On June 25, 2017, news raced around social media that Ethereum creator Vitalik Buterin had died in a car crash. Speculators panicked. Prices fell 20 percent, lopping $4 billion off Ethereum’s value in hours.
The next day, a tweet from Vitalik himself went viral. The tweet showed a photo of him, very much alive, holding up a piece of paper with the number of a newly mined block in the Ethereum blockchain and a figure, known as a hash, that had just unlocked the block. Vitalik’s tweet was the blockchain equivalent of a hostage holding up a daily newspaper as proof that he was alive. The picture proved Vitalik was not dead. The price of Ethereum bounced back up.
The car wreck story was a hoax perpetrated by trolls on the website 4chan, either to manipulate the market or simply to pull off a ghoulish prank. Either way, the stunt demonstrated how critical Vitalik—the strange, spectral genius who had created Ethereum—was to the currency’s success and the success of crypto in general. It also underscored how Ethereum had taken center stage, over bitcoin, in the 2017 crypto boom.
Early in the year, the price of Ethereum was $13. By summer, its value had increased thirtyfold and was nudging $400. And the big run-up was just beginning. Meanwhile, thanks in large part to Ethereum, dozens and then hundreds of other cryptocurrencies began to take off.
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Ethereum, you may recall, was Vitalik’s smart contract machine that had emerged as bitcoin’s main rival in the blockchain world. But it also served as the most popular platform for building other cryptocurrency projects. Suppose someone wanted to offer file storage or sports betting on a blockchain? One option would be to build a blockchain specifically for that purpose. A much easier option, though, would be to use smart contracts to build that service on top of Ethereum. In the emerging crypto industry, Ethereum was like a new type of internet, and these new third-party projects—like file sharing or sports betting—were the websites that ran on top of it.
Ethereum is different than the internet in one crucial way, though. The services that sit on top of it require a special digital token to operate. Using the internet analogy, it’s as if each site on the web required visitors to acquire and spend a unique currency in order to access the site.
Another way to think of Ethereum is as an amusement park. Ethereum owns the park and lets others build and manage the rides. The apps for sports betting and file storage and so on are the rides. If you want to get on the betting roller coaster, you first have to buy and then cash in a roller coaster token. The file storage carousel likewise requires a file storage token. Ethereum helps the ride owners by minting their tokens. In return, the game owners pay Ethereum a small commission every time someone cashes in a token to get on a ride. Customers who come to the park can go on any ride they want, and go on multiple rides, but there is no all-access wristband: they must pay for each ride with that ride’s special token, acquired at the Ethereum counter.
A quirk of this amusement park, however, is that most of the rides haven’t been built yet, but customers still buy tokens for future rides. Using Ethereum, buyers acquired tokens in the hope that those tokens would one day be used for a blockchain service. In reality, the ride they buy into may or may not get built. But while they wait, they can always try and flip their tokens to someone else who wanted to bet on a ride getting built. And that’s what most people did. Speculation pure and simple.
Every day in 2017, someone on the internet announced a new token project. And every day, people raced to buy the tokens. The projects spanned the lurid, including SpankChain, which promised a way to pay porn actors directly, to the far-fetched such as ASTRCoin, whose tokens purportedly served as claims on various asteroids. The phenomenon gained the name “the ICO.” Instead of an IPO, or initial public offering, this was an “initial coin offering.” The ICO could last a few days or a few weeks, and it involved sending funds—typically in Ethereum or bitcoin—to a project’s online wallet and waiting to receive tokens in exchange.
Never in history has there been an easier way to raise more money from more people with such little effort. The number and size of the ICOs defied logic. Staggering sums changed hands every day. A company called Filecoin, which promised to build a blockchain storage network, raised $205 million. An outfit called Bancor, which touted an online supercurrency, raised $153 million worth of Ethereum in just three hours, while one called Brave—a new web browser—raised $35 million in thirty seconds. The flow of cash reached a crescendo with a service called EOS. Billing itself as a rival to Ethereum itself, EOS raised a staggering $4.2 billion with the marketing help of Brock Pierce, a former child star in Disney’s Mighty Ducks movies, who had reinvented himself as a crypto gadfly.
Until 2017, the only companies that could raise that kind of capital were white-hot startups like Uber or Airbnb—“unicorns” in Silicon Valley slang. Sure, many claimed the likes of Uber were overvalued, but no one could deny what these startups did have: a proven business idea, millions of customers, and billions in revenue. Many of the ICO companies, by contrast, had none of these things. Millions were invested in small teams of developers with a white paper outlining their idea and nothing else. For their supporters, that was enough. After all, bitcoin and Ethereum had been born from nine-page white papers, and those projects were now worth billions. Why wouldn’t these ICO projects produce the same result?
