Can Olaf Carlson-Wee survive the Bitcoin crash?

SAN FRANCISCO:Olaf Carlson-Wee has crammed the highs and lows of a hedge-fund career into roughly one year—all before his 30th birthday. 

He turned $14,502 into a $150 million personal fortune by going all-in on cryptocurrencies right before bitcoin became a household name. His fund, Polychain Capital, earned investors including Silicon Valley heavyweight Andreessen Horowitz a staggering 2,303% last year, after fees—among the best showings for a billion-dollar investment firm in history—drawing comparisons to Wall Street traders such as John Paulson and George Soros.

Now, Mr. Carlson-Wee must prove he isn’t a one-hit wonder. It isn’t going well.

Polychain has shed 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 grumble that Mr. Carlson-Wee refuses to change tactics despite a broad pullback from crypto. Mr. Carlson-Wee cashed out a big chunk of his personal haul in the fund months ago.

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.

Crypto fever, meanwhile, has broken. After capturing the attention of the investing world in 2017, bitcoin, the most well-known of a mushrooming collection of so-called digital assets, is down 55% this year. It recently traded for $6,301, down from its peak of nearly $19,280 in December.

“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.

At the center of the maelstrom is Mr. Carlson-Wee, a Silicon Valley 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.

In interviews, he compared his relationship with cryptocurrency to romantic love, and likened the current investment opportunity to the early days of the internet.

Through each dip downward, he has continued buying, particularly stakes in businesses tied to bitcoin rivals such as the cryptocurrency ether. 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.

“I want to emphasize how long I’ve been doing this,” says Mr. Carlson-Wee, who turned 29 last month. “This is really just like breathing in and out for me.”

This account of the windfall and subsequent struggles of Polychain and Mr. Carlson-Wee is based on multiple interviews with people close to the firm, as well as audits and other investor documents reviewed by the Journal.

Mr. Carlson-Wee’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.

Bitcoin is software that allows people to exchange value directly, without any government intermediary, essentially functioning as a digital form of money. It was created in 2008 by a person or people under the pseudonym Satoshi Nakamoto.

After graduation in 2012, Mr. Carlson-Wee became the first employee at Coinbase, a nascent cryptocurrency exchange. Until the morning of the 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.

In July 2016, Mr. 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: 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 Naimi 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. Naimi repeated the same question. “I think $400 million is really the right number,” Mr. Carlson-Wee said.

Polychain was growing fast because cryptocurrency was suddenly mainstream. Hundreds if not thousands of startups were forming to use the blockchain, the software that underpins bitcoin. The blockchain is said to be able to help airlines track flights, banks settle accounts and grocers stock food, among other uses.

New, competing cryptocurrencies popped up rapidly via so-called initial coin offerings that could raise hundreds of millions of dollars instantly. The creators of some coins gave them away to Polychain, Mr. Carlson-Wee and other early adopters, hoping for the imprimatur of approval. Polychain would later sell some for profit.

Mr. Carlson-Wee spent hours each day at his computer, occasionally responding to strangers on social-media sites like 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.

Around the summer of 2017, Polychain irked some of its earliest investors, including friends who had invested months earlier on little more than faith, when it demanded they each invest hundreds of thousands of dollars more. Some didn’t have the cash, and were forced out. Mr. Carlson-Wee says the move was required as Polychain made changes to accommodate larger investors, and that only a small number of Polychain backers were affected.

Mr. Carlson-Wee was growing wary of onetime allies. He raged against an early backer, San Francisco firm Pantera Capital, which started a competing crypto fund while it still had access to Polychain’s trading information. Mr. Carlson-Wee blocked Pantera from receiving updates on Polychain and threatened to force them and other early investors to sell their stakes, before backing down under promise of a prolonged legal fight.

In a statement, Pantera said it “denies that it misused any confidential Polychain information or otherwise violated any obligation to Polychain.”

In early November, Mr. Carlson-Wee paid for around a dozen employees to fly to an oceanfront resort in Cancún. The crypto market was soaring and everyone was relaxed, say attendees; one afternoon, some in the group skipped an iPhone back-and-forth across the pool as they debated whether the device was waterproof. A few minutes later, the phone sank and was ruined.

Mr. Carlson-Wee blames a friend, Richard Craib, for the broken phone.

Mr. Craib was among the early investors 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.

At a panel discussion during Union Square’s annual investor meeting in November, one attendee asked for the firm’s thoughts on Polychain. “Oh, Olaf,” responded Union Square partner Albert Wenger, inserting an extended pause, according to an attendee. “He’s a bit of a gunslinger.”

Union Square co-founder Fred Wilson says he doesn’t recall Mr. Wenger making such a comment and says the firm still has faith in Polychain. Still, Union Square decided to pull some of its money in Polychain late last year, he says, in an effort to “de-risk the investment.” He says Mr. Carlson-Wee is “a quirky guy” who “makes up his own mind and figures things out in his own head.”

Mr. Carlson-Wee 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, Calif., 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.”

Mr. Carlson-Wee describes his approach instead 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.

Ethereum is down 74% this year, and 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.

Since the start of the year, Polychain has blocked investors from redeeming their money immediately, instead putting investments into a so-called side pocket that now makes up more than half the fund. That means investors can’t cash out fully even if they want to.

“If cryptocurrencies go to zero, we go to zero,” Mr. Carlson-Wee said. “I don’t think anyone is under any illusions that’s not the case.”

Mr. Carlson-Wee is rich either way. 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. Mr. Carlson-Wee started last year with just $14,502 in the fund, and turned that into $150 million of fees. He 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.

“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.

Mr. Carlson-Wee and Polychain face a lawsuit filed in March from an early investor, professional poker player Harry Greenhouse. In court filings, Mr. Greenhouse says he asked for his money back late last year and was partly repaid “at cost,” or for the price originally paid, as opposed to what it could be sold for. He alleges Polychain won’t detail how they valued his investment, and suspects he was underpaid.

The matter is in arbitration.

Mr. 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,” Mr. Carlson-Wee said, smiling. “Like, if this whole thing collapsed, that would be crazy, you know?”

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