Olaf Carlson Turned $14,502 Into $800 Million: Now The World's Biggest Crypto Hedge Fund Is Hurting

Olaf Carlson Turned $14,502 Into $800 Million: Now The World’s Biggest Crypto Hedge Fund Is Hurting

Olaf Carlson-Wee is hardly a household name in the pantheon of iconic hedge fund investors. And yet, after turning $14,502 into a $150 million personal fortune by going all-in on cryptocurrencies just before bitcoin became a household name, earning investors in his Polychain Capital such as heavyweight VC Andreessen Horowitz a staggering 2,303% return last year, eventually growing his hedge fund to $800 million… and then losing some 40% of it all before the age of 30, perhaps he  should be.

But the bigger question is with millions riding cryptocurrencies from rag to riches and then back to rags again, is Olaf just a one hit wonder?

Olaf Carlson Turned ,502 Into 0 Million: Now The World's Biggest Crypto Hedge Fund Is Hurting
Olaf Carlson-Wee, 29

That’s what the WSJ asks in its wide-ranging profile of the Silicon Valley (former?) star who wears neon tracksuits, has five earrings and routinely eats only a plate of refried beans, garlic and cheese for dinner. He is treated as an oracle by wannabe cryptocurrency moguls who mob him in public. He was treated similarly by his investors, until the losses started coming in.

Riding the crypto wave to its December 2017 all time highs, Polychain has since lost around 40% of the $800 million it made for clients last year “through a combination of investment losses and withdrawals by some of its earliest investors.” Some backers are unhappy that Carlson-Wee refuses to change tactics despite a broad pullback from crypto; he himself – like David Einhorn – is fine with his strategy, especially since he cashed out a big chunk of his personal haul in the fund months ago.

To be sure, 2018 has brought nothing but bad news for the one-time star investors:

Prominent venture-capital firm Union Square Ventures has yanked some of its money, while others have fallen out privately with the firm. One investor is suing, suspecting he was underpaid when he moved to redeem his investment. Attorneys for Polychain and Mr. Carlson-Wee deny that.

Worse, the crypto bubble has burst, with bitcoin sliding 55% this year, recently trading for $6,301, down from its peak of nearly $19,280 in December. Ethereum is even worse, down over 80% from its all time highs over $1,300 to below $200 and sliding every day.

“How much of it is luck, how much of it is skill and how much of it is luck disguised?” asks Fred Ehrsam, one of Polychain’s first investors, who is now starting his own fund.

Luck or skill, it is safe to say that Olaf is unorthodox.

The young man has “compared his relationship with cryptocurrency to romantic love, and likened the current investment opportunity to the early days of the internet.” A true bitcoin fanatic, he is not only a hodler, he is a BTFDer – and there have been many dips recently – and has continued buying on every single dip, particularly stakes in businesses tied to bitcoin rivals such as the cryptocurrency ether.

His “office” is what one would hardly describe as “midtown Madison avenue”: he manages Polychain’s roughly $650 million flagship fund—the world’s biggest in crypto—from an Apple laptop surrounded by vintage boom boxes in undisclosed, secret San Francisco warehouse offices.

His background is also unique: Olaf’s path to high-stakes investing began in Minnesota, in the suburbs of Fargo, N.D., where his parents were Lutheran pastors. In high school, Mr. Carlson-Wee wrote an SAT tutoring program in his spare time. He said he had few friends; his classmates voted him “most unique.” At Vassar College, he majored in sociology and against advice from his professors wrote a senior thesis on a virtually unknown digital currency named bitcoin.

After graduation in 2012, he found his calling early when he became the first employee at Coinbase, a cryptocurrency exchange that would soon become America’s largest.

And – unexpectedly for a multi-millionaire – until the morning of his WSJ interview, he owned only one pair of pants: jeans covered in sap from a short stint as a lumberjack. A shoestring acted as the belt. His $50,000 starting salary was paid in bitcoin.

And lucky that it was, because in July 2016, Carlson-Wee quit to start one of the first-ever crypto funds out of an apartment he shared with seven roommates in San Francisco’s gritty Mission district.

With a mullet, a wide collection of vintage windbreakers and a tendency to speak extemporaneously on esoteric topics, Mr. Carlson-Wee reminded some investors of the 1980s “Back to the Future” character Marty McFly.

The pitch worked and soon venture capitalists were lined up at the door (even though as the WSJ writes, Carlson-Wee reminded some investors of the 1980s “Back to the Future” character Marty McFly).

The pitch worked: In December 2016, Union Square Ventures agreed to invest in the fledgling firm at a $5 million valuation, a steep price considering its total assets under management were roughly the same.

Venture capitalist Ramtin Maimi took a stake in Polychain at the same time, and afterward took Mr. Carlson-Wee out to lunch. Over avocado toast, he asked the manager how large Polychain could grow.

“Fifty million dollars is a great target,” Mr. Carlson-Wee responded. A few months later, Mr. Maimi repeated the same question. “I think $400 million is really the right number,” Mr. Carlson-Wee said.

