Last summer, Crypto Joe couldn’t afford a plane ticket to see his wife in Europe. By November, he was seriously considering whether or not he should step down from his position as a tenured professor teaching philosophy and logic—after making more money trading cryptocurrencies than his annual salary in the span of a few short months.
“I initially got into this because I needed some money,” said Joe, who wishes to keep his real identity private. Before long, he’d not only booked a flight but paid off the entirety of his credit card debt and then some. “But it wasn’t just a cool way to make money. It was such a cool system. I became completely addicted to the speed of trading on the Ripple platform.”
On his best days, Joe rakes in thousands of dollars of profit—not a bad take for a relative newcomer to the scene, one who readily admits having limited investment experience beyond owning some mutual funds and his retirement account. What helped was his academic concentration and love of strategy and probability games.
“I used to devise betting strategies to test at the casino. My most interesting strategy was an algorithm for playing craps. It involved betting according to the Fibonacci sequence and always putting as much of the capital on ‘odds,’” he explained. Then there was Ikariam, a real-time online game, which has “its own economy and involved war strategy against other players and alliances.”
“So I’d never done any real trading, but I spent a lot of time on these strategy games. Suddenly, I was channeling all my energy into trading bitcoins,” said Joe, who now moves hundreds of thousands of ripples in one go.
Joe started off as a broker, selling cryptocurrencies for a small fee to people looking to buy a few coin without going through the hassle of getting setup on an exchange or gateway. Today, he’s a bonafide crypto-market maker.
It’s not the kind of strategy that comes to mind when people think of bitcoin trading, which typically boils down to “buy and hold” and hoping that the price keeps rising—or the “pump and dump” schemes popular among certain altcoins. In fact, Joe isn’t making directional bets at all. Instead, he capitalizes on what are known as arbitrage opportunities, essentially price discrepancies, across various exchanges and gateways.
Arbitrage scenarios arise when markets are inefficient: If the price of BTC is $620 on BitStamp and $615 on Kraken, you could buy on Kraken and sell on BitStamp to lock in an instant $5 profit minus fees with minimal risk. In an efficient market, the price across all exchanges should theoretically converge toward the same price. Regular observers of Bitcoincharts.com over the past year know this isn’t the case, more often than not, since moving funds between or out of exchanges isn’t always a straightforward process given situations like the one with MtGox.
“The Ripple platform in particular is cool because you don’t have to depend on any one operator or exchange,” said Joe, who regularly sneaks to his computer between classes so he can set up new markets on days when he’s teaching. “It has all the benefits of cryptocurrencies but the trading platform is also decentralized and peer-to-peer, which makes bitcoin even cheaper to trade than it already is and involves less trust.”
“You don’t have to pay commissions to an exchange operator and if one exchange went down or wasn’t doing withdrawals, at least in theory, you aren’t trapped,” he explained. “You could always trade assets to another gateway. It was always nice to have more than one way to get my dollars out.”
And in a short period of time, Joe has become a bit of an expert. Being an effective market maker isn’t just about spotting price differences but also requires an intimate awareness of how money flows through the system and a finger on the community’s pulse.
“With cryptocurrencies, I’m constantly thinking about how to get assets all over the world quickly and easily,” said Joe, adding that “there’s tons of arbitrage out there waiting to be grabbed.”
“Some pathways are blocked, some are slow, some are more reliable than others, and the dynamics shifty daily. Charts help to show where the loot is, but utilizing the new technologies, networks, exchanges, and gateways requires some study, some familiarity, lots of testing, interacting with the community on the forums, and ultimately just knowing which parts of the new economy are working right now and how well.”
For crypto-traders like Joe, it’s an empowering feeling, one that isn’t easily reproduced in the real world due to a lack of accessibility, poor transparency, and a system that’s generally stacked against the little guy. On Tuesday, New York’s Attorney General Eric Schneiderman opened up “a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages,” reported Bloomberg.
“This new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors and allows them to use new technologies to reap huge profits based on very, very minor, but nonetheless unfair, advantages,” Schneiderman said during a speech Wednesday at New York Law School.
Beyond potential conflicts of interests between exchanges and their preferred customers, the current structure is a “polluted landscape” that creates a ‘two-tiered’ market and information asymmetry, Phil Rapaport, director of markets and trading at Ripple Labs, noted in a post earlier this year. “If you don’t have the resources to co-locate and purchase specialized hardware, then you are likely paying a toll when you trade to those who do,” he wrote, adding that a distributed model would enable “retail investors to access the global FX market in a fair way and enables them to move money without punitive fees/spreads.”
This market disparity was evident last week when Virtu, a leading high-frequency trading firm, announced a multi-billion dollar IPO, revealing that the company had just “one losing trading day” over a 1,238 trading-day period. The proposal also led with an ominous disclaimer—that Virtu was being investigated by the U.S. Commodity Futures Trading Commission for “participation in certain incentive programs offered by exchanges or venues.” The probe by regulators is still ongoing and the company denies breaking any laws.
Even if Virtu was playing it straight—for which they deserve the benefit of the doubt—their eye-opening performance record is testament enough to the widening chasm between the haves and the have-nots.
When the dominant platform fundamentally favors certain participants at the expense of everyone else with questionable benefits for society at large—namely the arguably unnecessary focus on speed and the costly arms race that invariably results—it’s only natural that the broader public might feel a sense of resentment or mistrust for the system they perceive as unfair by design.
Because trading in and of itself is hardly “evil.” Indeed, guys like Joe provide a clear service by creating liquidity and price discovery, which in turn increases the efficiency of the system, reducing fees and expanding accessibility for end users. For their efforts, market makers are rewarded with potential profits based on their proficiency, effectiveness, and overall appetite for risk.
But in the case of Crypto Joe, it’s mostly about having fun. “I can’t tell if my friends and family think I’m crazy,” he said. “I just really enjoy reading about the technology, the startups, and the new ideas. It’s just all really exciting. It seems like a no-brainer that cryptocurrencies and platforms like Ripple will change the world, and it’s fun being part of that.” Presumably, the extra money doesn’t hurt.