More than a few financial watchers who’d seen bubbles before pointed out that it was insane to throw hundreds of millions of dollars at these pop-up blockchain ventures. The Financial Times’ influential Alphaville column spewed snark at ICOs and “crypto bros,” warning it would all end in tears. But such doomsday prophecies from the financial establishment made little impression inside the bubble of Silicon Valley, where the tech elite were buzzing about an essay published by one of their own.
Titled “Thoughts on Tokens,” the essay explained how ICO-style fundraising would help democratize finance and throw open the door to investments from around the globe: no longer would startups have to depend on a clique of venture capitalists to get off the ground. The high priests of Silicon Valley would soon be competing with a global base of token buyers to invest in new companies. The essay’s author was Balaji Srinivasan—the same Balaji Srinivasan who had turned up at Coinbase three years before looking like a hobo/drug dealer with Ivy League ideas, and who was now a partner at the VC firm Andreessen Horowitz. “Thoughts on Tokens” zipped from inbox to inbox among the clubby world of Valley investors, triggering a rush of FOMO. Before long, the venture capital world began pouring money into an emerging crypto industry already awash in cash.
For the VCs, bets on crypto were a hedge of sorts. If Balaji was right, the forthcoming token economy was poised to upend the Valley’s longtime role as kingmaker of the startup scene. Better then to try and get an inside track on the emerging industry that could make Sand Hill Road—the famous strip of Palo Alto and Menlo Park that houses the most prestigious venture capital offices—irrelevant.
Americans were glomming onto the growing crypto mania but it was nothing compared to what was happening across the Pacific. In South Korea, investing in crypto became as common as buying mutual funds, and by late 2017, one-third of the country’s workers owned some sort of digital currency. A great number came from the country’s lower-income strata—they called themselves “dirt spoons”—and saw owning crypto as a once-in-a-lifetime shot at subverting what they saw as a rigged class system. Korean television fanned the flames, producing spectacles like a game show where contestants competed to launch a new coin. In Japan, meanwhile, it was not just the young rushing to buy cryptocurrency. On the streets of Tokyo, retail stores sprang up to offer an easy way for seniors and others uneasy with technology to buy crypto. The stores removed the mystery of keys and wallets and blockchains, and instead allowed customers to walk up to a counter and purchase digital coins in the same way they would a bowl of noodles—a kind of brick-and-mortar version of Coinbase’s user-friendly strategy.
By mid-2017, crypto stalwarts like bitcoin, Ethereum, and Litecoin were joined by a galaxy of new tokens that had flooded into the market through ICOs, with names like Qash or QuarkChain. No matter how obscure, nearly all promised they would be the next bitcoin—or at least something like it. In the case of Dentacoin, whose ICO raised $1.1 million, the project promised to be the crypto of choice for dentists. And in a market where crypto coins of all stripes kept soaring higher and higher, why not take a flyer on a brand-new ICO before the rest of the market bid up the price? Each day, it seemed, another obscure coin enjoyed a 100 percent pop, which in turn inspired yet another ICO.
The crypto media called this flood of new currencies “altcoins”—as in, alternatives to bitcoin. Longtime bitcoin believers had their own name for the tokens: “shitcoins.” Shitcoin critics claimed the new tokens were spun up on shaky technology and then flogged in fly-by-night marketing schemes.
It was during this craze, at an exclusive investor conference in New York, that JPMorgan Chase CEO Jamie Dimon, likely horrified by the rampant speculation, tore into cryptocurrency, including bitcoin. He ranted that he would fire any employee trading bitcoin on the grounds of stupidity. Cryptocurrency wouldn’t end well, he warned. “It’s a fraud,” he added for good measure. “Worse than tulip bulbs.”
The market cared about neither Dimon’s words nor the shitcoin critics. Prices kept climbing, and the ICOs kept multiplying. On Capitol Hill, Federal Reserve Chairman Janet Yellen testified before Congress—only to be photobombed by a prankster holding up a yellow legal pad with “Buy Bitcoin” scrawled across it. The image of Yellen looking stern as “Buy Bitcoin” floated like a thought bubble beside her head became another meme for the crypto community to flog. For his troubles, the prankster—known as bitcoin Sign Guy—earned six bitcoin in donations, or about $25,000.
By June, the price of bitcoin had tripled from the start of the year to reach an all-time high of $3,000, while Ethereum was up thirtyfold to $380. Many longtime crypto holders, who were now worth millions or tens of millions of dollars, cashed in portions of their hoard to invest in the new digital currencies on the market. Meanwhile, those who became staggeringly rich from an ICO often plowed their windfall into other ICOs, pumping still more money into the crypto craze.