His timing was perfect: polychain grew exponentially at a time when cryptocurrency suddenly became mainstream. Hundreds if not thousands of startups were forming to use the blockchain.

As the money rolled in, Carlson-Wee spent hours each day at his computer, occasionally responding to strangers on Reddit, encouraging them to buy bitcoin and the like. More big names in Silicon Valley were beginning to invest in the fund including Sequoia Capital, Bain Capital Ventures and Peter Thiel’s Founders Fund, all eager to get access and insight into the crypto phenomenon.

Olaf Carlson Turned ,502 Into 0 Million: Now The World's Biggest Crypto Hedge Fund Is Hurting
Carlson-Wee at Polychain Capital’s offices in a converted warehouse

However, things started to turn sour after Richard Craib, one of Olaf’s friends who first invested with Polychain, was among the first those having second thoughts. He had invented his own coin, dubbed the Numeraire, which briefly made him wealthy on paper as investors including Polychain bid it up. But Polychain subsequently sold some Numeraire, depressing the value of Mr. Craib’s holdings. Mr. Craib shortly after redeemed his investment in Polychain funds, for what he says were unrelated reasons.

Union Square Ventures, one of Polychain’s earliest backers, was also debating its investment. Polychain was racking up millions in gains, but only on paper, and the digital currency was volatile.

None of these events would have taken place if bitcoin had continued to surge, but it was not meant to be.

So has the bitcoin crash affected the 29 year old? Not at all: according to the WSJ, Olaf isn’t bothered by bitcoin’s daily churns. On a recent weekday afternoon, he left his cellphone in his dusty, black Cadillac Escalade for a 90-minute, technology-free hike to the site of an ancient volcanic crater in the Oakland hills.

In between digressions on movie trailers (he won’t watch them, fearing spoilers) and capitalism (in a natural, but not imminent, decline), he talked about how he doesn’t consider himself a trader.

“One thing I want to emphasize is that as a trader, when something doubles, you sell half—or something like that,” he says, making air quotes over the word “trader.” At Polychain, he says, “We don’t trade. We shift around positions.”

Instead, Carlson-Wee describes his approach as “long-term, thesis-driven investing.” This philosophy, shared by blue-chip technology investors such as Andreessen Horowitz, is that cryptocurrency is only one branch of a larger upending of the digital world. Most existing online entities, from dating applications to enterprise cloud computing, will be replaced on a less-expensive, decentralized infrastructure, the blockchain. The question for evangelists is which of the hundreds of competing blockchain platforms will reach widespread adoption.

Last year, Mr. Carlson-Wee was largely placing a bet that his favored platform, Ethereum, would win out; more than one-quarter of Polychain’s main fund was invested in Ethereum, according to its most recent audit.

It proved to be a pinful but, as ethereum is down over 75% this year, while Polychain’s main portfolio is down by about 31% through the end of July, the latest figures available. In communications this year with investors, the firm defended its performance as better than the crypto market at large.

Investors in the fund credit a shift from assets such as Ethereum into less-liquid, more stable stakes in crypto companies internationally. That’s a less-volatile bet but one that’s harder to get out of in the case of an extended decline.

Whether he managed to beat his ethereum “benchmark” is irrelevant, as those investors who want to pull all of their money are now out of luck. Since the start of the year, Polychain has blocked investors from redeeming their money immediately, instead putting investments into a side pocket that now comprises more than half the fund. That means investors can’t cash out fully even if they want to.

But while his investors may be stuck, Carlson-Wee is rich. Unlike many firms that hold illiquid assets that are paid only when they sell investments, Polychain’s main fund takes its fees every year on paper gains. And while Carlson-Wee started last year with just $14,502 in the fund, turning that into $150 million of fees, he has since cashed out $60 million, a move that raised concerns among investors about his commitment to his own fund. “He says he set aside money for family, and subsequently invested more in the firm’s funds.”

What happens next is unclear.

Carlson-Wee now straddles the line between crypto kid and crypto king. He has pared back his time on online message boards to 15 minutes a day, from an hour or more in years’ past, to spend more time on the fund. He recently chopped off his mullet because being known for such an idiosyncrasy reminded him of “something a hedge-fund manager would do.”

He moved the firm to new offices in a converted warehouse. The San Francisco address listed on Polychain’s public filings is a fake, designed to fool would-be hackers and kidnappers who have targeted other crypto traders.

“This is going to be such an epic adventure either way,” Carlson-Wee said, smiling. “Like, if this whole thing collapsed, that would be crazy, you know?”

Others disagree: “This model will not last,” says Jing Sun, a Polychain investor. Polychain is now raising new funds that won’t charge fees until they realize gains.

Ultimately, the story of Olaf will be determined by whether believers in cryptocurrencies can reflate yet another bubble. “If cryptocurrencies go to zero, we go to zero,” Carson-Wee said. “I don’t think anyone is under any illusions that’s not the case.”

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