Cryptocurrency Derivatives? You Bet. This Trader Has 295% Return
Jay Smith has little doubt the cryptocurrency market will crash.
The price of bitcoin has increased sixfold in the past year, despite a 25 percent plunge this month triggered by China’s crackdown on digital tokens. Not a week goes by without startups launching new ones to fund everything from dentistry to Las Vegas strip clubs. Even Paris Hilton is tweeting to her 16 million followers about her cryptocurrency investments. If that isn’t a jump-the-shark-moment, what is?
Yet Smith, the No. 1 cryptocurrency trader at online brokerage eToro, shrugs all that off as he plays the markets from his home in Basingstoke, a suburban town west of London. Every day he looks for reasons to buy more bitcoin and other digital tokens — computer programs that use cryptography to create artificial units of value. He doesn’t have much information to size up the prospects of Blackmoon Crypto, Steem, FirstBlood and other coins that have caught his eye, but that’s cool with Smith, a high school dropout and onetime professional video-game player. His portfolio is up 295 percent in the past 12 months.
“I just put in an order for a Tesla, and I don’t even know how to drive,” said the 29-year-old Briton.
Smith isn’t playing with just his own cash. More than 9,000 retail investors heed his advice and copy his trades on eToro, which is licensed in Cyprus and by the U.K.’s Financial Conduct Authority. It’s a social trading network that enables clients to track their favorite cryptocurrency traders. In an unregulated, ultravolatile market that few investors understand, eToro injects even more risk into the mix.
The firm is one of several that use contracts for difference, or CFDs, derivatives that allow investors to speculate on the price of cryptocurrencies. Plus500 Ltd. offers leverage of 30 to 1 on such bets, while XTB International Ltd, registered in Belize, touts its award as the best cryptocurrency trading provider of 2017.
Unlike futures contracts, CFDs don’t trade on exchanges and are largely illiquid. Investors can suffer big losses because they have to put up only a percentage of the value of their trades on margin. While the U.S. largely prohibits retail investors from trading CFDs, regulators in Europe are only now beginning to address the peril they pose.
In June, the European Securities and Markets Authority, the European Union watchdog for capital markets, said it was concerned about the suitability of CFDs and was weighing measures to restrict their use. Combining CFDs with cryptocurrencies is reckless, said Rainer Lenz, chairman of Finance Watch, a Brussels-based public-interest organization, who serves on an advisory group at ESMA.
“We have to put a stop to this,” said Lenz. “This is selling a synthetic instrument on top of another synthetic instrument. This is the highest form of speculation. You just can’t do that to retail investors.”
Read more: Why contracts for difference face scrutiny – a QuickTake Q&A
The fine print in eToro’s risk-disclosure statement warns that “If the market moves against you, you may sustain a total loss greater than the funds invested in a specific position.” But Iqbal Gandham, head of eToro’s London office, said that in practice the firm uses mandatory stop-loss orders to prevent investors from losing more than their initial deposits. He denied that mixing CFDs and cryptocurrencies is harmful to retail investors.
“You can’t lose more than you put in,” Gandham said. “And if you don’t know what you’re doing, just copy someone who does.”
That’s where Smith comes in. An easygoing man with the air of someone dazed by his luck, Smith dropped out of school at 14. He threw himself into eSports, a competitive form of video gaming that’s huge in Asia. Soon enough Smith, who goes by the online handle Jaynemesis, was day-trading tech stocks and then bitcoin. He started buying dozens of them at $25 each (they cost $3,944 on Sept. 26).
Smith rode out the currency’s first big crash in 2013, when it lost half its value in less than three weeks. By early 2017, he’d built a portfolio of coins from Ethereum, Litecoin and other issuers. He also discovered eToro, co-founded in 2007 in Tel Aviv by brothers Yoni and Ronen Assia.
The brokerage handled stocks, currencies and other securities. In 2010, Yoni Assia became infatuated with digital tokens and provided office space to Vitalik Buterin, the brains behind Ethereum. Four years later, Assia added bitcoin trading to eToro, which is based in Cyprus.
In February, the firm expanded into other cryptocurrencies. It also launched a marketing campaign aimed at retail investors with push notifications sent to customers’ mobile phones, instructional videos on YouTube and ads in the London subway proclaiming “Crypto Needn’t Be Cryptic.”
Copy trading is what separates eToro from other CFD firms offering cryptocurrency trading. EToro pays Smith, who’s not an employee, at least 2 percent of the money that follows him. As of Sept. 26, that meant he was earning about $230,000 annually on the $11.5 million in assets held by his 9,143 copiers. Smith, who allocates about half his portfolio to stocks and the rest to cryptocurrencies, makes more money with every investor he draws to the site.
