From his small suburban home in Basingstoke, just west of London, Jay Smith - the No. 1 cryptocurrency trader at online brokerage eToro - looks for reasons to buy more bitcoin and other digital tokens.
The 29-year-old high school dropout and one-time professional video-game player doesn't mind the volatility, as Bloomberg reports, 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..."
However, as Bloomberg uncovers, 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, offering leverage of 30 to 1 on such bets.
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.”
Iqbal Gandham, head of eToro’s London office 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.”
Which is where Smith comes in.
As Bloomberg details, 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.
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.”
He started buying dozens of Bitcoin at $25 each, it's now at $4250...
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.
As Bloomberg notes, the fusion of derivatives and cryptocurrencies was probably inevitable in a market that appears to be spinning out of control.
“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.