The Economist - USA (2021-12-18)

52 Holiday specials TheEconomistDecember18th 2021

leverage,meaninga $10,000accountatBitmexcould

beturnedintoa $1mbet;ftxandBinancethenpushed

thecapevenhigher.Regulatorsbanexchangesfrom

offeringsuchhigh­riskproductstonon­professional

investorsinAmerica,buttheycanstillbuythemusing

cheapsoftware,suchasa “vpn”, tocircumventrestric­

tions.Today,thevolumeofderivativestradedfarex­

ceedsthatofactualcryptocurrencytransactions.

The founders see no contradiction. When he

launchedCoinbase—whichdoesnotlistderivatives

buthasappliedfora licencetodoso—MrArmstrong

arguedthatsettingupa trustedexchangewouldhelp

makewhatwasthena fringeproducteasierandsafer

touse.Nineyearslaterthatisstillhisview.CZsayshis

missionisnot“aslowasmakingmoney,butnotas

highassavingtheworld”:itisaboutprovidingpeople

withmorechoice.

Whetherforpurposeorprofit,allaretoilingaway.

MrArmstrong,a self­described“nightowl”,startsat

10amandfinishesatmidnight.CZ,whoworkssolely

fromhome,hasremotemeetingswithhislieutenants

sixdaysa week.SBFmostlysleepsona beanbagnext

tohisdesk,fourtofivehoursa day,inbetweenmeet­

ingsscheduledaroundtheclock.Hemakeslittledis­

tinctionbetweendinnerandbreakfast,“otherthan

whichrestaurantsareopenfordelivery”.Thedayhe

spoke to The Economist his “last call tonight” was

scheduledfor5am.

notimetodice

Brainpower,idealismsplashedwithopportunismand

physicalstaminaseemtobekeyingredientsformak­

ingitincrypto.Inthreedomains,however,thefoun­

dersdiffermarkedly—andit isthosethatcoulddecide

notjustwhogetsevenricher,butwhoendsupshap­

ing,anddominating,thefutureoftheindustry.

Thefirstismanagementstyle.PeopleclosetoSBF

describehimascapableofhandlingextraordinaryde­

tailwhilejugglingmanythings,fromissuesattheex­

changetoambitioussideprojects(includingSolana,a

superfastblockchain).Headmitsheis“prettyhands

on”.BycontrastCZjokesthatheisa “poormanager”,

pronetodelegating.Binancedominatesthetradingof

cryptofutures,a typeofderivative,butCZisrarelyin­

volved.In 2018 it boughtTrust,a popularcryptowallet;

whenTheEconomistinterviewedhim,hehadnotspo­

kentoitsfounder,whostillrunsit,insixmonths.

MrArmstrongissomewhereinbetweenintermsof

engagement,whileleadingthepackwhenitcomesto

transparencyandhumility—inkeepingwithhisgood­

pupilcredentials.Hehasaskedhisseniormanagersto

nominatesixpotentialsuccessorseach,sothefirm

“standsthetestoftime”.Heencouragesstafftocom­

plain,thoughhispromisedrewardof$20(incrypto)to

whoever offers “the most raw, negative” feedback

soundsa littlestingy.MrHayesistheclosestofthe

fourtoa superstarexecutive.Heischarming,muscu­

larandgoodontv. “He’stryingtoplaylikeit’sJames

Bondrunningthecompany,”saysRichRosenblumof

gsr, a crypto­tradingfirm.Heisalsotheclosesttoa

self­styledvisionary:hisfortnightlyessaysmuseon

thepresentandfutureofdigitalfinance.

MrHayes’shigh­octanelifestylecertainlycomes

closesttothatofthefictionalBritishspy.In 2018 hear­

rivedata cryptotradeshowinanorangeLamborghini,

tweetinglatertohisthrongsoffollowers,“Didyousee

myridetoday?”HeskisinHokkaido,playssquashin

has  been  charged  in  America  with  anti­money­laun­

dering  failings  and  is  awaiting  trial,  declined  to  take

part,  but  your  correspondent  spoke  to  sources  who

know him well. He denies wrongdoing. 