The fusion of derivatives and cryptocurrencies was probably inevitable in a market that appears to be spinning out of control. Thanks largely to Ethereum, a three-year-old open-source software project inspired by bitcoin’s blockchain technology, anyone can create a digital token.
That’s spurred startups worldwide to fund their development by minting tokens and selling them to investors via initial coin offerings, or ICOs. The bet is that once an issuer prospers, the value of its company scrip will soar. At the beginning of 2013, there were only seven digital coins worth $1.6 billion. Today there are 1,228 coins with a market value of $136 billion, according to CoinMarketCap, a firm that tracks digital tokens. Bitcoin accounts for 48 percent of the total.
Read more about the bitcoin ’bubble’
“What we are seeing is pure unlicensed capitalism,” said Jon Matonis, a founding director of the Bitcoin Foundation and chairman of Globitex, a cryptocurrency exchange based in Riga, Latvia. “And you just can’t keep up with the market anymore.”
Regulators are scrambling to catch up. On Sept. 4, China outlawed ICOs and moved to shut down exchanges as well. In July, the U.S. Securities and Exchange Commission required companies to register ICOs like IPOs. Russia and Japan are also eyeing new rules.
To many finance pros, cryptocurrencies look too ephemeral to become a real asset class. This month, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon likened them to the 17th century Dutch tulip bulb mania and called bitcoin a fraud.
Yet Wall Street’s embrace of blockchain is one reason bitcoin’s price has soared. Goldman Sachs Group Inc., Banco Santander SA and JPMorgan are some of the institutions investing millions of dollars in related startups and joining industry research groups.
With Ethereum up more than 3,562 percent this year, the euphoria was running high at a July reception eToro hosted in London’s tech haven of Shoreditch. Investors and entrepreneurs jammed into a dimly lit basement space to drink Mexican beer and swap gossip on the hottest ICOs. One impresario handed out fliers for a new token like a promoter at a rock concert.
Smith, with a shaved head and a silver ring embedded in each earlobe, was holding court as eToro’s star. A Goldman Sachs analyst sought his views on recent moves in bitcoin. Smith, shouting above the din, was happy to oblige.
EToro strives to make trading cryptocurrencies as simple as possible for retail investors. It’s as easy to bet on digital tokens as it is to buy merchandise on Amazon.com. You just point and click a “buy” tab to go long or “sell” to go short. The firm’s algorithms do the rest. While the FCA requires eToro to ascertain whether its products are appropriate for retail customers, they’ll have to read the fine print on its website to learn that CFDs aren’t good long-term investments.
On Sept. 6, eToro announced that investors can buy bitcoin and four other cryptocurrencies directly, so they will no longer have to use CFDs to go long. But customers still have to utilize the derivatives to short the tokens or copy the trades of Smith and others.
For most of the year, Smith’s followers have been pumped when he livestreams his trading sessions on Twitch, a social media site.
“Feeling cryptocrazy,” one user wrote in the chat box on Sept. 5.
“Me cryptodrunk,” replied another.
“Just put 10K with you,” said a new follower.
Ten days later, with bitcoin and Ethereum having lost more than a third of their value, the mood of his followers had darkened. Smith’s eToro portfolio had skidded more than 10 percent and he’d lost a few hundred copiers. Those sticking with him wanted to know if this was the shakeout everyone, including Smith, had been fearing. Humming to himself as he tapped the keyboard, the trader paused and told them to relax.
“Hopefully you can tell from my calm attitude that I’m not in the least bit phased by this,” Smith said. “It will be over in two weeks time, and then the market will start rallying again. Nothing has changed. This just means that the Chinese can’t buy tokens so easily now. All that’s going through my head is buy the dip.”
As Smith talked, bitcoin started surging. Over the next few hours, it skyrocketed 30 percent from its low of the day.
“Look at it go,” he gushed. “It’s going insane. Let’s buy some more.”
Written by Bloomberg
Showtime websites secretly mined user CPU for cryptocurrency
This past weekend, Showtime websites were found to be running a script that allows the sites to mine visitors’ extra CPU power for cryptocurrency, as pointed out by users on Twitter. The afflicted sites included showtime.com and showtimeanytime.com, but the script has since been removed following reports from Gizmodo and other sites.
The script mines the cryptocurrency known as Monero. Launched in April 2014, Monero is meant to be a more anonymous version of Bitcoin because you can purchase it offline with cash. Thirty percent of the proceeds go to Coinhive, while sites using the service, like Showtime and The Pirate Bay, keep the rest. For its part, The Pirate Bay has apologized for secretly running the script and then asked its users if they preferred ads or CPU mining. Surprisingly, many of the comments indicate a positive reception towards the idea.
