If you’re the type of person for whom the blockchain feels about as relevant to your life as string theory, Warwick’s formula is quite an oversimplification. To become a citizen of crypto land, you need to covert real money into bitcoin or possibly some Ether (the cryptocurrency of Ethereum, a “smart contract” blockchain that platforms such as Synthetix are built on). You’ll also need some kind of strong security protocol that protects your hoard from shark-like hackers who scour the blockchain looking for weak, vulnerable digital wallets.
Once you’ve got that sorted, you should probably begin boning up on the terminology needed to navigate the choppy terrain. Would you like to stake your stash? Provide liquidity for a fledgling protocol? Arbitrage between oscillating protocols on various exchanges?
Henrik Andersson, chief investment officer at Apollo Capital, a $30 million crypto fund based out of Melbourne, concedes the barriers to the lucrative, soaring world of cryptocurrencies are high. “It’s very hard to use these systems if you’re not in crypto already,” the 43-year-old says. “It’s a bit of a jungle out there.”
During our Zoom call, as Andersson describes the types of wealthy investors who approach his fund, his eyes often slide across to the left, where an active trading screen is reflected in his glasses. It’s from these screens that he consumes the vast tracts of data, news flow and general market chatter that guide his DeFi investment decisions, and that have seen the fund return almost 68 per cent since inception in February 2018 to the end of last year.
“Most family offices are looking for uncorrelated assets with upside potential in their portfolio, or a hedge against the inevitable inflation thanks to the kinds of money printing from central banks,” he says.
Like many in crypto land, his disdain for quantitative easing compounds his commitment to an alternative financial universe where software calls the shots and there are no central bankers pulling and pushing on levers to pump-prime their economies.
“Holding fiat currency will soon be like holding a melting ice cube,” he says. “When you’re protected by software, you don’t have to trust a politician or a bank who will seemingly always print more money.”
A native Swede, Andersson studied physics and applied maths in Stockholm before starting his career at one of Sweden’s largest investment banks. He moved to a quant hedge fund in Singapore, before moving in 2006 to New York, where he spent 10 years on the sell side of an institutional equity sales desk.
“I’d been fascinated by the stock market since I was about 12, when I started investing in stocks,” he says. “And I spent my entire career in traditional finance in equities.”
It was around 2013 when the bitcoin price began popping up more on Andersson’s Bloomberg terminal, ratcheting up from $100 to $1000 in half a year, when he sat down to read the whitepaper written by Satoshi Nakamoto, bitcoin’s enigmatic and anonymous founder. “It was the price that caught my attention but what got me hooked was the technical side,” he says.
This was the era when record label companies and movie studios despaired as their copyright was plundered, their songs and films turned into MP3 and MP4 files and endlessly replicated and downloaded for free on Napster, BitTorrent and The Pirate Bay.
Bitcoin was the first digital asset that could not be duplicated or copied, and there could only ever be 21 million in circulation, a function of the mathematics that secure the blockchain. Those with technical backgrounds and an interest in financial markets began to surmise it was a scarce asset, a store of wealth, akin to gold. What’s more, bitcoin was on the internet.
“When you have scarcity, you have ownership,” Andersson says. “And creating scarcity in digital form, you just couldn’t do it before bitcoin. The computer science solution became very interesting for me.”
In 2017 Andersson moved to Melbourne with his Australian-born wife and two children and set up Apollo Capital. It was a time when crypto was in the doldrums, after the bitcoin price had crashed from $25,700 to $4450 following the speculative initial coin offering (ICO) craze ended (crypto’s version of the dotcom bubble).
Scouring the Australian investor scene, and armed with the networks he built from attending meetups with geeky bitcoin pioneers in New York, he built the fund under a deeply sceptical cloud. Lately, however, he’s found more investors looking for a safe haven from any impending inflation as the US Federal Reserve prints more money during the COVID-19 crisis.
When asked where crypto is heading, Andersson shrugs. “To match the gold market capitalisation, bitcoin needs to be trading at $500,000.”
While price fluctuations in bitcoin make headlines, the mainstreaming of cryptocurrencies marches along at a steady pace. In July, the US Office of the Comptroller of the Currency said national banks could custody crypto assets, and then in September announced banks could officially provide services to stablecoin issuers (cryptos pegged to something in the real world. An example is Facebook’s planned crypto, which is pegged to the US dollar).
