zabella Kaminska and Paul Murphy
Most organisations have their share of IT workers who slip under the
radar. But what is that quiet tech guy really up to when he should be
fixing the server?
He might be pursuing a new career, speculating in crypto currencies.
In virtual terms at least, he could soon be earning 20 times his annual
salary as he joins the latest online investing craze that has shades of
Using digital money loaned on an online exchange, IT staff at mainly
financial services companies are betting on “alt-coins” during working
An investment of just a few thousand dollars a month ago in a newly
fashionable currency called Muse is now worth close to $500,000. Last
week alone the price rose 278 per cent. At the current trajectory, the
IT guy will be a dollar-millionaire by Thursday.
Except these are not real-world dollars. This is virtual money, one
of the many variants on bitcoin — the original crypto currency that has
been around for more than eight years. But there is a speculative frenzy
for a new line of investment in the crypto market through initial coin
Aping the real-world process of floating a company on a stock market,
this crypto version involves a group publishing a business plan —
commonly known as a white paper — and then promoting the sale to
speculators through internet forums. The ICOs raise money in existing
crypto currencies, mostly bitcoin and another popular token called
Many of the more than 830 so-called alt-coins now on the market are
bitcoin copies in their own right, others are simply contracts that sit
embedded in other cryptocurrency protocols such as Ethereum — a platform
that mimics bitcoin’s blockchain technology but adds a smart contract
The bitcoin copies are mineable — which means the number of coins in
circulation expands — whereas the contracts tend to be non-mineable,
with a capped number of coins in circulation.
“The ICO appeals to people who have a lot less competence to evaluate
what they’re investing in,” said Jorge Stolfi, a computer science
professor at the State University of Campinas in Brazil, who made a
prominent case to the Securities Exchange Commission about the dangers
of bitcoin last year.
The first example of this was the Ethereum platform itself, which
launched in 2014 with Ether tokens. It initially raised $18m at $0.40
per token: the tokens are now valued at $92 apiece.
While close to $400m was raised through ICOs last year — and $1.2bn
in total — in recent weeks there has been an explosion of new issues.
These include Zrcoin, which claims to base its value on cubic zirconia,
and Voise, a “decentralised music platform”.
The total market capitalisation of all alt-coins burst through $50bn
last week. Bitcoin itself has almost doubled in price since March, but
some alt-coins have jumped four or fivefold in the past week alone.
“The applicable crowd psychology textbook here is Extraordinary
Popular Delusions and the Madness of Crowds,” said David Gerard, author
of an upcoming analysis of the industry called Attack of the 50-foot
Whether the faceless IT guy cited above will ever manage to turn his Muse into real-world cash is now a burning question.
In recent weeks crypto traders have been hit by a sudden inability to
withdraw dollars after a crackdown by numerous banks previously used to
access the real-world payments system. Technical limitations associated
with the bitcoin platform have also slowed trade settlements, making
the crypto currency unusable for day-to-day transactions.
“It’s a real concern, and we’ve started to use Ether to move money
around a lot more now as it will actually be there when you need it,”
said one specialist OTC crypto-currency trader.
The delays have had the most impact on bitcoin’s primary use —
servicing the dark markets often used by drug dealers. One of them,
AlphaBay, recently announced it was accepting Ether.
Locked in the market and stuck with no immediate use for their
alt-coins and tokens, many speculators have been happy to chase the ICO
fad. This month TokenCard, a company claiming to have a blockchain
development called New Alchemy, was able to boast of raising $16m in
The prospect of regulatory intervention is not concerning all
investors. Many insist they are dealing in a utility, not buying an
interest in a company, and so should remain out of regulatory reach.
“It’s very hard to say if they should be regulated or not. It really
depends on the nature of the rights and features of the particular token
or coin. Or the grants to the holder,” said David Shearer, a partner at
Norton Rose Fulbright. While some token sales grant rights similar to
holding equity in a company, others offer less rights.
An ICO for an artificial-intelligence-powered investment fund called
Beth promises holders the right to receive 60 per cent of the venture’s
quarterly profits while reinvesting a further 25 per cent in its
The phenomenon is reminiscent of the early days of the
still-unregulated eurobond markets, which mushroomed in size in the
1960s and 1970s and became an important source of alternative dollar
funding for corporations frozen out because of stricter money controls.
In the style of penny stocks, for every successful token issued there
are many more that fail. With ICOs, uncertainty over exactly what it is
you are buying adds to the risk.
“People are willing to spend on something, but they own nothing. It’s
a promise from a development team which may or may not be useful to
people in the market” said Arthur Hayes, a trader for crypto-currency
derivative exchange BitMex. “I think it’s interesting that people can
raise $10m in minutes based on a dream.”
Frozen in cyber space
Huge wealth built trading crypto currencies is worth nothing if it
remains frozen in cyber space — a state of frustration readily
understood by customers of Hong Kong-based Bitfinex, one of the most
prominent and popular bitcoin exchanges globally.
In August last year, Bitfinex suffered a cyber hack that saw 120,000
bitcoins stolen from customer balances. As compensation, the exchange
issued IOUs called BFX, but those digital promises were subsequently
redeemed earlier this year, with customers having their accounts at
Bitfinex credited with dollar balances.
As customers moved to
withdraw those dollars it emerged that Bitfinex was suddenly unable to
process these transactions. On April 13, Bitfinex officially alerted
customers to the fact it was “experiencing delays in the processing of
outbound USD wires to customers” because “the normal channels that we
have been operating through in the past are currently unavailable”.
The issue was unilateral action by those correspondent banks Bitfinex
had been using as a gateway to the world’s real money payments
On April 17, the exchange announced that “all incoming wires to
Bitfinex will be blocked and refused by our Taiwan banks,” adding that
it was continuing to work on alternative solutions for customers who
wanted either to deposit or withdraw in fiat.
Panic spread through the ranks of customers as Bitfinex prices
diverged from all other exchanges by more than $200, leading some
reportedly to fly to Taiwan to open local bank accounts in the hope of
accessing frozen funds.
A video has surfaced where Bitfinex’s chief security officer, Phil
Potter, says: “There’s been lots of cat and mouse tricks that everyone
in the bitcoin industry has to avail themselves of,” adding that Taiwan
was undergoing a clampdown on lax customer identity procedures and the
potential for money-laundering