Coinhive updated its site to include the statement: “We’re a bit saddened to see that some of our customers integrate Coinhive into their pages without disclosing to their users what’s going on, let alone asking for their permission.” Going forward, the service claims that it will now ask people browsing a site for permission before mining their CPU. Showtime declined to comment.
Written By the Verge
European Central Bank President: No Power to Regulate Bitcoin
Mario Draghi, the erstwhile president of the European Central Bank (ECB) made some startling comments during his presentation today at the Hearing of the Committee on Economic and Monetary Affairs.
When asked about cryptocurrency regulations or bans, similar to the political decisions the Chinese central government has enforced, Draghi made it clear that there is no way to ban Bitcoin, or to even regulate it, saying:
“It would actually not be in our powers to prohibit and regulate them. We have to ask what effects cryptocurrencies have on the economy.”
He added that they are still far too immature to be considered a viable payment methodology – a conclusion that was reached by the ECB in tandem with the Central Bank of Japan last week.
While the ECB has no powers over the regulatory control of Bitcoin and other cryptocurrencies, they do have control over EU member states wishing to issue their own cryptocurrency, like Estonia.
Draghi made it abundantly clear that the ECB does not recognize the ‘estcoin,’ stating that no member state can issue its own currency, even digitally. “The currency of the Eurozone is the euro,” he said succinctly.
Written by cointelegraph
NEO Shakes Off Bad News, Surges 20 Percent
NEO, often termed the ‘Chinese Ethereum’ took a major price tumble when the announcements regarding Chinese exchanges were made public last week. The price dropped to a low of $13.29 per coin, a massive drop from its peak of $48 exactly 30 days earlier.
The price drop was linked directly to the Chinese announcement since NEO is a generally Chinese coin, with most of the trading volume being on Bittrex (45%) and only Bitfinex as a secondary exchange.
Down but not out
With the ban on exchanges, and the generally anti-cryptocurrency sentiment in China, some thought NEO would simply cease to exist. However, just a week after having to repay some of its initial investors, the altcoin has regained much of what it lost.
On relatively stable trading volume, NEO rose to over $26 per coin, a full 100% increase over its lows, and a substantial 20% from yesterday’s price.
As previously reported by Cointelegraph, NEO may well be positioned to be the best cryptocurrency and app platform within China. Sometimes removing all the competition makes it easy to succeed.
Written by coin Telegraph
Distinguished London Gold Dealer Accepts Bitcoin for Payment
The number of merchants accepting Bitcoin as a means of payment has steadily increased over the past year. The latest to accept Bitcoin is Sharps Pixley, a London gold dealer.
Sharps Pixley, whose origins date to 1778, is a London-based dealer of precious metals. It is a full member of the London Bullion Market Association. It acts as a full service shop for investors to buy, store and trade precious metals. Although it has been in operation for ~250 years, Sharps Pixley has shown that it is in sync with the times by deciding to accept Bitcoin as a means of payment.
Ross Norman, the CEO of Sharps Pixley, said:
“It is our view that many investors in Bitcoin would like the option of holding intrinsic value in a traditional safe haven asset like gold; and be able to switch across in a simple and cost effective way. That avenue is now open to them.”
Bitcoin may be called digital gold, but it still has a long way to go before it can rival gold as a safe haven asset. The volume of gold traded annually is estimated to be $22 tln and there is a flourishing derivatives market for it. Bitcoin investors represent a niche class of investors, although awareness about cryptocurrencies is increasing.
Giles Mable, a Business Development Director at Sharps Pixley, said:
“We are bridging the gap between the world’s oldest currency and its newest, offering new and existing customers the means to exchange and diversify digital currency for a real, tangible asset which they can store and trade at Sharps Pixley.”
Bitcoin accepted through Bitpay
Sharps Pixley will accept Bitcoins for the sale of gold through the payment processor Bitpay. This will help them avoid any risk of Bitcoin’s fluctuating price. Given that Sharps Pixley’s core competency lies in trading precious metals, the decision not to accept Bitcoins directly is wise.
Unless merchants have some costs which are denominated in Bitcoin (and not fiat), they will be exposing themselves to Bitcoin’s price volatility if they accept Bitcoins directly. We still have a long way to go before Bitcoin can be used at each stage of a product’s value chain – right from the raw material to the sale to the end customer.
