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Market & Analysis

A 20-year-old crypto market-maker who skipped college breaks down his Reddit-inspired approach to trading – and outlines why he sees ether displacing bitcoin as the ‘king cryptocurrency’

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Matthew Tweed
Matthew Tweed is a 20-year-old crypto market maker.

  • Matthew Tweed runs his crypto firm from his parents’ house in the suburbs outside London.
  • 20-year old Tweed told Insider “around 90%” of the conversations he has about crypto take place on Reddit.
  • He backed ether to eventually displace bitcoin due to its technological advantages.
  • See more stories on Insider’s business page.

Matthew Tweed learnt his first valuable lesson about cryptocurrency six years ago, when he was just 14 years old.

“I got into investing in crypto because I found an interesting token that was meant to be for online marketplaces, and I moved from that to bitcoin,” Tweed told Insider. “I can’t remember what the project was called – it didn’t go anywhere, but that showed me that there’s a lot of cool projects, but a lot of projects won’t end up working out.”

Tweed now runs his low-latency trading firm, Pine Financial, from his family home in Woking, a medium-sized commuter town, 25 minutes from London. He believes 100% annualized gains are possible in that area of cryptocurrency trading.

Low-latency, or market-making, trading refers to the use of algorithmic trading to increase profitability. Tweed’s bots execute trades on crypto exchanges like Deribit.

“I managed to get into the market-making space without eight figures behind me, but it’s not very accessible,” Tweed said. “You have to put in a lot of time to become competitive.”

Tweed has spent a significant amount of that time on Reddit. He said his first break in market-making trading came from an interaction with another user on the social networking site.

“At the very end of 2018, I got into low-latency trading,” he said. “That came from someone I met on Reddit – to be honest, 90% of what I’ve done and the people that I’ve met has come from the various sub-reddits on algo-trading.”

“I frequent r/algotrading for a lot of my work,” Tweed added, referring to a Reddit forum with 1.2 million users that focuses on quantitative trading and automated strategies. “The specific subreddits are good, but places like r/cryptocurrency don’t have much good content, so I barely look at it.”

Tweed embarked on a career in algorithmic trading just as his classmates were beginning to apply to college. For him, a formal education had limited appeal, given his success with cryptocurrency trading.

In terms of which cryptos he likes the most, Tweed said he believes the ethereum network’s superior technological capabilities will enable its ether token to surpass bitcoin.

“Ethereum will be far more scalable – that should lead the way for being able to make much better applications, so you can have a proper smart contract based decentralized system,” he said. “You’d never be able to build smart exchanges on top of bitcoin – there’s not a platform for it.”

“Long-term, I think there’s a good chance ethereum will become the king cryptocurrency,” Tweed added.

Ether has been volatile this year, surging from $730 to a peak of almost $4,000, before collapsing to under $2,000 weeks later. The token has risen by around 10% to $3,140 since last week’s implementation of the so-called “London hard fork” upgrade, which initially burned around $8,900 worth of coins per minute.

“I think Ethereum 2.0 is going to be great for scalability in the crypto space,” Tweed said. “Many smart contract platforms claim better scaling than Ethereum, but they’re often extremely centralized, or make other fundamental trade-offs, which defeats the purpose of crypto.”

However, despite his own success as a relative outsider, Tweed said investors need to be careful before throwing themselves into the cryptocurrency space.

“Cryptocurrency is fairly small and specialist – I wouldn’t recommend people just throw money at it,” he said. “There’s a lot of ways that retail investors can lose money.”

“There’s a need for regulators to have knowledge of the industry, but in general, I’m in favor of exchange regulation, risk disclosures, and education to protect retail investors,” he added.

Tweed pointed to ‘sh*tcoins’, such as the highly volatile dogecoin, as an example of an area where retail investors could potentially lose money without tighter regulation.

“[Sh*tcoins] are amusing, and I enjoy watching them, but I wouldn’t invest in them or hold them,” he said. “The price may go up in the short-term, but there’s no reason it would in the long-term. In the short-term it’s just supply and demand – people jumping on the meme-coin.”

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Blockchain

Cryptocurrency mining under proposed US policy changes

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The regulatory scrutiny of blockchains and cryptocurrencies is increasing. From the cryptocurrency mining ban in China to President Joe Biden’s Working Group on Financial Markets, convened by Treasury Secretary Janet Yellen, the economic activities that support and are enabled by blockchains have become a significant concern for policymakers. Most recently, a provision in the proposed 2021 infrastructure bill amends the definition of a broker to expressly include “any person who […] is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

The stated goal of this “miner-as-broker” policy change is to improve the collection of tax revenues on cryptocurrency capital gains by enhancing the ability of tax collectors to observe cryptocurrency trades. Since cryptocurrency miners regularly validate transactions that transfer digital assets, such as cryptocurrencies, on behalf of cryptocurrency holders, these miners would appear to satisfy this definition of a broker. Unsurprisingly, many in the cryptocurrency industry have raised concerns.

