Low Asset

My wild ride into the cryptosphere


A few weeks ago, I went off to the races. Not the ones you might know, at Ascot or Churchill Downs. Instead, I signed up at Zed Run, an online horseracing platform, where I discovered just how easy it is to buy cryptocurrencies and crypto assets — and just how hard it is to get out.

I watched a few races on my computer to warm up. A dozen glistening equine avatars lined up at a neon starting gate and then — three, two, one — galloped down a space-age track, hooves pounding to techno music. No jockeys, no broken legs, just round-the-clock horseracing on the blockchain.

My first task was to create a virtual stable. I labelled mine “Life & Arts” and described it as helping to “provide essential news and analysis to ambitious individuals and companies around the world”. Then I signed up for an online auction called a “drop”, where I would bid for one of thousands of Zed Run horses, each unique in colour, name and bloodline. 

Here are the steps: register with a crypto exchange platform (such as Coinbase), link to a bank account and transfer money (using the financial app Plaid), buy ethereum (the second-largest cryptocurrency, known as ether or ETH), transfer ether to a crypto “wallet” (MetaMask), and then exchange ether for “wrapped” ethereum, or wETH, a version of ether that, at least for now, is more seamlessly tradeable via the common standard known as ERC-20.

Frank Partnoy’s digital horse ‘Tearaway Charlie’
Frank Partnoy’s digital horse ‘Tearaway Charlie’

If you haven’t traded crypto before, each step feels like a leap of faith. You might find it disconcerting that MetaMask’s software can “read and change all your data on the websites you visit”, or that anyone with your secret back-up phrase “can take your ether forever”. The bigger problem for me was that some of the steps would take too long. The horse drop was in five hours, not five days.

Fortunately, there’s a shortcut: use a credit card and pay a 5 per cent “slippage” fee. I clicked through terms and warnings, and a blue box confirming “I understand the risks”. The last step, converting ETH to wETH, took five minutes and required a fee called “gas”. After starting with $400, I had 0.1436 wETH, worth just over $350 at the time. It was a big cut. But I was ready to buy my first racehorse.

As a former Wall Street derivatives trader and a researcher who studies financial market regulation, I am often suspicious of financial innovation. The 2008 financial crisis reminded us that financial instruments can carry hidden dangers, and in March 2020 the markets nearly collapsed because of yet more complex bets by banks, until regulators flooded the global economy with cash. So I approach crypto markets, and the innovation there, with fascination, but also caution.

The crypto world can seem mystifying, but there are really only two main concepts: money and assets. Bitcoin, ethereum and wETH are just the latest iterations of fungible money. They are privately created versions of pounds or dollars in that they are both valuable and interchangeable.

In contrast, crypto assets are frequently non-fungible. They resemble other unique assets you own, such as collectibles. That is why they are labelled with the acronym NFT, for “non-fungible token”, a commonly used term in crypto. No Zed Run horse is exactly the same as the one I ultimately bought. 

Both cryptocurrencies and NFTs are rooted in the history of money and assets. The first fungible money is attributed to King Alyattes of Lydia, now western Turkey, around 600BC. He created coins from electrum and stamped them with pictures that acted as denominations. Animals were popular: a lion might be worth more than an owl or snake. Privately created currencies were vulnerable to government expropriation, as they are now.

BP5KK3 Lydian electrum third stater/trite gold coin (both sides). This coin in all likelihood was minted by King Alyattes in Sardis
A Lydian coin, most likely minted by King Alyattes, from around 600BC © Alamy

A Bored Ape. Different versions of the computer-generated cartoon change hands for thousands of dollars
A Bored Ape. Different versions of the computer-generated cartoon change hands for thousands of dollars

NFTs might seem new and esoteric, but they share features of early non-fungible assets. Instead of bartering with animal skins or salts, our ancestors might have paid for goods with a small dagger. An unusually shaped dagger was more valuable, a common one less so.

Crypto markets use technology to protect against government interference and to limit supply. In 2009, Satoshi Nakamoto (a pseudonym) created a secure computer-driven regime that guarantees slow and gradual creation of bitcoins; many other cryptocurrencies follow this approach. New money comes not from decisions by central bankers but from private computer farms that solve puzzles in order to manufacture new currency, using vast amounts of electricity. Similarly, private NFT founders create unique tokens and promise not to flood the market with new ones. Many people trust them more than they trust central bankers.

Place your bets: the volatility of crypto assets; % change on previous day

Cryptocurrencies are increasingly popular, and volatile, often fluctuating by more than 5 per cent a day. In a few hours on June 16, a cryptocurrency called Titan plummeted from about $60 a token, $2bn in total, to near zero. Stories of alleged hacks and exit scams known as “rug pulls” abound (just look up Safe Heaven, ShitCoin, or the thousands of examples at tokensniffer.com).

As it becomes easier to participate in crypto markets — you can purchase bitcoin with a credit card or Venmo, and use it to buy Starbucks coffee or a Microsoft Xbox — we face two inevitable questions, political and personal. First, what, if anything, should governments do about crypto? Second, as an individual, are you in or out?

Zed Run is one of thousands of platforms offering NFTs, which then trade on peer-to-peer marketplaces such as OpenSea, the world’s largest. The items there feel like the collectibles you might have in your home: paintings, furniture, bonsai plants. 

Animal NFTs have been especially popular, starting with CryptoKitties, which were in vogue in 2017-18. When I visited OpenSea recently, Bored Ape Yacht Club ranked first in trading volume. Each computer-generated cartoon ape looks uniquely bored and comes with a yacht club membership and access to “The Bathroom, a collaborative graffiti board”. I watched one morning as Bored Apes changed hands every few minutes, thousands of dollars per ape. 

Jargon buster: a glossary of crypto terms

Bitcoin the most widely held cryptocurrency

Blockchain a timestamped list of records called blocks that are linked together using cryptography

Cryptocurrency a digital currency that uses cryptography and is therefore difficult to counterfeit

DeFi (decentralised finance) a blockchain-based form of finance that uses smart contracts instead of financial intermediaries

Discord a messaging platform where people commonly discuss crypto markets

ERC-20 a technical standard used in the ethereum blockchain

Ethereum (ether or ETH) the next most popular cryptocurrency, from the ethereum blockchain platform

NFT (non-fungible token) a unit of data that is certified as representing a unique digital asset

OpenSea the world’s largest peer-to-peer marketplace for trading NFTs

wETH a “wrapped” version of ethereum that is more seamlessly tradeable than ETH because it uses ERC-20

When I got bored, I switched to Arabian Camels, where one polka-dotted camel smoking a cigarillo was being offered, its hat emblazoned with “That’s so fintech”. The hat is rare — only 0.04 per cent of camels wear one — so this particular camel was in high demand, though not as much as the apes. Crypto ape prices are up sixfold since May.

The supply of crypto assets is typically capped. There are a mere 10,000 Bored Apes. Zed Run says it will release only 38,000 first-generation horses, called “Genesis” (though breeding is now allowed, so there could be a population explosion). The priciest horses are from the purest bloodline, called Nakamoto, a nod to the bitcoin creator. The most common breeds are labelled Buterin, after Vitalik Buterin, a co-founder of ethereum.

The uniqueness of each NFT is a big part of the draw. Each Bored Ape was generated from 170 possible traits, including expression, headwear and clothing. As the founders say: “All apes are dope, but some are rarer than others.” The Zed Run horses also come with different characteristics, but their unique racing potential is hidden, which makes them arguably even more dope than the…


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