To my parents, who always encouraged me to be curious and embrace discovery – you made sure I always had opportunities to absorb, even in high school, when I thought I would never need to learn how to write.
I am forever grateful to the group at Austin Global Exchange: Justin Northcutt and Ryan Crow – you took a chance on a new currency and were true professionals throughout the entire project.
Nautiluscoin, as it stands today, would not exist without the talented coding skills of Jared Tate of DigiByte. I consider myself lucky to have met you before the world discovers your talent.
To the publishing team at Wiley, especially Lia Ottaviano – thank you for guiding this first-time author and answering an untold number of silly questions. To Evan Burton – thank you for believing in this project and being its champion.
Last, but certainly not least, to my wife Dawn, aka Mrs. BK – this entire project would not have occurred without your support. Besides listening to countless hours of my droning on about how amazing digital currencies are, you were a much needed sounding board. You always challenged my views – this book and I am better for it.
About the Author
Brian Kelly is founder of Brian Kelly Capital LLC, a global macro investment manager with a focus on currencies. He has 20 years' investment experience trading U.S. and international equities, foreign currency, options, futures, metals, and commodities. Throughout his career, Brian has specialized in trading multiple asset classes, cross-border investments, and risk arbitrage.
Brian is a CNBC contributor and can be seen on Fast Money (host: Melissa Lee), Halftime Report (host: Scott Wapner), and The Kudlow Report (host: Larry Kudlow).
Brian is a graduate of the University of Vermont, where he received a BS in finance. He also holds an MBA from Babson Graduate School of Business, with a concentration in finance and econometrics.
A passion for investments and entrepreneurship has led Brian to start several successful investment businesses. His most recent start-up (Brian Kelly Capital) is a global investment management firm specializing in global macro and currency investing.
Chapter 1
Bitcoin Is a Bubble
When I see a bubble, I buy that bubble, because that is how I make money.
Fad, scheme, scam, tulipmania, and bubble are all terms I have used to describe Bitcoin. The majority of my professional money management career has been spent in the currency markets, and as a so-called expert I was convinced Bitcoin was nothing more than a speculative bubble. It seemed impossible that a string of numbers backed by nothing and without an army could ever meet the accepted definition of a currency as a plausible medium of exchange, store of value, or unit of account. More than once, I confidently declared that Bitcoin was nothing more than “Tulipmania 2.0,” a reference to the Dutch tulip bubble of the 1600s. Of course, the only thing I knew about Bitcoin was that people were calling it a digital currency, a term that was new to me. Unfortunately, not even ignorance could stop me from bellowing on national television that Bitcoin would not last.
I had first read about Bitcoin in 2011 while browsing my usual currency websites looking for investment ideas. In the late spring of 2011, the price of bitcoin had reached parity with the U.S. dollar, and by July, one bitcoin was worth $31. Any investment that has a 3,000 percent increase in value will attract a lot of attention, but two decades working on Wall Street has taught me not only to be skeptical but to automatically dismiss these investments as unsustainable bubbles.
Bitcoin appeared to be a quirky little project hallucinated by a cryptic computer programmer who was disillusioned with the post-financial-crisis world. It was interesting, but I did not think there was any money to be made, so I promptly forgot about this diversion and continued blissfully unaware that a revolution was under way. It was not until the autumn of 2013 that Bitcoin would reappear on my radar.
In October 2013, I was consumed with research on the end of quantitative easing by the U.S. Federal Reserve. The so-called taper had roiled financial markets, and I needed a template to guide my investment decisions. Since many believed that Bitcoin was a direct response to quantitative easing, the two concepts had become twinned, especially on the Internet. Through my research, I began to notice the price of bitcoin was once again on the rise. After stagnating below $31, the price of bitcoin had spent the past year climbing to $150.
As the price climbed, the media attention grew, particularly on the business channel CNBC, on which I appeared. If there is one thing I have learned from being on television, it is “if it bleeds, it leads,” and Bitcoin was as close as business news gets to a bleeding headline. Not only was the price rising rapidly, but the clandestine creator made the story fascinating. Most importantly, people were interested. Perhaps we all sensed that something remarkable was happening and we all craved knowledge. Information becomes a valuable commodity during times of uncertainty.
Despite my deep skepticism, I was haunted by a quote from famed investor George Soros. Mr. Soros was talking about gold as the ultimate bubble when he was quoted by The Australian as saying, “When I see a bubble, I buy that bubble, because that's how I make money.” Well, this was my bubble and it had been unknowingly stalking me for two years. I could no longer ignore the palpable euphoria. I wanted in – no, I needed in.
The Quest to Buy Bitcoin
In my day job, I am accustomed to taking risks, but as I contemplated buying into the Bitcoin hype, fear coursed through my veins. This was a different kind of risk; Bitcoin had a bad reputation. The notorious website Silk Road had just been shut down and its hoard of bitcoins seized by the FBI. Characters with monikers like Dread Pirate Roberts ruled this realm, while hackers constantly launched attacks. If I were to stride into this land flashing my Wall Street credentials, I would be an easy target. Caution and anonymity would be my friends on this quest.
Clicking on stealth mode, I typed “how to buy Bitcoin” and Google's algorithm churned out 166,000 results. The first page of results was meaningless to this neophyte, except for one: Mt. Gox. Since Mt. Gox was the largest exchange in the world, I was vaguely familiar with the name. It was comforting that Mt. Gox was the largest bitcoin exchange in the world, and I decided immediately to ascend Mt. Gox to make my purchase. Astonishingly, it did not bother me that only a short time ago Mt. Gox stood for Magic: The Gathering Online Exchange and was a place to trade magical game cards. Bitcoin was cutting edge, it was the Wild West; I needed to take a risk. In a spurt of rapture I convinced myself that since Mt. Gox was located in Japan and the inventor of Bitcoin went by the name Satoshi Nakamoto, then Japan must be the Bitcoin epicenter.
Doing my best impression of James Bond, I created a fictitious Gmail account to remain as nameless as everyone else who dealt in these “coins.” My pulse quickened as I registered under my alias – I was unsure if I was breaking the law or stumbling upon a hidden fortune. I surveyed my new environs, and I decided to make a purchase; this was my first step toward untold riches. But it all came to a screeching halt when I realized that I overlooked one tiny detail – I needed an actual bank account with real money to buy the coins.
I was determined to cash in on my bubble and promptly formulated a plan.
When I signed into Mt. Gox, a message advised that there was a waiting list of people trying to buy bitcoins. The exchange was so busy that they could not process all the requests, and the message indicated it would be five days before my paperwork could be processed. I was thrilled to have an additional five days to open a U.S. bank account for a “person” with only a fake Gmail address. It was not yet clear to me that my judgment had been compromised by visions of planes, autos, and jewelry. Finally, I drifted back to reality and began to hatch a better plan.
Even though Bitcoin was anonymous, I quickly recognized that my dreams of bitcoin billions required my personal information. I immediately began to look for a layer of security. Another Internet search led me to eBay, where sellers of bitcoins were