Lessons from the crypto crash
Alright, let’s get this out of the way right up front. I know you hate the “I told you so” guy. We all hate that guy.
You especially hate that guy when you’ve paid the price and learned your lesson, and he’s sitting there in the corner with a smug little smile on his face, shaking his head at you.
So I write this memo at the risk of being that punchable guy.
The big story of the moment is the implosion of the FTX crypto exchange. Now I know that most of my readers are not invested in this space, but there’s a lot to learn here as you watch safely from afar.
Lesson 1: Resist the temptation to follow the crowd
As the crypto bubble was peaking in 2021, I spoke with several investors who felt compelled to take part in the boom. There was a lot of excitement around it, and money to be made (or at least, that was the perception). But for those who should have been investing defensively, what was to be gained from participating? I can’t make a comment better than referring to the quote from Niki Lauda that appears in my book:
“The secret is to win going as slowly as possible.”
As a very young, unregulated industry, cryptocurrencies and non-fungible tokens (better known as NFTs) were treacherous. For those with a good-sized portfolio and a reliable source of income, there was no logical reason to take this risk, and avoiding the urge to participate was the right decision.
Lesson 2: “Mainstream” doesn’t mean “safe”
Unfortunately, many mainstream investment firms who should have known better caved to the speculative masses and cranked out various crypto funds and products to meet the demand. They set their professionalism aside and participated in a bubble with their clients’ savings because it was good for their bottom line. What to remember for the next bubble is that these products are just an industry meeting investor demand, not a validation of the safety of the investment.
Lesson 3: Don’t assume the big guys know what they’re doing
The Ontario Teachers’ Pension Plan lost $95 million of its’ members money in FTX. As recently as September 2022, CEO Jo Taylor was quoted as saying “In terms of the risk profile, it is probably the lowest risk profile you can have in that it’s everybody else is trading on your platform.”
Legendary venture capital firm Sequoia Capital was another “victim” of the ponzi, but what’s notable is that they had a fawning profile of founder Sam Bankman Fried (SBF) up on their website before deleting it this past week. Of course we know that nothing is ever deleted on the internet.
Sample quotes. This stuff is so wrong it would be funny, if billions of dollars of wealth had not been stolen.
After my interview with SBF, I was convinced: I was talking to a future trillionaire. Whatever mojo he worked on the partners at Sequoia—who fell for him after one Zoom—had worked on me, too. For me, it was simply a gut feeling. I’ve been talking to founders and doing deep dives into technology companies for decades. It’s been my entire professional life as a writer. And because of that experience, there must be a pattern-matching algorithm churning away somewhere in my subconscious. I don’t know how I know, I just do. SBF is a winner.
But that wasn’t even the main thing. There was something else I felt: something in my heart, not just my gut. After sitting ten feet from him for most of the week, studying him in the human musk of the startup grind and chatting in between beanbag naps, I couldn’t shake the feeling that this guy is actually as selfless as he claims to be.
Banking will be disrupted and transformed by crypto, just as media was transformed and disrupted by the web. Something of the sort must happen eventually, as the current system, with its layers upon layers of intermediaries, is antiquated and prone to crashing—the global financial crisis of 2008 was just the latest in a long line of failures that occurred because banks didn’t actually know what was on their balance sheets. Crypto is money that can audit itself, no accountant or bookkeeper needed, and thus a financial system with the blockchain built in can, in theory, cut out most of the financial middlemen, to the advantage of all. Of course, that’s the pitch of every crypto company out there. The FTX competitive advantage? Ethical behavior.
As the success of FTX seems like a foregone conclusion, my interest gravitates to SBF the person. He’s like no other billionaire I’ve ever met, and I’ve hung out with quite a few. It’s like the brain of Spock has been transplanted into the shambolic body of Fozzie Bear. He’s a bit of both: instantly lovable—with the guilelessness, kindness, and openness of a Muppet—and so abstract that he seems more like a super-advanced AI than flesh and blood.
Holy shit. Honestly, you couldn’t make this stuff up if you tried. If this doesn’t convince you that the biggest, most respected venture capitalists are just as prone to greed, stupidity, and error as the rest of us, you should go back and read those excerpts again.
Lesson 4: They don’t care about you
One of the revelations of the FTX fiasco that I find most offensive is the fact that SBF personally invested over $500 million in funds of many of the private equity backers of FTX. In other words, there was a quid-pro-quo arrangement where they earned fees on his money while exposing all of their investors to the risk of investing in his ponzi scheme.
Because the private equity world is largely the wild west, it’s unlikely that there will be any consequence for any of the actors involved in these conflicts. Yet another reason to avoid the space, in my opinion.
Lesson 5: Don’t take investment advice from entertainers.
Enough said.