I’ve got five simple rules for crypto investing – my “5 Ts.” But, if I had to whip up a sixth rule, it’d be “DJPC,” as in “don’t join a personality cult.”
There’s absolutely zero room for hero worship for serious crypto investors. And I’m lookin’ at you, Sam Bankman-Fried.
Bankman-Fried, or “SBF,” as he’s known, is idolized by crypto “fans” all over the world. A way-too-credulous media held him up as crypto’s “white knight,” riding to the rescue of way-too-credulous investors with crypto trapped in failing exchanges over the summer. (Not that he was worried about the investors – more in the balance sheets of the companies he was poised to “rescue.”)
His big claim to fame? He was a billionaire in his thirties. And I do mean was, because arrogance, stupidity, and bad luck just vaporized around 95% of his crypto fortune. He’s not a billionaire anymore. He’s probably worth about $900 million today, which is way, way more than I can say for the regular people who believed in him and his FTX exchange.
Here’s the thing. Crypto’s tremendous upside is due in part to its newness as an asset class; it’s like stocks in the 17th century, with hundreds of trillions in profits left to realize. I’m so confident in this, I’ve gone all-in on digital assets.
But that novelty also has a downside – it breeds hordes of wealthy minor celebrities who all think they’re red-hot financial wizards. That’s where the danger starts. It should be when the red lights start to flash, but all too often it isn’t.
Here’s what I mean…
How to Get Started on the Road to Ruin
These hot crypto-celebrities in turn attract a cult following of people who want to be rich and who think they’re in on the ground floor with the second coming of Merlin. And then human nature leads these crypto-celebs to guzzle their own Kool-Aid and start to believe they really are financial wizards.
But they are not financial wizards. They’re early, and they are lucky. That’s it.
Bankman-Fried bet big on Solana, a trash crypto with a faulty network that can’t hold itself together for more than a few weeks at a time. He did this at exactly the right time to make a lot of money and convince people that he knew what he was doing. Those people turned around and trusted him enough to allow him to build a paper empire based on his FTT token, which lacks any fundamental value and wouldn’t pass a single one of my “5 Ts” criteria.
Right now, Sam Bankman-Fried is dealing with the consequences of becoming richer and more famous than his actual skill level could support.
And his followers, the people who bought in and put their crypto on FTX are dealing with the awful consequences of believing in a guy who’s essentially an empty shirt. It’s likely a lot of people will have lost everything on FTX.
I dunno… Maybe SBF is a wizard after all – he certainly made a fortune vanish into thin air.
Don’t Be Fooled by Simple Dumb Luck
The fall of SBF and his customer-victims proves one of the most fundamental realities of the crypto space. The novelty of crypto has the power to propel lucky, early-adopting people to phenomenal wealth. Inevitably, some outside prospect crypto with no fundamental value will catch some meme-momentum.
Of course, at the same time, the people who bet on the “lucky ones” and their random cryptos will eventually get crushed. The latecomers who hear about the meme-currency and buy-in at its peak will get crushed even harder.
So, good riddance to the “lucky ones” whose overblown reputations have led other straight into bankruptcy. In order for the crypto world to become less volatile, and for the truly groundbreaking projects with fundamental value to shine through, coins and figureheads coasting on luck and hype need to be cleared away.
The easy way to avoid disasters like this is to be careful; be aware of your own cognitive biases, and beextremely skeptical of outrageously wealthy people claiming to be crypto experts, because chances are they’re not.
When you’re looking at a coin, run it through the 5 Ts. Be merciless. Act like it could be a danger to you and your wealth because the wrong coin very well could be.