A rising tide was lifting all boats, including Coinbase, which was signing up millions of new customers—whether it had the capacity to serve them or not.
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In that June of 2016, life was good for Coinbase employees. The San Francisco weather was fine, and the ballooning value of their crypto and stock options felt finer still. Then on the morning of June 22, the bottom fell out. Employees stared at their screens in disbelief, then panic, then despair. A whale, bloated with the proceeds from a recent ICO, abruptly dumped millions of dollars’ worth of Ethereum onto the company’s GDAX exchange platform, causing the price to tumble. That caused others to sell, lowering the prices again and so on. Ethereum was in freefall. Its price on GDAX dropped from $320 to below $300 and then fell off a cliff, hurtling down to $13 and, for a brief moment, crashing to 10 cents.
It was a textbook example of a flash crash. A similar event had happened in 2010 on traditional exchanges when a London trader created fake trades to suggest an impending sell-off, triggering thirty minutes of chaos on US stock markets. The trader’s antics fooled others in the market—most notably those who had put automatic “sell” orders in place in the event stocks fell below a certain price. These machine-triggered sell-offs led other machines to join the stampede to sell, regardless of the price and whether the sale was rational. Venerable companies like Procter & Gamble and Accenture briefly traded for mere pennies. The crash came to a halt when stock exchanges put a stop to all trading and then canceled transactions that had transpired during the machine-driven free-for-all.
The 2010 flash crash led major exchanges to adopt a system called circuit breakers, which automatically pause trading in the case of unusual, logic-defying fluctuations. Seven years later, no such system existed at Coinbase. Ironically, the company had carried out a tabletop simulation of a flash crash earlier that month, but no one had thought to install circuit breakers.
Adam White, who oversaw GDAX during the flash crash debacle, puts the blame on himself but also on amateurs in over their heads. These were so-called retail traders, who used GDAX’s powerful platform to trade for their own accounts, as opposed to professional traders who traded on behalf of institutions for a living. “These retail guys can’t protect themselves,” White recalls. “It’s like you give them a machine gun and find out they can’t handle it.”
It wasn’t just retail investors who got burned with automated sell orders. So did many Coinbase employees who had set their GDAX accounts to sell Ethereum if it dipped below a certain price—and then watched in dismay as their automated sell order liquidated their position for a few dollars. Morale at the office plummeted in response to customer anger over the crash and to the financial wipeout that befell many on staff.
Two days later, Brian announced Coinbase would honor the trades that took place during the flash crash, while also reimbursing anyone who lost money from the haywire sell-offs—something of a lose-lose for Coinbase. This preserved goodwill among Coinbase customers on both sides of the ledger (and staff who thought they had lost it all). But the gesture cost Coinbase $20 million and later triggered an investigation from the CFTC.
The flash crash proved to be an expensive education for Coinbase, though the company was hardly alone in learning painful lessons during these months of crypto mania. Ordinary people were getting burned too, and unlike Coinbase’s losses from the flash crash, their misfortune wasn’t the result of honest mistakes. The boom had given birth to crypto predators who unleashed a series of brazen scams to part the greedy and the gullible from their money.
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“Bitcoooonnnnnect!” the voice boomed from the stage. “Hey, hey, hey! Whassup? Bitcooooonnnnnect!”
The speaker, a trim, bald Latino man named Carlos Matos, beamed broadly. On the stage behind him, grinning hucksters clapped as Matos prowled back and forth, fronting a blue background and a large “Bitconnect” sign. Then he howled again.
“Bitcooooonnnnnect!” Matos bellowed to more cheers. Then the pitch: he recounted how he had used Bitconnect to turn $40,000 into $120,000 and would soon turn that into much, much more.
Matos had made his investment through a website that encouraged customers to trade in bitcoin and receive a new cryptocurrency—called Bitconnect—which they could lend out in order to receive returns as high as 40 percent a month. Customers could obtain even higher returns if they signed up other clients for Bitconnect. Crypto details aside, Bitconnect was an old-fashioned Ponzi scheme.
It worked for a while. Bitconnect tokens reached an all-time high in late 2017 of $450, but the value collapsed when the company shut down months later amid an FBI investigation. Today, its millions of tokens are worth nothing. The thousands of people who bought Bitconnect tokens, which briefly sat as the twentieth-most-popular cryptocurrency, lost every dollar. The only remaining value is Matos’s “Bitcooooonnnnnect!” yodel, which became an internet meme and fodder for Last Week Tonight, John Oliver’s late-night comedy takedown of current events.