Born to cerebral middle­class parents, most started

with good cards in hand to do well at school. SBF, the

son of law professors at Stanford, says he was “stron­

gest”  at  maths.  CZ,  whose  father  taught  geophysics

after  fleeing  China’s  Cultural  Revolution,  ranked

among the top ten in Canada’s national maths compe­

tition. California­born Mr Armstrong’s mother earned

a phdin bioinformatics. Mr Hayes’s parents worked in

manufacturing,  at  General  Motors  in  Buffalo  and  De­

troit, but he favoured chemistry and economics, hav­

ing won a scholarship to a private school.

the square roots of success

Even  that  early,  however,  there  were  hints  of  restless

entrepreneurialism.  In  high  school  Mr  Armstrong

taught  himself  how  to  code  and  founded  an  e­com­

merce  website  listing  refurbished  computers,  selling

“maybe 50” in total. He was not alone in often finding

university too abstract. “I actually struggled in maths

and  physics,  because  they  got  too  much  into  theory,”

CZ says. As a second­generation immigrant, he wanted

to learn how to achieve “financial freedom”.

This quest for money­fuelled liberty began at trad­

ing­technology firms, where CZ wrote code. Mr Hayes

and  SBF  cut  their  teeth  on  Wall  Street.  Mr  Armstrong

drew  a  winning  “lottery  ticket”  by  joining  Airbnb,  a

holiday­rental  firm  now  valued  at  $115bn,  in  which,

like all joiners, he was given a stake. That he chose to

leave  early  shows  how  much  he  believed  in  crypto,

says Dan Romero, one of Coinbase’s first employees.

For Mr Armstrong the trigger was a trip after leaving

college  to  Argentina,  where  reckless  money­printing

was  fuelling  hyperinflation.  For  Mr  Hayes  the  trigger

was more literal: his bank fired him. Having read about

bitcoin  on  Zerohedge,  a  libertarian  financial  blog,  he

became  enamoured  with  its  built­in  scarcity—bit­

coin’s blockchain is designed so only 21m coins can ev­

er be “mined”. A gold bug, he was intrigued by the idea

that,  as  with  the  yellow  metal,  limited  supply  could

give it value. CZquickly grasped that bitcoin “would do

to  finance  what  the  internet  did  to  information”.  SBF

simply saw an opportunity to do “really good trades”.

The  founders’  loftiest  visions  have  not  been  real­

ised: bitcoin’s price has exploded, from $700 in 2016 to

$50,000 in mid­December, but it is rarely used to make

payments. Still, they argue, it will, in time, foster “eco­

nomic freedom” by offering an alternative to misman­

aged  “fiat”  currencies,  boosting  financial  inclusion,

cheapening  cross­border  payments  and  enabling

startups to raise funds wherever they are. CZ predicts

80% of people will accept crypto payments within five

to ten years. Two years ago, he says, it “felt rude” to ask

if he could pay for a bottle of wine in crypto. No longer.

Given  their  professed  credo  it  may  seem  odd  that

the founders are not running payment firms but what,

to sceptics at least, look like giant digital casinos. Mr

Hayes started his crypto career by buying bitcoin over­

seas and swapping them for cash in China, where they

were trading at a premium, before crossing the border

with bags of banknotes. Bitmex, which he co­founded

in  2014,  pioneered  crypto  “derivatives”—contracts  al­

lowing  punters  to  bet  on  the  future  performance  of

digital assets. It took off when it started offering 100x

Brainpower,

idealism

splashedwith

opportunism

andphysical

staminaseem

tobekey

ingredients

formaking

itincrypto

Thepercentageof

Americansaged

18-29thatsaythey

haveeverinvested

in,tradedorused

a cryptocurrency

Thecapitalisation

ofcrypto-markets

inmid-December

v $200bn at the

start of 2020

31 %

$2.3TRN