“The telephone blasted Peter Fallow awake inside an egg with the shell peeled away and only the membranous sac holding it intact. Ah! The membranous sac was his head, and the right side of his head was on the pillow, and the yolk was as heavy as mercury, and it rolled like mercury, and it was pressing down on his right temple and his right eye and his right ear. If he tried to get up to answer the telephone, the yolk, the mercury, the poisoned mass, would shift and roll and rupture the sac, and his brains would fall out.”
—Tom Wolfe, The Bonfire of the Vanities
Wolfe’s account has been cited as the greatest hangover in fiction. It’s also a good analogy for the cryptocurrency industry at the start of 2018. The market was in free fall as bitcoin lost half its value, sinking below $10,000 by February, and the state of altcoins was even worse. But for a few months, big investors could pretend the bubble had not popped—they could pray, like Wolfe’s hangover subject, that there was no rupture and that all the money would not leak away.
It was harder for small-time investors to nurture such illusions. Most were people who came to crypto late in the game—buying bitcoin on a credit card for $15,000 or $18,000 or plowing savings into a shitcoin ICO. They could only watch in despair as prices kept plunging. By April, bitcoin fell below $7,000 and kept falling. Many other digital currencies, backed only by a white paper and lofty promises, were down 90 percent or more and would never recover. Buyers of exotic tokens like Emercoin or XEM suffered the same fate as those who bought Dutch tulip futures in the seventeenth century or stock in the South Sea Company in the eighteenth. Like these unlucky Europeans of yore, the crypto buyers were victims of a modern-day speculative bubble, without even the flowers to show for it. They had traded cash for digital dust.
In 2017, the media offered numerous accounts of ordinary individuals who had ridden the crypto wave to windfalls. Now, the stories took a sadder turn. The New York Times told of the hard lessons learned by an Englishman who had thrown his savings of $23,000 into altcoins and now held only $4,000. On Reddit, the stories were darker. One user told a discussion board how his wife had left him after he dumped all of their money into Tron, a once-hyped altcoin that hit a high of 23 cents but now trades for a penny. Other Reddit readers consoled each other with assurances that the market would bounce back or, in some cases, shared the numbers of suicide prevention hotlines. In Asia, which had been ground zero for crypto mania, the misery was particularly widespread. In one widely shared news story, a Korean mother in the city of Busan recounted how her twenty-year-old son took his life after months of trading cryptocurrencies.
Even as amateur and small-time crypto buyers reeled, others greeted 2018 as if the 2017 party remained in full swing. The mercurial investor Peter Thiel revealed his Founder’s Fund had taken a $20 million position in bitcoin. Venture capitalists disclosed deals they had hatched at the height of the mania, including a $75 million investment by billionaire Tim Draper’s fund into Ledger, a company that makes crypto storage devices. ICOs had not gone completely out of style—the messaging app Telegram declared it would raise $500 million by selling its own tokens. And in a Hail Mary gambit, the CEO of Kodak—the once-proud camera maker from upstate New York—announced it would back KodakCoin, a half-baked scheme to manage photographs on the blockchain.
The cultural excesses of crypto mania would linger well after the bubble had popped. At Consensus, the crypto industry’s annual trade show, Lamborghini owners parked conspicuously on Manhattan’s Sixth Avenue to kick off the event. Inside, fly-by-night companies crowded airless hallways in the hopes of finding the dumb money that had sloshed around so freely just months before. Meanwhile, sixteen hundred miles away, a gaggle of wealthy twenty-something men had descended upon Puerto Rico. Their arrival came as residents of the island struggled to rebuild from the devastation wreaked by Hurricane Maria, but the young millionaires—some of them were billionaires—had another priority: creating “Puertopia.” This was to be a new type of city where people paid only with cryptocurrency and laws were written on a blockchain. For the new arrivals, Puertopia invoked a paradise. For everyone else, it meant “crypto bros looking for a tax haven.” The plan would unravel less than two years later when the island’s corrupt governor, a supporter of the scheme, resigned in disgrace.