Bitconnect investors weren’t the only victims of crypto swindles. Others got fleeced by ICO exit scams, whose perpetrators did not even put up the pretext of running a company. Instead, they marketed the promise of a new cryptocurrency but stayed around only long enough to collect the ICO proceeds. After that, they vanished into the mists of the internet.
The scams were just so easy. All it took to spin up an ICO was a website and a white paper. In the most egregious examples, scammers would simply copy and paste technical jargon from other white papers and slap on a new title. Some websites dressed up the hustle with an ICO countdown clock, a marketing slogan, and biographies of the ICO team. The team profile was often fictitious, of course. More than a few ICO sites listed Ethereum founder Vitalik Buterin—who had nothing to do with the projects—as an executive or adviser.
Scammers with hacking skills found an even quicker way to profit from ICOs: hijack them. They’d quietly take control of an ICO’s website and then, on the day when the fundraising commenced, change the payment address of the wallet designated to collect the bitcoin and Ethereum. The real ICO team could only watch in horror as the investors’ funds got diverted into the hands of the hackers.
Coinbase, too, had to contend with hackers draining customer accounts. While the company had hardened its network against intruders, it could do little about customers who gave up control of their account passwords. Typically, this occurred as a result of phishing attacks on a client’s Gmail account—similar to the one Russia directed at the Democratic political operative John Podesta prior to the 2016 election. Once a Coinbase customer’s Gmail account was compromised, the hackers could ask to reset their password and steal their crypto.
Like banks and other sites, Coinbase required two-factor authentication—customers had to enter a code delivered to their phone before changing a password. Hackers found a way to get around this obstacle, however, by bribing employees at cell phone companies like AT&T. In exchange for a few dollars, a corrupt (or sometimes naive) employee would agree to change the SIM card associated with a customer’s account. This would allow the hacker to intercept the authentication code that Coinbase sent out and burgle the customer’s account. The scheme sounds elaborate, but it became so common in the crypto world it acquired a name—SIM-swapping—and would result in class action lawsuits against the phone carriers.
Other crooks targeted social media—a critical part of crypto culture—which became rife with criminal schemes. On Twitter, scammers created profiles with the faces of Brian and Vitalik, and announced they were giving away bitcoin and Ethereum in special promotions. To receive the windfall, the targeted Twitter user was told to send a small amount of cryptocurrency first—funds that would, of course, be promptly pocketed by the scammer. Twitter would eventually shut down the impersonator accounts, and the scammers would simply open new ones. The problem became so pervasive that Vitalik changed his Twitter name to “Vitalik Not Giving Away Ethereum Buterin.”
On Telegram, the messaging app hugely popular with the crypto community, crooks organized conspiracies to manipulate the market. One Telegram group known as “the Big Pump” would pick a little-known altcoin and agree to buy it en masse. The influx of buyer interest, they hoped, would cause a stir in the market and lead naive outsiders to run in and buy the coin too, causing its value to soar. The Telegram insiders would then sell off their positions, completing the crypto version of a classic investment scam, the pump and dump. But those who joined the groups in hopes of a quick payout weren’t actually in on the scheme. They were its victims. The organizers of groups like the Big Pump had already bought positions in the coin to be pumped, leaving the would-be conspirators to serve as patsies who would buy the coin at an inflated price. The crypto industry was so awash with dumb money that scammers were preying on scammers.
Crypto mania was out of control. The only thing that could have inflated it further was celebrity endorsements. And those came soon enough. On July 27, the boxer Floyd “Money” Mayweather posted an Instagram photo of himself on an airplane with a suitcase brimming with cash. “I’m gonna make a $hit t$on of money on August 2nd on the Stox.com ICO,” he captioned it.
Few in the world of sports or even in crypto circles had heard of Stox, which purported to offer a blockchain-based way to make predictions on horse racing and other events. The company’s obscure origins and half-baked business plan didn’t deter the celebrity boxer who, in a follow-up Instagram post, told the world, “You can call me Floyd Crypto Mayweather from now on.”
Soon after, the heiress Paris Hilton tweeted about her eager anticipation to participate in the launch of a token called Lydian that, in a perfect storm of buzzwords, promised to “deliver artificial intelligence marketing on a blockchain.”
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In Washington, DC, the Securities and Exchange Commission watched all the events of 2017 unfold with surprise and alarm. The blatant scams—and there were plenty of them—were bad, but so was the very premise of Initial Coin Offerings. After all, US law makes it illegal to sell securities to ordinary people without registering with the SEC—a process that’s supposed to make companies follow rules related to accounting and transparency. Yet these ICOs appeared to be doing just that: selling securities. The promoters might call them coins and use a lot of blockchain lingo, but what they were selling looked for all the world like shares of stock or other securities.
