How to make and lose millions in the crypto economy and not lose your mind

Sherwood’s Jack Raines interviewed Nat Eliason about his new book, “Crypto Confidential,” and the two discussed Nat’s experience making and losing millions of dollars, his thoughts on tokenomics and investor incentive structures, issues with crypto wallet transparency, where he sees crypto going next, the impact that crypto had on his personal life, and more.

To learn more about Nat’s story, check out his new book, Crypto Confidential.

Jack Raines: With crypto prices now rebounding, do you think that we're going to see mania at the same level that we saw in 2020 and 2021?

Nat Eliason: Totally. It'll just be in new categories, right? In 2020 and 2021, art NFTs went crazy. Then we had the profile picture NFT mania. After that, the ethereum (ETH) competing chains took off. And you had these crazy runs in solana and avalanche and luna.

There was also all of the stablecoin nonsense, like Terra's “20% APR” stablecoin. And you had Olympus as well, right? Those exact same playbooks probably won't get rerun, and you probably won't see another chain promising 20% fixed APR on stablecoins, but there will be new ones.

Now, there are all of these memecoins on solana. There have been memecoins before, but the memecoin crisis is at a whole other level now. You've got the Trump and Elizabeth Warren and Biden (BODEN) coins, for example. There are going to be new stupid things that happen, so I don't think the silly side of the industry is going away anytime soon.

If I was going to make a prediction, it would be that as Coinbase's base chain gets more popular, we will see a much larger mania on there, probably with memecoins, and maybe with NFTs again.

Jack Raines: How did you end up in crypto in the first place?

Nat Eliason: It was the end of 2020, I was stepping away from my marketing agency, and I was looking for something new.

Bitcoin and ethereum were hitting new highs, and as I was day trading dogecoin on Robinhood* on my phone and I started to think, “Okay, there's probably a lot more going on behind the scenes here.” I saw a few friends on Twitter who were getting crazy into crypto and talking about stuff that I did not understand, and I started reaching out to them asking what the hell they were up to, which led me down the rabbit hole.

Jack Raines: As someone who has long been critical of crypto, I was initially skeptical about a book called “Crypto Confidential," but I was pleasantly surprised by how real you were throughout the book. I thought you threaded the needle well, detailing your experience in the crypto market without sounding bombastic.

Was there any point in the middle of the crypto craze where you were a true believer, or did you always think, “This feels like a bubble, but let’s make some money while we’re here?”

Nat Eliason: I was definitely a believer until close to the end, but I wasn’t blindly bullish on everything. I'm proud that I wrote an article pretty early on saying people shouldn't be putting money into Terra because it didn't make any sense. But I didn’t think we were going to see another major drop like we ended up experiencing.

I believed in the Three Arrows Capital super cycle, which forecasted that prices would decline slightly before climbing even higher. I thought ETH would hit $10,000 in 2022. That was where my head was at. I don't think I would have gone as far as I did if I hadn't fully drunk the Kool-Aid.

I feel like you have to reach that point to develop a full view of the space. You have to be obsessed to understand what actually makes sense, to separate the nonsense and cult-like noise from what’s real.

Jack Raines: Was there any point where, looking back, you started to become more skeptical? Or you at least considered diversifying your portfolio a bit?

Nat Eliason: Yes. I think I had a conversation with Nick Maggiulli about portfolio rebalancing, and I did a net worth analysis and realized that 70% of my net worth was invested in crypto, and the correlation of everything in crypto was close to one. That's when I thought, “Okay, this needs to change.”

I still thought the market would move higher, but I had a kid at this point, and I realized that I shouldn’t keep 70% of my family's wealth in crypto. Even if there's a 1% of a 1% chance that something could go wrong, it was worth selling some. That was the only thing that brought me back to some level of sanity.

I didn't sell nearly as much as I should have, but it saved me some money.

Jack Raines: How would you describe Crypto Confidential in two sentences?

Nat Eliason: A first-person thriller adventure of living through the craziest parts of a new mania. It's obviously about that time period, but it's also a story that has happened in many different industries before and will happen in many different industries in the future too.

Jack Raines: Why did you want to write “Crypto Confidential”?

Nat Eliason: After the market died in 2022, I felt like many people, myself included, had lived this insane life during that period. I had spent some time on the really speculative degenerate side of crypto, but I was also coding and building crypto apps. I felt like journalists and outsiders were going to write books about the big events, like FTX and Binance, and I had no interest in competing with them.

But no one was telling the story of the people who were behind the scenes, engaged in the really crazy manic casino side of the industry. I felt like I was in a really unique position to tell that story.

Jack Raines: Was there a specific event from the time period your book focused on that you thought was more ridiculous than everything else?

Nat Eliason: The Olympus DAO was really absurd. Its market cap reached $4 billion, and it was literally a game of chicken, a Ponzi scheme, where everyone thought, “The longer we all hold, the higher this has to go.” But as soon as one person starts selling, the whole thing will collapse, right?