Even as its economic foundation crumbled in early 2018, crypto continued to garner attention in the media and popular culture. This included a profile of Vitalik Buterin in “Lunch with the FT”—the Financial Times column where typical subjects included the likes of Jeff Bezos, Angela Merkel, and Angelina Jolie. In the profile, the Ethereum founder recounts a recent tête-à-tête he had with Russian President Vladimir Putin about crypto and laments the greed that engulfed many ICOs. “There’s projects that never had a soul, that are just like, ‘ra-ra, price go up. Lambo, vrromm, buybuybuy now’!” exclaimed Buterin, whose eccentricity had only grown with his Ethereum fame.
By the spring of 2018, Hollywood scriptwriters had glommed onto the fading days of crypto mania as well. In the show Billions, the main character Bobby Axelrod, who is reportedly based on real-life hedge fund billionaire Steve Cohen, turns to cryptocurrency to thwart SEC trading restrictions. “One million dollars straight in crypto, in chilly storage,” Bobby says, proffering a USB storage device to a minion.
A few days later, HBO’s tech parody, Silicon Valley, would likewise air an episode that uses cryptocurrency as a central plot point. The episode depicts a main character, Bertram Gilfoyle, plunging forward with a plan to mine and distribute “Pied Piper Coins”—tokens named for his company—through an ICO. Pied Piper Coin would earn a place in crypto lore, but it would not be the most famous fictional coin to launch in 2018. Days after the Pied Piper episode, the crypto world buzzed with news of another ICO called “HoweyCoin.” The coin’s website purported to offer a new type of crypto that could be used for travel or bought and sold as an investment. And in true ICO fashion, the HoweyCoin website included an offer for investors to receive discounted coins if they purchased early.
HoweyCoin, however, turned out to be a clever prank played by the Securities and Exchange Commission to call attention to the perils of ICOs. The name “Howey” was a tongue-in-cheek reference to a Supreme Court case about the sale of securities, and anyone gullible enough to try and purchase HoweyCoins would be redirected to an SEC page that warned about sketchy investments.
It’s not every day that a federal regulator trolls an entire industry, so the HoweyCoin episode earned the SEC plenty of publicity. The fake Howey site even included an endorsement from a famous boxer—a not-so-subtle riff on Floyd “Crypto” Mayweather’s vow the previous year to “make a shit-ton of money” on an ICO.
The SEC, it turned out, had a sense of humor, but that didn’t mean there was anything funny about the wave of enforcement the agency was unleashing on the crypto industry. Like a slumbering grizzly bear poked again and again, the SEC was at last awake and ready to mete out punishments.
In January, SEC Chairman Jay Clayton sent chills down the spines of many in the crypto industry with a speech to an annual gathering of securities lawyers. The chairman called the behavior of certain attorneys involved in ICOs “disturbing,” and scolded them for enabling the hucksters. “There are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an ‘ICO,’ which sounds pretty close to an ‘IPO.’ On the other hand, those lawyers claim the products are not securities, and the promoters proceed without compliance with the securities laws,” scolded Clayton.
Translation: You guys are supposed to advise your clients not to sell this crap—not help them unload it.
The SEC had tried to telegraph this message in July 2017 with its warning that the ICO project known as the DAO had dealt in unlicensed securities. But few in the crypto world knew or cared about the SEC’s salvo. Not long after the July warning, a clever lawyer named Marco Santori had unveiled a document called the SAFT (short for Simple Agreement for Future Tokens). The SAFT was a riff on a familiar startup investment contract known as SAFE (Simple Agreement for Future Equity)—and this SAFT version promised a safe and legal path to holding an ICO. Thanks to the SAFT, it looked like the ICO party could go on.
Santori’s aggressive approach to crypto lawyering had already earned him a plum position at Cooley, a prominent Silicon Valley law firm that has long come up with creative ways to accommodate the tech industry. In the dot-com boom, for instance, Cooley became one of the first firms to accept equity from startups instead of cash retainers. It’s no surprise, then, that Santori and his magical SAFT agreement appeared to be a perfect fit for the firm—until the SEC Chairman’s fateful speech about lawyers abetting the sale of unlicensed securities. Shortly after the speech, Santori’s short stint at Cooley came to an abrupt end.
The reputation of ICOs, meanwhile, dimmed further. At the Wall Street Journal, investigative reporters had pored over the documents for more than fourteen hundred ICOs and uncovered some grim findings: 271 of them had red flags, such as plagiarized filings or fake executive profiles that showed pictures cribbed from stock photo sites. Plenty of people had warned that the ICO economy was rife with scams, but now there was a growing pile of evidence.