Brian may have wanted to reimagine the SEC but what was happening with ICOs in some ways proved the value of what the SEC did on a day-to-day basis. Without its oversight, you get Bitconnect. You get pump-and-dumps. You get bribery, phishing, and SIM-swapping.
And the scale of it was staggering.
The trade publication CoinDesk reported that ICOs had pulled in $729 million in token sales in the second quarter of 2017 alone. That was more than triple the amount venture capitalists—the traditional financial engine of the startup word—had invested during the same period. And the ICO craze showed no sign of slowing.
In late July, the SEC broke its silence and issued a report concerning the DAO project—the autonomous investment service that had launched in 2016 and famously got hacked, triggering a rollback of the Ethereum blockchain. The hack had roiled the Ethereum world, but for the SEC, what mattered was that the DAO had begun as an ICO, issuing tokens to investors. And those tokens, said the SEC, amounted to a security sale.
The DAO report made clear that the SEC had at last arrived on the crypto scene. But it also amounted to no more than a warning shot. The SEC acknowledged that it had issued no rules about cryptocurrencies, so the organizers of the DAO had not technically broken the law. Thus, the agency would use the DAO episode to put other would-be token sellers on notice: The SEC would treat future ICOs as illegal unless the organizers first registered the coins with the agency.
This should have cooled the crypto fever sweeping the United States. It did not. A few months after the news came out, bitcoin hit another all-time high, near $5,000. Ethereum also soared, and so did the hundreds of altcoins riding in their wake. Brazen crypto promoters went forward with initial coin offerings all the same. The SEC is regarded as the powerful policeman of the financial markets. But during the crypto craze of 2017, the agency was caught off guard by the scale of the mania and came across as a mall cop pleading with a mob of rioting teens to settle down.
By the second half of 2017, crypto fever had burst into the mainstream. The business network CNBC started producing breathless reports on a daily basis about how to buy bitcoin. Fly-by-night PR agencies popped up, offering to promote new token sales via “ICO in a box” packages. And cunning lawyers conjured up a legal arrangement called a SAFT—short for Simple Agreement for Future Tokens—that they promised could circumvent the SEC’s recent declaration that ICOs amounted to security sales.
Meanwhile, the sight of Lamborghinis became more common in crypto hubs like New York and San Francisco. The luxury car—already a brazen declaration of wealth—had become a talisman in the crypto community that revered the phrase “When Lambo? When Lambo?” as shorthand for “When are my tokens going through the roof?” Thanks to crypto prices that had shot up tenfold or more, the answer to “When Lambo?” became “Now Lambo” for dozens of young men who became stupid rich. Lamborghini posted more than a 10 percent year-over-year increase in sales.
A final dose of fuel for the crypto craze came with the launch of a spin-off from Bitcoin called Bitcoin Cash. The arrival of Bitcoin Cash came as unfinished business stemming from the long-running civil war over bitcoin block size that began back in 2015. A faction of Chinese miners, unhappy with bitcoin’s ongoing congestion problem, had pushed through a plan to launch a new version of the currency with bigger blocks.
The launch of Bitcoin Cash meant engineering a hard fork—a radical software update like the one Ethereum had undergone a year before—that would lead to the creation of two rival blockchains. Though the fork was unpopular with the majority of longtime bitcoin believers, the big-block dissidents had enough influence to direct a critical mass of miners to work on their rival currency.
The upshot was that when Bitcoin Cash arrived on the scene, it sprang from nowhere to become the fourth-most-valuable cryptocurrency, worth billions. It also meant that anyone who held bitcoin prior to the split received an equal amount of the new currency as a pure windfall. It was like handing out a large cash dividend to stock owners in the midst of an improbable bull run. Many who received Bitcoin Cash sold it and plowed the proceeds right back into other parts of the overheated market.
Crypto prices, already tethered to little in the way of real-world value, kept climbing. And investors kept buying. The crypto spree of 2017 made the stock buying of the 1990s dot-com boom—famously described by then Federal Reserve Chair Alan Greenspan as “irrational exuberance”—look relatively sane.
It fell to Olaf, who was riding high at his crypto hedge fund since leaving Coinbase, to put an exclamation point on the era. He graced the cover of Forbes magazine, his shaggy blond mane set against a suit coat. In the photo, tossing coins casually, he fixes his elfish stare on the camera. Underneath, big block letters pronounce: “The Craziest Bubble Ever.”