Anchor's stablecoin was another one. I think Anchor had $50 billion at one point? Maybe the $20 billion in the stablecoin behind Terra Luna, or Beeple’s art auction? Looking back, selling an NFT for $69 million was insane. It’s hard to choose.

Jack Raines: In traditional venture capital, when you buy a stake in a company, it typically remains illiquid until an IPO or an acquisition. But in crypto, tokens are liquid immediately, so investors can sell as soon as their tokens vest, correct?

Nat Eliason: Yeah. The nice thing with true public markets is there is often enough liquidity to absorb the VCs selling, but with a lot of these crypto tokens, the liquidity is so small that the market value of the token could be “$50 million,” but there is only $500,000 in liquidity backing it up. As soon as one person starts selling, the liquidity disappears, and now your token is worthless.

Jack Raines: Would investors get their tokens priced at a discount? 

Nat Eliason: Yeah, that was really common. They either received them at a discount or they would get them super early. For example, they might receive 100,000 tokens at $0.10, while the token launches at $1, so the investors are happy sellers at almost any price, while anybody who bought in the public market doesn’t want to sell below a dollar, and they become the exit liquidity.

Jack Raines: Later in the book, you mentioned a certain hedge fund that played a large role in, basically, blowing up a project that you were involved in. Do you think that most of these big investors, such as venture capitalists and hedge funds, were just “investing” because they realized they could flip tokens and make a quick buck?

Nat Eliason: Certainly some did. While there are wonderful crypto VCs who aren't doing this, we did witness blatant insider trading on token launches and token announcements.

If you are a VC, tokens are a sick deal, and I see how a lot of them got sucked up in it. If you invest in a normal company, it might be 7, 10, or 15 years before the IPO, and until then your investment is illiquid, excluding an occasional secondary sale. But if you invest in these crypto projects, the token comes out a year or two later, and you have tokens that unlock pretty quickly, so you can start to sell them and begin to recoup that investment much earlier. It's like reducing the VC cycle to one-tenth of its normal timeline, right? I think a lot of investors were enamored with that, for better or worse.

Some of the international funds, a number of which blew up, were corrupt, in my opinion. We saw that when they invested in us, and then they front-ran the announcement of their investment by buying tokens. That was one of the moments when I was thought, “Oh, man, this is all just fucked.”

Jack Raines: So, when you saw it happening to your project, you realized, “This is probably happening to every project?”

Nat Eliason: Yeah, something similar happened to another project around this time too, and I realized that this was what a lot of VCs and angel investors were doing.

To test that hypothesis, I actually bought into a project shortly after it launched and after the hype died down, and I set a mark on my calendar for when the investor tokens would start unlocking so I could sell right before that date. Sure enough, the token’s price peaked leading up to that date, and then it went off a cliff as soon as the investors started unlocking because they were just dumping everything. That was the game all along.

Jack Raines: How would you design the tokenomics of a crypto project to better align incentives between investors, users, and builders?

Nat Eliason: Most projects have too much liquidity way too quickly, and the core issue is that the teams building crypto projects, as well as their investors, were given tokens before there was an actual product, and before the product could function without its current team members. So that’s the first issue to fix. 

Let’s be honest: if a team member has a few million dollars, and their token suddenly unlocks, they'd be dumb not to sell it. And once you’ve already made your money, you’re no longer as incentivized to work hard.

I think tokens are cool, and they’re a great idea for certain projects, but they should come a lot later and unlock much slower. It's just too easy for people to take the money and run otherwise.

Jack Raines: You're not involved in crypto at all now, right?

Nat Eliason: Correct.

Jack Raines: Have you felt any temptation to dive back in, now that prices are hitting all-time highs again?

Nat Eliason: 100%. I funded a small solana wallet so I could screw around with the shitcoins just to scratch the itch, but I think you have to either go all-in, scanning Discord chats 24/7 trying to find the alpha and figure out what to do, or you shouldn’t get involved at all. Being half in and half out is where you just get destroyed. You won't know when to exit, and you won’t know what's launching. That’s how you become people's exit liquidity.

I had a pretty good outcome from my time in crypto, but the easiest way to lose all of that would be to assume that I could just run back the same playbook and double my money.

Look at investors who got wrecked, like Three Arrows Capital. They could have sold huge multiples of their original investments at any point, but they didn't. They kept doubling down and then ended up getting liquidated.

Jack Raines: Do you think most of the money in crypto was the same pool of money jumping from project to project to project, or do you think the ecosystem had net inflows or outflows?

Nat Eliason: I think there were two phases. First, there was the big retail inflow from the end of 2020 to the beginning of 2021, and that probably ended when BTC and ETH started dropping around May 2021. But then the bull market picked back up, and that’s when NFTs, Olympus, and gaming went crazy.

