayes pulled up to the Hilton in midtown Manhattan in an orange Lamborghini and tweeted: “Did you see my ride today at #Consensus2018 ?”
A close friend insisted he was simply lampooning the thousands of attendees gathered inside the hotel—investors who talked a big game about cashing in on crypto, but who had really only succeeded in burning through millions in venture capital on harebrained schemes and ICOs (initial coin offerings). Still, looking back, the Lambo gambit might well have been the moment, more than any other, when Hayes painted a bull’s-eye on his back.
True, the firm’s partners had differing approaches to their images and their booming business. Hayes, who didn’t mind ruffling feathers, reveled in the role of financial renegade. Sam Reed kept an extremely low profile, a secret billionaire (on paper) walking the streets of Milwaukee. Ben Delo, however, seemed to hunger for mainstream acceptance.
When BitMEX was declared the world’s largest cryptocurrency exchange in 2018, a string of British newspapers dubbed him “the U.K.’s youngest self-made billionaire.
” That October he donated £5 million to Oxford’s Worcester College and a few months later signed the Giving Pledge, designed by Bill and Melinda Gates and Warren Buffett as “an open invitation for billionaires…to publicly commit to giving the majority of their wealth to philanthropy.
” In a letter explaining his decision, he wrote, “As a schoolboy in Britain aged 16, I was asked to list my ambitions for the future. I answered concisely: ‘Computer programmer. Internet entrepreneur. Millionaire.’ I have been incredibly fortunate to exceed those goals, and I’m grateful to be in a position to sign this pledge.”
Two years ago BitMEX leased the 45th floor of Cheung Kong Center, the most expensive real estate in Hong Kong and home to Goldman Sachs, Barclays, Bloomberg, and Bank of America.
Hayes, Delo, and Reed were literally moving in on the establishment.
But ever eager to make a statement, BitMEX kitted out its office with an accessory none of those stodgy legacy companies had: a large aquarium inhabited, appropriately enough, by live sharks.
THE TANGLE IN TAIPEI
By the summer of 2019, the amount of money moving through BitMEX was staggering. On June 27, the company announced it had set a new daily record, trading $16 billion. Two days later Hayes tweeted: “One Trillion Dollars traded in a year; the stats don’t lie. BitMEX ain’t nothing to fucking [sic] with. @Nouriel I’ll see you on Wednesday.”
The man he was tweeting at was Nouriel Roubini, a respected NYU economics professor—and BitMEX’s fiercest critic. Dubbed Dr.
Doom, Roubini sat on President Clinton’s Council of Economic Advisers and served at the Treasury Department, the International Monetary Fund, and the World Bank. In other words, he was about as establishment as Hayes was contrarian.
On July 3, the pair faced off onstage at the Asia Blockchain Summit in what was publicized as “the Tangle in Taipei,” taking their seats as the theme from Rocky blared overhead.
Bitcoin Rises Above $50,000. Where Does It Go From Here?
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Despite their heavy reliance on data, investors can be an emotional lot—they are susceptible to the same biases as everyone else, after all. Here’s the latest evidence for that proposition: Bitcoin has traded above $50,000.
The popular cryptocurrency recently passed this key psychological marker, hitting $51,202 as of writing.
Financial services companies Mastercard and BNY Mellon have announced new Bitcoin initiatives, helping it top this notable threshold.
Their moves follow an announcement by Tesla’s iconoclastic chief executive Elon Musk that his company had purchased $1.5 billion worth of Bitcoin and would begin accepting payments in the cryptocurrency.
At this time last year, one Bitcoin was worth slightly less than $10,000.
“The story right now is institutional adoption,” said Stephen McKeon, associate professor of finance at the University of Oregon. “The arrival of qualified custodians and other key infrastructure has facilitated the onboarding of significant institutional capital in a way that was unfeasible just a few years ago.”
Despite Bitcoin’s recent rise, you still need to be careful. While the flagship cryptocurrency appears to be maturing, it’s still extremely volatile in both directions. For regular investors, that means you should tread lightly with this speculative asset class unless you have your fundamentals, an emergency fund and basic retirement portfolio, covered.
Big Companies Are Buying Bitcoin
BNY Mellon, which can trace its roots back to the 18th century, is the latest big name to adapt to the world of Bitcoin.
The financial services giant plans to help its asset-management customers utilize Bitcoin, essentially treating it any other security.
Meanwhile, Mastercard said it would process Bitcoin payments on its network in an effort to give businesses and customers “more choice” in how they buy things.
Note that Elon Musk’s infatuation with the digital currency is nothing new, and it jibes with his affinity for unconventional investments and ideas.
Bitcoin is my safe word
— Elon Musk (@elonmusk) December 20, 2020
In its annual report, Tesla said it added $1.5 billion in Bitcoin as part of a larger policy to earn more on its cash that it doesn’t need to keep the company going.
This alternative reserve will also look into gold bullion, gold exchange traded funds (ETFs), and potentially other assets in the future.
