How we made $100K trading CryptoKitties

On December 4–5, several less prestigious Kitties (#35, #78, #87) sold for almost 200 ETH, so we were confident our listing price was well-adjusted. However, December 5–6 was the top on every metric, and by the end of December 6 the popularity was clearly trending downhill. Observing this, we had an emergency call on December 6 trying to figure out what to do with the Kitties, none of which sold at our listed 250 ETH price yet. I wanted to re-list the Kitty at a lower price of 100 ETH, whereas Oleg was steadfast on sticking to 250 ETH. Given our disagreement about the value of the Kitty, we did the obvious arbitrage: I sold my 20% stake to him at a 100 ETH “Kitty valuation”, essentially doubling my money on the spot. Little did I know I’d only be happy about this deal for about 20 minutes…

I kept watching the marketplace out of curiosity. Now, 20 minutes after Oleg bought me out, I saw our Founder Cat #4 sold at the original 250 ETH price. I was so confident it was Oleg generating game activity for his merchandise, I barely bothered to ask him. When I did, however, I learned the full power of HODLing: it was a genuine purchase, we had no idea who was the buyer, and he’d just set the world record for selling a collectible on the blockchain.

Automatic arbitrage

Having had such a lucky start to the game, we discussed what else we could do with it. Peak hype was clearly over and ridiculous prices for the rarest Kitties were unattainable, but the long tail remained: people still wanted to play, and to get some kind of Kitty for themselves.

So we decided to try running an automatic arbitrage bot on the long tail of cheaper Kitties. Like any reseller strategy, it essentially consisted of the following three steps:

• Determine clusters of Kitties that should be priced roughly the same. The parameters we looked at were Rarity, Cooldown and Generation (only Gen 0 and Gen 1 were expensive enough to bother). Kitties with same values across these 3 parameters were deemed equivalent (ignoring cuter artwork or Cattribute variations).
• Buy underpriced items within each class. In our case, we only bought the cheapest Kitty across every parameter set.
• Resell the acquired item for more. In our case, we wanted to avoid a race to the bottom with other potential resellers, so we listed each Kitty at slightly below the second-cheapest price (similar to Google’s second-price auction).

After exploring several blockchain libraries, we found refactoring my previous Bancor front-running code to work best. The strategy was: watch for transactions that put Kitties on sale, buy out immediately if it matches the criteria. This instant reaction mechanism is pretty similar to front-running except it’s more like post-running: one cannot put the “buy” transaction before the “list on the auction” transaction, so it needs to happen immediately after. On a more technical level, there are several ways to implement this:

• Whenever you see a pending “listing” transaction, try to buy out the Kitty within the same block. You could either send the “buy” transaction with a slightly lower price (e.g. if the “list” transaction pays 25 gwei for gas, you can pay 24.999 gwei), or, alternatively, pay precisely the same. In the former case, you risk being just below the block cutoff threshold, and then your transaction would stay “pending” for hours if the activity spikes. In the latter case, you risk miners putting your “buy” transaction in front of the “list” transaction (since gasPrice is the same, the order can be arbitrary and depends on miner software), which would result in our transaction failing.
• Wait until the “listing” transaction is confirmed, and send out the “buy” transaction right after with a very high gasPrice, ensuring confirmation within the next block.

You wouldn’t expect this cute game to be a particularly dense arena, but we had competitors who employed each of those options trying to snatch the Kitties! And since each of those options had its own benefits, we had to implement all of the strategies to have the highest chance (this can be done either the naive way, by running the 3 versions from 3 accounts, or by re-using the nonce within the same account, but further technical details are beyond this story).

Another possibility we considered was the following: assume you want to buy a Kitty, and its price is slowly going down as determined by the linear time auction. Instead of buying it right away, one can wait until another contender appears and front-run their purchase, achieving lowest possible price. As much fun as it would have been to be such evil masterminds, the market was crashing too fast to warrant spending that much attention on any single big-ticket Kitty.

Aftermath

More than a month after the peak hype subsided, we received a pleasant surprise: somebody bought out Kitty #6 as well. 29 ETH was below the initial purchase price, but decent money nevertheless (plus Ethereum doubled in price at the time).

The remaining Kitty #8 gets Oleg’s undivided care and adoration. The Kitty has its own laptop stickers, t-shirts and even a custom-made silver pin. I hear it is about to get its own Instagram channel too.

In the end, it was a very hands-on lesson on speculative manias. I undershot and Oleg overshot, but both of us almost precisely doubled our money, which was a pretty amazing outcome. Yes, there is absolutely no guaranteed intrinsic value or price floor for imaginary Kitties. Nevertheless, one can still play this game and even win. And of course, it was practically impossible to predict where the top of the bubble would be, although we came pretty close.

As for my ~$5000 profit from this adventure, I decided to donate it to MCCME’s Summer Informatics School, an exceptional coding bootcamp in Russia where I studied as a high-schooler, as well as the Freedom of the Press Foundation. Here I doubled my money again thanks to Google’s generous Gift Match Program.