That second phase, I think, was pretty circular. A lot of the same money was rotating between projects, and the crypto market became PVP, right? Player versus player. The one outside source of capital here was all of the VCs who had raised all this money and had to invest it. The companies they invested in would buy ETH for their treasuries, or buy NFTs, so that added more money to the ecosystem. But I think that after that first peak in prices, the retail inflows declined significantly.

Jack Raines: Some of my favorite sections of your book were when you would step back from crypto to discuss what was going on in your home life, and an underlying theme was that your obsession with crypto was negatively impacting your real world relationships. Do you think this was a pervasive trend in crypto?

Nat Eliason: I think that was super widespread. I remember, during that time period, basically every time my wife and I would hang out with friends, all the guys would be talking about crypto within minutes, and all the women grew sick of it.

It was all we wanted to talk about, and everybody else was tired of listening to it. I think a lot of people felt a sense of relief after the market crashed, Like, “Oh, I'm free. I can turn it off, I can get out now.”

We were addicted to the dopamine, and we were checking prices 24/7. I'm glad to have had that experience because now I can recognize when I start getting pulled into that headspace again, and I can take a step back before it becomes all-consuming.

Jack Raines: What was the hardest part about figuring out when to sell?

Nat Eliason: First of all, I didn't do a great job of selling. The irrational, unreasonable bullishness that convinces you to make a lucrative investment early will also convince you not to sell.

I think it's pretty easy to buy in at the right time, but it's really, really hard to sell at the right time. For example, I put like $10,000 or $20,000 in Olympus, rode it up to $110,000 or $120,000, and I ended up losing money on it because I rode it all the way back down.

I made a crazy return on my Bored Ape, but then I rolled those proceeds into a CryptoPunk at the top of the market, and I lost more than I made on the Ape.

The two things that saved me were 1) Doing the net worth analysis that showed I had 70% of my money in crypto, and realizing that was way too high, and 2) realizing the liquidity problem early and understanding that it would be difficult to quickly sell my positions in a lot of these tokens, so I had to start selling a little bit each day. If I hadn't done that with the last project I was working on, I wouldn't have made a quarter of my returns because I would have held it all until the end. The token is something like $0.01 or $0.02 now, and at one point in the book, it was $13.

Jack Raines: Which sensation was stronger, the pain from losses or the enjoyment from gains?

Nat Eliason: Honestly, the worst pain was the missed gains. Watching something continue to go up after I sold or decided not to buy was tough. Losses were easier to ignore because I thought, “Oh well, at least you played.” But when you choose not to play, you can always convince yourself that you would have made all that money, even though you probably wouldn’t have. It’s toxic, because then you are throwing money into everything out of FOMO.

Jack Raines: You mentioned in "Crypto Confidential” one issue that arose when you started selling your project’s tokens was that everyone could see everyone’s wallet, and all transactions were public. When investors saw you selling, they thought, “Wait, why is he selling?”

Selling isn’t necessarily bearish, and it’s not that different from a CEO or some other insider selling stock in their company for a million different reasons. Maybe they want to buy a new home or pay for their kid’s college education. But in crypto, everyone can instantly see everyone’s transactions, and rumors spread quickly.

Do you think this level of transparency is good or bad?

Nat Eliason: It's definitely good in some ways. For example, I use an analogy in the book that it would be awesome if every government dollar was super transparent on exactly where it was going. That would be such an improvement in society.

But when every dollar that you own is public, it gets a little freaky. When I was first working for the team, I thought it was going to be a small side project. And then suddenly, there are tens of thousands of dollars per day hitting my wallet.

Jack Raines: How big was the project’s treasury at its peak?

Nat Eliason: There are a lot of ways to measure it. Using the most ridiculous measurement, we had “$1.2 billion.” Of course, you could never get all of that out because the market wouldn’t have been liquid enough, but it looked cool on paper.

Jack Raines: Did you ever take a screenshot of that?

Nat Eliason: Oh yeah, it's somewhere in the team's discord. But back to your main question. People started hounding me and hounding the team, asking, “Why are you selling?” And I was thinking, “It’s my tokens, I can do whatever I want with them!” But on the flip side, I know plenty of people who were working in crypto, who were also getting paid in their team's tokens, who never sold anything because they were worried about the optics.

They could have been up millions of dollars, and they didn't take any of it off the table because they were worried about what people would think. That was a huge mistake, obviously, because that money is never coming back. It’s a shame, because those people did real work. So I have mixed feelings on the level of transparency. If I were doing it again today, I would probably use an anonymous wallet to get paid the token, so it wouldn't have been a big deal. 

Jack Raines: What would you want a reader to take away from Crypto Confidential?

Nat Eliason: Really know what game you're playing if you want to dive into a mania like this. Don't drink the Kool-Aid. Don't believe that this crazy casino, hyper volatile mania that you're in is going to change the world.

It’s fine to play, but don't let it ruin the rest of your life. Try to keep everything in perspective. Once you start making a little bit of money, it will sink its hooks into you really, really quickly.

To learn more about Nat’s story, check out his new book, Crypto Confidential.