Written by CoinTelegraph
Is This The Top For The Cryptocurrency Craze? Introducing Jesus Coin
Question: How do you recognize a bubble that’s ready to burst?
The answer is twofold:
- When people start going crazy over a certain asset—even the ones who couldn’t have cared less a year earlier.
- When people start doing insane things with that particular asset.
For example, in 2006, I read that some homeowners were taking out home equity loans to purchase Super Bowl tickets.
Using your house as an ATM was just fine, because everybody knew that home prices would always go up. It was almost a natural law, like the sun rising in the East.
When I read the Super Bowl story, I remember thinking: This is going to crash.
That people were willing to risk the roof over their head to buy tickets for a football game (yes, even that football game) seemed to be the epitome of irrational exuberance.
This week, I had a similar A-ha moment when I first heard about Jesus Coin.
Decentralizing Jesus On The Blockchain
When you visit the website of this new cryptocurrency, it’s impossible not to think that it’s a hoax.
That’s because it started as one. Initially meant as satire by a group of friends, soon after its ICO launch, Jesus Coin started taking off as cryptocurrency investors scrambled to get a piece of the action.
The homepage states: “Jesus Coin has been developed as the currency of God’s Son. Unlike morally bereft cryptocurrencies, Jesus Coin has the unique advantage of providing global access to Jesus that’s safer and faster than ever before.”
The three main benefits of Jesus Coin are supposedly sin forgiveness through outsourcing, “record transaction speeds between you and God’s son,” and a predicted $50 billion market cap.
Jesus Christ is named as the founder and CEO of the company, with the positions of trustee and public relations officer being held by Judas Iscariot and Saint Peter, respectively.
The Jesus Coin ICO
Jesus Coin is compliant with the ERC20 Ethereum token standard. 1 Ethereum (ETH) equals 12 Jesus Coins (JC) in the initial pricing, and seed creation will be capped at 13 million JC.
The crowdsale spans roughly three and a half months, from September 12 to December 25. Trading is scheduled to begin on December 27.
The founders assert in their whitepaper that “Jesus would be pumped to have his own coin,” a notion that most Christians probably wouldn’t share.
After all, one of the few passages in the New Testament that depict Jesus as truly outraged is Matthew 21:12–13, where he overturns the tables of the money changers in the temple.
But whatever you think about Jesus Coin’s philosophy—if you can call it that—the main point here is that it’s as good a bubble-top indicator as I’ve ever seen.
As Cryptocurrencies Fail, Gold Will Pick Up The Slack
If you still doubt that the current crypto craze is unsustainable, look at this infographic contrarian analyst Jared Dillian posted in a Business Insider article on the “Everything Bubble.”
There are only 180 UN-recognized paper currencies in the world, but a stunning 1,072 cryptocurrencies… and a new one is added nearly every day.
Gold, on the other hand, has proven itself to be a timeless store of value. And the best part is, you can put it in your pocket or under your mattress—or bury it in your backyard if you’re so inclined.
In a recent Metal Masters interview, Real Vision co-founder Grant Williams said holding gold in his hand for the first time answered a lot of questions for him: “People get stuck in this trap of ‘Why does it have value?’ These are the wrong questions to ask because you’re driving yourself mad. It does. Pure and simple.”
Get A Free Ebook On Precious Metals Investing
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Written by Forbes
A Crypto Fund King Says Bitcoin Will Be the Biggest Bubble Ever
Mike Novogratz is reinventing himself as the king of bitcoin.
The swaggering macro manager who flamed out at Fortress Investment Group LLC is starting a $500 million hedge fund to invest in cryptocurrencies, initial coin offerings and related companies. Novogratz will put up $150 million of his own money and plans to raise $350 million more by January, mainly from family offices, wealthy individuals and fellow hedge fund managers, said a person familiar with his plans.
At that size, the Galaxy Digital Assets Fund would be the biggest of its kind and signal a growing acceptance of cryptocurrencies such as bitcoin and ether as legitimate investments. For Novogratz, 52, the fund marks a comeback to professional money management after humbling losses at Fortress and almost two years of self-imposed exile from Wall Street.
Novogratz, in an interview with Bloomberg Television, declined to confirm or deny that he’s raising a fund, citing regulatory constraints. He did talk at length about his recent experience with digital assets and why he’s eager to trade them.
“This is going to be the largest bubble of our lifetimes,” Novogratz said. “Prices are going to get way ahead of where they should be. You can make a whole lot of money on the way up, and we plan on it.”
Just this month, bitcoin hit a record of almost $5,000 then plunged 30 percent in two weeks as buyers weighed the impact of a Chinese ban on initial coin offerings and domestic trading in virtual currencies.