The company, which is valued at slightly less than $900 billion, also said that it plans to begin taking Bitcoin as payment “in the near future.”
Today’s move higher appears to be driven in large part by speculative buying. The irony is that speculation could undermine the interests of Tesla and Mastercard in using Bitcoin as a medium of exchange.
One reason we use dollars is that we don’t expect the value of one dollar to rise or fall 14% on any given day.
Why use Bitcoin to buy goods and services when its value fluctuates double-digits on a regular basis?
Institutional Investors See Bitcoin as an Inflation Hedge
BNY Mellon, Mastercard and Tesla are only the latest boldface names backing Bitcoin.
Paul Tudor Jones, one of the nation’s richest hedge fund investors, appeared on CNBC in late 2020 to make his case for the cryptocurrency, citing concerns about inflation and the Federal Reserve.
While inflation remains subdued now, Tudor Jones’s Bitcoin thesis appears to rest on the development of the coronavirus crisis since early 2020.
As Covid-19 spread to Europe and then the United States, starting in late February, governments began imposing lockdowns to limit the spread of the virus. Lockdowns suppressed economic growth, sparking a global recession, and central banks stepped in to support national economies.
In the U.S., the Federal Reserve immediately cut short-term interest rates to near zero and began printing trillions of dollars to buttress the economy.
As the economy began to heal, Fed Chair Jerome Powell announced that the Fed would allow inflation to run a bit higher before the FOMC would contemplate raising interest rates again.
The new strategy crystallized new thinking and new research at the Fed concerning weak inflation.
Enter Paul Tudor Jones and other hedge fund heavies, who began buying up Bitcoin in May in anticipation of rising inflation.
“The reason I recommended Bitcoin is because it was one of the menu of inflation trades, gold, TIPS breakevens, copper, being long yield curve, and I came to the conclusion that Bitcoin was going to be the best inflation trade,” Jones told CNBC last month.
PayPal Makes Bitcoin Easier to Own and Spend
In October 2020, online payments giant PayPal announced it would let customers buy, hold and sell a range of cryptocurrencies, including Bitcoin, as well as allow them to actually make purchases with Bitcoin at more than 26 million businesses.
In August 2020, Fidelity launched a passively managed Bitcoin fund for accredited investors, the Wise Origin Bitcoin Index Fund I. Fidelity, one of the few mainline Wall Street firms to fully embrace Bitcoin, has created a separate unit—Fidelity Digital Assets—to manage this fund and similar vehicles.
These developments confirm a growing trend of regulatory and institutional acceptance of cryptocurrencies. When Fidelity announced its Bitcoin fund, for instance, it also released survey data showing that 36% of institutional investors in the U.S. and Europe already owned digital currencies, and 60% believed digital assets belonged in their portfolios.
Could Bitcoin Become the New Gold?
So where do we go from here? One Citibank analyst says Bitcoin could hit $318,000 by the end of next year, ning its meteoric rise to the 1970s gold market. An ounce of gold was worth about $35 in the beginning of 1970, compared to a little more than $1,900 now. Part of gold’s appeal, as Paul Tudor Jones noted, is its value as an inflation hedge.
But does gold actually behave that way?
The real story is more complicated, according to Campbell Harvey, Duke professor and senior advisor to Research Affiliates. Over a time frame of hundreds of years, gold may retain its value. But over shorter periods of time, it’s highly volatile and very unpredictable.
Despite this, gold certainly fills a role as a security blanket for investors who are anxious about the state of the world. Gold’s most recent hayday, for instance, was between 2011 and 2012 when the U.S.
was stumbling through its post-Great Recession recovery and the Euro Zone was teetering on the brink of currency disaster.
For much of the past eight years, as stocks have zoomed, gold has been a dead weight, though.
It appears, then, that institutional investors are hoping to get on the ground floor of the new gold. Bitcoin’s current rollercoaster ride may track the bullish, risk-on appetites of stock traders, but eventually it might replace gold as a safe haven.
“The Bitcoin network currently stores $350 billion,” McKeon said. “In contrast, several trillion dollars are stored in the form of gold. So, Bitcoin is still comparatively small.
As the narrative around, and acceptance of, Bitcoin as digital gold grows, the network will store substantially more value.
This translates to a higher price for Bitcoin since supply growth is capped at about 2% annually, and supply increases will further decline over time.”
The case, then, is that Bitcoin has much more room to grow than gold and will continue to attract big money in search of high returns in an era of low yields.
The Final Word on Bitcoin: Buyer Beware
Regular investors don’t really have the luxury to stomach wild price volatility and wait out years and years of negative returns on the hope that an esoteric decentralized financial product will conquer the commanding heights of finance and upend gold as the ultimate safe-haven asset. You need a steadier financial plan, a well-diversified portfolio of low-cost index funds that has proven to make retirement possible.
If you want to scratch your Bitcoin itch, make sure you do so with a fraction of your taxable investments, in your brokerage account. The standard allocation recommended for gold has been a maximum of 10% of your total portfolio. If Bitcoin ends up as the new gold, that upper limit would still make a ton of sense.