Square, the payments company, announced in October last year it would put some $50 million, or 1 per cent of its assets, into bitcoin. PayPal, another payments company, plans to allow its 346 million customers to hold bitcoin and other cryptocurrencies, and to shop with them at the 26 million merchants on its network.
Analysts with JPMorgan, whose CEO Jamie Dimon had famously called bitcoin a “fraud” in 2017, noted last October that the cryptocurrency had “considerable” price upside. “Even a modest crowding out of gold as an alternative currency over the longer term would imply doubling or tripling of the bitcoin price from here,” they wrote.
As 2020 ticked over into 2021, bitcoin’s price had soared to more than $60,000, courtesy of hedge funds clambering to buy an inflation-hedge, or to at least have some exposure to this strange internet gold. In January, Ray Dalio – a giant in the hedge fund industry – said he was going to start putting his investors’ money into crypto. In February, Elon Musk announced Tesla had invested $US1.5 billion into bitcoin and would eventually accept the cryptocurrency as payment for its cars.
And yet, bitcoin still hasn’t shaken off its reputation as the currency of choice for the shadiest parts of the internet.
Stefan Qin is living the crypto cowboy nightmare. Holed up in New York City, the 24-year-old UNSW dropout has pleaded guilty to securities fraud. The US Securities and Exchange Commission found Qin had drained almost all the assets from his $US90 million crypto arbitrage fund and spent them on an “extravagant lifestyle” over a period of three years, paying for food, services, and rent for a penthouse in New York City, while also speculating on ICOs and real estate.
Qin, who founded Virgil Capital at the age of 19, also withdrew $1.7 million in investor funds to pay off Chinese loan sharks. Plus he altered spreadsheets tracking investments at 39 cryptocurrency trading platforms.
I met Stefan Qin on the fourth floor of the Palisade Hotel in Sydney’s The Rocks one evening in October 2017, while reporting on markets for the Financial Review. He had just finished explaining to a small group of Australian, Russian and Chinese crypto investors how his arbitrage strategy worked: price discrepancies between the major cryptocurrency exchanges were yo-yoing during the ICO boom.
The volatility offered a juicy opportunity for his automated trading bot to execute triangular trades whenever the price difference reached more than 6 per cent. As we looked out over the sparkling waters of Walsh Bay, I introduced myself to Qin and asked how much money he could make in a week. As much as I want, he replied.
During the following few years, and despite the doldrums in crypto land after the ICO bubble burst, Qin’s fund’s performance was outstanding. According to shareholder letters he dispatched in September 2019, his Sigma Fund had returned 2811 per cent since inception in July 2016, outstripping bitcoin’s 1500 per cent cumulative returns over the same period.
But when investors began requesting redemptions in July 2020, the SEC found Qin told them their funds would be moved to another fund, though this never happened.
It was then that Qin began asking traders at his funds to help him withdraw money to pay off Chinese loan providers. “They’ve been patient for three months,” Qin told the head trader, according to the SEC filing. “They might do anything to collect on the debt.”
AFR Magazine has spoken with several investors in Qin’s fund, including David Lu, who was completing a commerce-law degree at UNSW when they met. Asked whether he expects to see his money again, Lu says: “Touch wood.”
As bitcoin markets get bigger, he notes, real-world regulators are increasingly peering in. “When the US judicial process is involved it’s a bit scarier. Unlike ASIC, they have unlimited resources, so they can push these cases very far.” Qin’s securities fraud charge carries a maximum term of 20 years in prison. The sentencing is scheduled for May 20, 2021.
As regulators are catching up, and as sophisticated investors are buying in, the geeks who were early into bitcoin are busy building their parallel financial universe. Andersson’s Apollo Capital fund, on top of the 68 per cent gain made in the three years to the end of 2020, is up a further 50 per cent in January alone. “At the moment, we are super focused on DeFi and making new investments,” he says. One of the businesses he’s invested in is Synthetix.
Synthetix’s founder Kain Warwick began his crypto journey in 2014, when banks were point-blank refusing to facilitate fiat currency transactions into bitcoin wallets, pointing to their stringent know-your-customer requirements and bitcoin’s shady reputation.
This was towards the very start of the bitcoin phase in Australia, when the likes of Asher Tan, founder of Australian exchange CoinJar, set up the first bitcoin meetup in Melbourne, and he and fellow exchange founder Adrian Przelozny began lobbying and educating financial institutions and regulators about bitcoin.