The Wall Street Journal report appeared as San Franciscans and New Yorkers alike basked in the glorious days of late spring. But in crypto circles, they were calling this period of time “crypto winter.” The phrase sprang from the lips of depressed investors and ricocheted around social media. As crypto prices continued to slide ever downward, it became clear the chill of crypto winter would not yield to a spring for a long time to come.
• • •
A burst of investment in crypto in early 2018, such as Peter Thiel’s $20 million bet, convinced some that the bubble hadn’t burst, but by May it became clear that the good times were over. Retail investors who had made smaller bets on crypto felt the pain first; the big players came next. Masayoshi Son, the founder of Japanese conglomerate SoftBank, had also bought at the top of the bitcoin market only to take a drubbing to the tune of $130 million when he sold off his position months later. Goldman Sachs, the investment bank whose aversion to tech had led Fred Ehrsam to quit in frustration, had finally, it appeared, come around to bitcoin. After a series of press leaks teasing the news, Goldman revealed that it was creating a desk to trade cryptocurrency and, as if to underscore the edginess of the gambit, appointed a smirking thirty-eight-year-old with a man-bun to head the desk. The gambit, however, was short-lived. The bank quietly pulled the plug months later.
Crypto’s moment in the mainstream had passed. Whatever toes had been dipped in the pool were withdrawn. Once again, the biggest names of the financial establishment wanted no part of it. As if to underscore the point, Warren Buffett explained to investors in May that bitcoin was “probably rat poison squared,” while his longtime consigliere, Charlie Munger, likened cryptocurrency trading to “dementia.” (Buffett’s opinion was no doubt reinforced two years later when a cryptocurrency CEO won an auction to attend the Oracle of Omaha’s annual charity lunch, but then canceled amid reports he was being investigated by the Chinese government.)
The fallout from crypto winter spread to unlikely places. On the sweeping plains of Rockdale, Texas, town leaders had extended their finest southern hospitality to woo the crypto-mining giant Bitmain to set up shop. The arrival of Bitmain brought the promise of hundreds of well-paying jobs to a place that had been hard hit by the closing of an Alcoa coal plant. To clinch the deal, Rockdale’s political leaders ginned up a ten-year tax abatement plan for the firm and feted Bitmain executives at banquets with beer and Texas barbecue.
“We’ll feed and water you,” drawled the county judge to their would-be crypto saviors. But the Texans’ high hopes came crashing down as crypto prices kept falling, and Bitmain concluded its mining venture would not pan out.
As 2018 dragged to a close, the smart-money set began to get wiped out too. Hedge funds, which months earlier had splashed onto the financial scene, began to close their doors. By year’s end, more than three dozen crypto funds would shut for good, while one of the most prominent funds—billionaire Mike Novogratz’s Galaxy Digital—would post an eye-popping loss of $272 million for the year. Even Olaf, who enjoyed prophet status in many corners of the crypto world, couldn’t escape the mounting malaise. An unflattering profile appeared in the Wall Street Journal, portraying Olaf as a dilettante weirdo and his Polychain Capital fund as floundering in losses and legal trouble. The profile showed Olaf looking defiant in front of a bookshelf that displayed two copies of Infinite Jest.
• • •
On Market Street, Brian and Coinbase also endured crypto winter. A total collapse in prices—bitcoin would tumble a full 85 percent to just over $3,000 by December of 2018—delivered a gut-punch to the company’s income. Despite its long-running quest to find new revenue streams, Coinbase still lived very much on trading commissions, and a 3 percent cut on $3,000 obviously didn’t compare to the 3 percent it took on $20,000. And they were taking fewer commissions: client activity had fallen 80 percent since the go-go days of the previous December.
Coinbase’s problems beyond the slump were mounting, too. The company’s run-and-gun, just-hold-on approach during the bubble had produced a fine legal mess. Bitcoin Cash customers were suing over the December debacle. The IRS was still rooting around in Coinbase’s client files. And to top it off, angry customers had filed over one hundred complaints with the SEC accusing the company of mishandling their money. Coinbase was in constant contact with its white-shoe law firm Davis Polk, where partners bill $2,000 an hour. The cost of pissing off clients and the government was becoming very, very expensive.