“I sold at $5,000 or $4,980,” he said. “Then three weeks later I’m trying to buy it in the low $3,000s. If you’re good at that and you’re a trading junkie, it’s a lot of fun.”
The fortunes being made and lost are just one reason Novogratz likens the cryptocurrency market to the Wild West. Digital assets like bitcoin need more regulation, and in the meantime some initial coin offerings, or ICOs, will prove to be fraudulent “get-rich-quick schemes,” he said.
While the technology community has embraced the libertarian ideal of a decentralized, open-source payment system in which a fixed money supply is determined by computer code, financiers are taking a more cautious approach. Only two other hedge funds have raised tens of millions of dollars to invest in digital assets, Polychain Capital and MetaStable Capital.
Novogratz’s fund will have a broader mandate, including market-making, arbitrage, stakes in internet coin offerings and venture capital-style investments in digital-asset development, said the person familiar with his plans, who asked not to be named because they’re still private. He also brought on as partners two traders with years of experience in hedge fund investing and compliance: Richard Tavoso, the former head of global arbitrage at RBC Capital Markets; and David Namdar, who worked at Millennium Partners, Marto Capital and UBS AG, the person said.
Most large institutions have steered clear of the cryptocurrency market out of skepticism about its legitimacy or concerns that the mostly unregulated instruments are too volatile. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon captured the prevailing view on Wall Street when earlier this month he called bitcoin a “fraud” and said he would fire anyone at his bank for trading it.
Where others see volatility and liability, Novogratz, a former Goldman Sachs Group Inc. partner, smells opportunity.
“In a lot of ways, this is a market like any other market,” Novogratz said. “You see the psychology of fear and greed in the charts the same way you’d see it in charts of the Indonesian rupiah or dollar-yen or Treasuries. They’re exaggerated because of less liquidity and because you can’t get short.”
Novogratz developed his taste for risk as a varsity wrestler at Princeton University and later as a National Guard helicopter pilot. He dabbled in bitcoin while still managing billions of dollars in a macro fund at Fortress, but didn’t score his first big win until after leaving the New York-based firm two years ago.
It started with a late-2015 visit to a friend’s startup in Brooklyn.
“I expected to see Joe, a dog and one assistant. Instead I saw 30 dynamic young people crammed in a Bushwick warehouse, coding, talking on the phone, making plans for this revolution,” Novogratz said. “Macro guys are instinctive. My instinct was, ‘I want to buy a chunk of this company.”’
$250 Million Haul
He decided instead to invest in ether, the cryptocurrency token used on the Ethereum network. Novogratz bought about $500,000 at less than a dollar per ether and left on a vacation to India. By the time he returned a few weeks later, the price had risen more than fivefold. He bought more.
Over the course of 2016 and into 2017, as ether surged to almost $400 and bitcoin topped $2,500, Novogratz sold enough to make about $250 million, the biggest haul of any single trade in his career. He said he paid tax on the profits, bought a Gulfstream G550jet and donated an equal amount to a philanthropic project for criminal justice reform.
Novogratz was hooked. Today, he hosts a weekly “crypto meet-up” for as many as 90 people over drinks at his office in Manhattan’s SoHo district and waxes effusive about his adopted industry.
“Remember, bubbles happen around things that fundamentally change the way we live,” he said. “The railroad bubble. Railroads really fundamentally changed the way we lived. The internet bubble changed the way we live. When I look forward five, 10 years, the possibilities really get your animal spirits going.”
Novogratz, known to his friends as “Novo,” estimates that he now has about 20 percent of his net worth in digital assets. In addition to cryptocurrencies, his family office has invested in bitcoin mining, trading platforms, initial coin offerings, pre-ICO sales and blockchain technology. He said Gemini, the exchange run by Cameron and Tyler Winkelvoss, is “one of our go-to places” in part because it has a New York State license to trade bitcoin and ether.
With a $500 million hedge fund, Novogratz will be able to capture trading opportunities that require more scale, as well as wield influence with developers, entrepreneurs and regulators. Of course, he’ll also make money on other people’s money: The person familiar with his fund, who has seen early versions of marketing documents, said it will charge investors a 2 percent management fee and 20 percent of profits, with a two-year lockup.
Plus, he doesn’t like the idea of fading away.
“Everyone would love to leave Wall Street gracefully and very few do,” Novogratz said. “You get kicked in the knees or kicked in the midsection, you learn from your mistakes, you kind of rebuild and you start your new adventure.”
One thing hasn’t changed: Novo’s love of the risky bet.
Written By Bloomberg
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