Warwick saw bitcoin’s inherent volatility as a problem for the long-term store of wealth and, through his start-up Havven in 2017, raised $38.6 million in an ICO to develop a “stablecoin” that was pegged to the US dollar. That in turn led to Synthetix, which pegs its synthetic assets – gold futures, US dollars – to real-world assets, with large pools of crypto as collateral.
Instead of a centralised board or executive team, Synthetix is governed by multiple decentralised autonomous organisations (DAOS), basically members of the network who decide the direction of the organisation through a voting system. As such, according to a Synthetix spokesman, there isn’t a “domiciled” or centralised body that issues trading derivatives or other assets, meaning it can operate globally without a financial license issued by ASIC.
Here in Australia, it was thanks to Asher Tan’s CoinJar, Adrian Przelozny’s Independent Reserve, and fledgling businesses like Warwick’s that bitcoin slowly emerged as more than just internet money for dark web criminals transacting for drugs and weapons. In time, it would pique the interest of governments, which scrambled to define bitcoin as a taxable commodity or a currency. In 2015 an Australian Senate committee inquiry sparked debate around how best to regulate exchanges like CoinJar.
“Australia has an anti-authoritarian culture already in some ways, and this idea that anyone should be allowed to participate, not just some guy in a corner office, exists in our society,” Warwick says. “And at the time regulators were giving off this sense, that if you were operating with good intentions and were adhering to the spirit of the existing regulatory regime, there would be kind of a hands-off approach, which has been great for innovation.”
Around the world, there are now thousands of organisations just like Synthetix programming existing financial services – borrowing, lending, insurance, margin trading – into code and onto the blockchain. DeFi is where all those crazed crypto-promises are slowly being built and tested, the next evolution of bitcoin’s decentralised journey.
An insurance company without any brokers? Nexus Mutual is on it. A decentralised corporation? There are now hundreds of them. Borrowing and lending platforms? Margin trading? Tick, tick, tick.
Of the super platforms like Synthetix, there’s MakerDAO, a decentralised credit platform; Uniswap, a decentralised Ethereum exchange; and Badger DAO which builds infrastructure assets that other DeFi platforms can use. Combined, the top 10 DeFi projects have locked up more than $US21 billion worth of cryptocurrency.
Institutional banks, on the other hand, are wont to keep an eye on DeFi and stay across its developments. Richard Galvin, a former JPMorgan banker who has since co-founded a crypto fund manager, recently told the Financial Review he was amazed at the number of Australian entrepreneurs carving out a presence in DeFi, adding that it could make entire parts of the financing value chain redundant.
At its heart, the crypto world is about stripping out the swollen central parties, doing to finance what the internet itself did for information – making it faster, cheaper and easier to access. At least, that’s the goal.
And like the foundation ideals of the internet, this decentralised orthodoxy reflects a world where trust between participants may be low, but trust in centralised institutions is even lower.
Selling a complicated story
Crypto news moves at warp speed. Every day new protocols are announced, new companies formed, new tokens issued, new markets emerging.
Samantha Yap reflects the maturing of a previously siloed industry, now aware its operations are of interest to more than just engineers testing and trying new technologies. Her fast-growing public relations firm, YAP Global, has the Herculean task of translating those new technologies to the media.
“It’s insane, every day we’re jumping from one super-complex concept to the next,” she says of her team that has grown from three to nine people in the past 12 months, scattered across Melbourne, London, Washington DC, Berlin and Paris.
From liquidity mining start-ups, to Ethereum token browsers, to bitcoin mining operations, the proliferation of legitimate, well-funded crypto projects means Yap and her team are working hard to translate their stories into English.
Formerly a journalist at the ABC, SBS and Channel NewsAsia, Yap moved from Melbourne to London three years ago and accidentally started her crypto PR firm after casting around for freelance work.
Within weeks of taking on one crypto client, she found more and more of them knocking on her door, eagerly hoping for some public relations guidance in getting customers and investors to understand their technologies.
“People make serious decisions off what they read in the crypto press, and because a lot of the journalists are young and new, both to the profession and to the technologies, we spend a huge amount of time teaching them why accuracy is really important,” she says.
While the mainstream press is trying to get a handle on the nuances of the industry, crypto companies are more interested in being featured in publications like The Block, CoinDesk, CoinTelegraph and Decrypt Media, which attract millions of eyeballs daily.
“It’s nice if we can get coverage in the Financial Times or CNBC or Bloomberg or something,” says Yap, who regularly logs on at 7am from London to field calls from reporters and her team all around the world.
“But our clients really want to be featured in the crypto press, they don’t mind if the mainstream media doesn’t get what they’re doing.”