Despite all this, Coinbase had reason to be optimistic. The company’s finances were in good shape thanks to a series E funding round worth $300 million and backed by the hedge fund Tiger Global. This cash infusion topped off a war chest the company had built up during the boom. Unlike other high-profile startups like Uber and WeWork, which were bleeding billions every quarter, Coinbase could actually turn a profit. Meanwhile, Coinbase lacked the hyper-bro culture that contributed to the implosion of other startups, including WeWork, whose plans for an IPO blew up spectacularly amid reports of its CEO’s penchant for tequila shots and smoking weed.
What’s more, crypto winter offered Coinbase a desperately needed respite. If 2017 had been a wildly successful party, then 2018 would be a year to clean up all the broken glass and replace the smashed furniture. For Coinbase, the calm offered time to patch up buggy code and fix its long-running customer service problem. “Things operate differently during peacetime than wartime,” says Brian. He remained optimistic. For others, the crash was apocalyptic. For him, 2018 looked like the slump of 2015, when many had written off the crypto industry for dead. He would move forward and use the new downturn as an opportunity to retool for an upswing.
This retooling involved ceding some control to Asiff Hirji, the COO who had arrived in November as part of the push by Coinbase’s board to introduce adult supervision to the company. It didn’t take him long to get to work. In Asiff’s view, Coinbase had come within a whisker of complete collapse in December of 2017 as a result of three critical risks: inadequate insurance coverage; a chaotic accounting system that made it impossible to tell if the company was up or down $200 million; and a jerry-rigged proprietary trading system known as “the hedger” that could blow up any minute.
The first two risks could be addressed easily enough. As part of the adult supervision mandate, Asiff brought on a chief financial officer, Alesia Haas, who smoothed out the insurance and accounting snafus. The hedger was another matter.
It was Fred Ehrsam who had introduced the hedger in the first place, back in the days when Coinbase lacked its own exchange and had to source bitcoins on the open market. The system used the company’s homespun algorithms to determine optimal times to buy and sell crypto. This not only provided the cash liquidity Coinbase needed to run its everyday operations, but also for arbitrage opportunities—chances to profit from small differences in price between different banks and exchanges.
The homegrown hedger was a source of pride for longtime Coinbase hands. To Asiff, it was a source of fear and dread. “In December,” he recalls, “the hedger misbehaved and almost melted down the company. I’ve seen it before—it’s a guaranteed way for trading companies to blow up, using those proprietary systems. There’s some misconfiguration of the algorithm, and no one knows what’s getting bought and sold. I went on a crusade to kill the hedger.”
Asiff won his crusade. Soon the hedger was dead and Coinbase was using an agency trading model—accepting a trade only when the other half of the trade was there in the market. In Asiff’s view, he had saved the company by extricating it from a trading model that relied on a black box that could blow up at any moment.
More and more, Coinbase’s leadership looked like a typical corporation. The executive team at Coinbase, which for years had amounted to Brian and Fred and a loose mantra of running through brick walls, added veteran outsiders. Asiff poached Emilie Choi, a longtime veteran of LinkedIn, and anointed her as VP of business development with the mission of acquiring a host of smaller crypto companies. He appointed a VP of communications, Rachael Horowitz, a firebrand who was fazed by nothing after navigating years of crises at Facebook and Twitter. (With Horowitz on board, David Farmer, the economist deputized to handle media by Brian, and who hated public relations, would no longer have to endure reporters’ calls.) As if to underscore its new posture to the press, the company also added Elliott Suthers, a caustic Australian who had earned his PR chevrons coaching onetime Republican candidate Sarah Palin for vice presidential debates.
Brian was freed from managing every last thing. Finally, he had time to pursue personal activities. He took flying lessons and dated actresses. And still committed to his longtime passion for using bitcoin to spread financial autonomy through the world, he launched a philanthropic fund, Give Crypto. Analytical as ever, Brian subscribed to research that suggested the best way to alleviate poverty was to give money to people who are poor. Give Crypto, he declared, would raise $1 billion for the cause.
As Asiff built the corporate team and Brian nurtured noble ambitions to save the world, the hangover persisted. Crypto winter dragged on. Safe in its financial fortress, Coinbase waited patiently for spring. Nearly too late, the company would realize this was a terrible mistake.