One key feature of blockchain technology is competitive decentralized record-keeping. The pros and cons of this new form of record-keeping relative to traditional centralized financial databases are an active debate. But the new regulation might produce a premature end to this debate.

Related: Authorities are looking to close the gap on unhosted wallets

What are the direct consequences of defining miners as brokers?

First, miners — at least those located in the United States — would be subject to significantly enhanced requirements for reporting to the Internal Revenue Service. The cost to miners of complying with such requirements is likely to be large and largely fixed. Miners would need to bear these costs, regardless of how much mining power they have and before they mine a single block. This will deter entry and likely cause more centralized control or concentration of mining power.

Second, these broker-miners would be responsible for satisfying Know Your Customer regulations. Given the pseudo-anonymous nature of most cryptocurrencies, such a policy would limit the types of transactions broker-miners would be able to process to non-anonymous transactions. How would this work? Presumably, I would register with a miner (linking my driver’s license with a Bitcoin address, say), and miners would only validate transactions on behalf of their registered users. But if that miner happens to be small (have small mining power), then my transactions are less likely to be processed on the Bitcoin (BTC) network. Perhaps, it would be better if I (and you) register with a larger miner. Or perhaps, we should all just use Coinbase and allow a miner to handle transactions on behalf of Coinbase. Again, the impact here is a greater concentration of mining power.

Combined, this policy is likely to increase the concentration in U.S. cryptocurrency mining while raising the costs of mining and possibly reducing the overall amount of mining that takes place; that is, the policy would shift mining within the U.S. away from the “shadowy faceless groups of super-coders” recently described by Sen. Elizabeth Warren, but perhaps increase the reliance of users on such faceless super-coders outside of the United States.

What are the global consequences of defining miners as brokers?

Part of the global impact of the proposed provisions in the infrastructure bill depends on the relative importance of U.S. cryptocurrency mining operations with the context of mining worldwide. Recent history provides some perspective. In June, China stepped up enforcement of its Bitcoin mining ban. The result was far fewer miners. We can see this in the drop in mining difficulty observed at the beginning of July. The mining difficulty governs the rate at which transactions are processed (about 1 block per 10 minutes on Bitcoin). With few miners, the difficulty falls to keep the transaction rate constant.

The lower level of mining difficulty requires less electricity to mine a block. The block reward is constant. The price of Bitcoin did not fall with the decreased difficulty in July. Here are three things to note:

  • Mining profits for the remaining miners must have increased.
  • New miners did not replace the now off-line China miners swiftly.
  • Competition in mining fell.

These features are likely to lead to a consolidation or concentration of mining power. If the new regulation — particularly the broker designation of miners — goes ahead, we can probably expect a similar impact.

Related: If you have a Bitcoin miner, turn it on

Is higher concentration inherently bad news?

Much of the security thesis of blockchain technology is rooted in decentralization. No person has incentives to exclude transactions or past blocks. When one miner has substantial mining power — a high likelihood of solving multiple blocks in a row — they may be able to alter part of the blockchain’s history. This situation is called a 51% attack and raises concerns about the immutability of the blockchain.

There are two related consequences of the proposed policy. First, higher concentration, by definition, puts miners closer to the mark where they can effectively alter the blockchain ledger. Second, and perhaps more subtle, the profitability of an attack is higher when the cost of mining falls — it is just cheaper to attack.

As my co-authors and I argue in ongoing research, however, such security concerns stem entirely from Bitcoin’s mining protocol, which recommends miners add new transactions to the longest chain in the blockchain. We argue that the potential success of 51% attacks derives entirely from this recommendation for coordinating miners on the longest chain. We show how alternative coordination devices may enhance a blockchain’s security and limit the security consequences of increased mining concentration.

No competition, no blockchain

Whether the current provisions concerning digital assets in the 2021 U.S. infrastructure bill pass or not, policymakers appear ready to enhance regulation and the reporting of cryptocurrency trades. While the debate has mostly focused on the tradeoffs of an enhanced monitoring of cryptocurrency trading by the U.S. government and the potential harm to U.S. innovation in blockchain, it is critical for both policymakers and innovators to consider the likely impact of such policies on competition within cryptocurrency mining, as this competition plays a critical role in securing blockchains.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph, nor Carnegie Mellon University or its affiliates.

Ariel Zetlin-Jones is an associate professor of economics at Carnegie Mellon University. He studies the interaction of financial intermediation and the macroeconomy. Since 2016, Ariel has been researching the economics of blockchains — how economic incentives may be used to shape blockchain consensus and stablecoin protocols as well as the novel and economically large centralized markets that currently support cryptocurrency trading. His research has been published in the American Economic Review, the Journal of Political Economy and the Journal of Monetary Economics.