By now, all my readers know my feelings about cryptocurrencies. For those that don’t, here is a quick synopsis. It is literally the largest Ponzi scheme ever created in mankind’s history.
Pretty simple huh? You believe in something because those that have come before you believed in it and they are now “rich”. You want in. You take money out of an established proven investment to put it in something you do not even partially understand. You lose your money. You, my friend, have been hoodwinked. You deserve it.
Sorry, I know that is harsh but the reality, as always, is when you put money into something you don’t understand you deserve to get taken.
Crypto is a textbook case for the expression “A sucker is born every minute”.
This is more an indictment on a generation rather than calling out the stupidity of investing in something you think you know but you really have no clue.
The age we are in, it seems to me that younger generations want to find something to believe in that is different from their parents generation. As a parent, I believed in solid investments with track records and investment principles that, while I am no Wharton MBA, I can understand. If I can’t explain it to a high school senior, I won’t invest in it. I know, I am a simpleton but any profits or losses I have ever sustained, I always knew why.
The generations that are coming into there prime earnings period don’t want their “Father’s Chevrolet”, they want something that is new and interesting and they can embrace as their own. They don’t want a Vanguard Income Fund, they want a ARK Crypto fund or some Robinhood account that they can trade from while they are sitting at the latest Vegan Sushi and Kombucha shop.
They look at the generations before them and see their parents, who worked hard for everything they have and say “No thanks, I don’t want to be a slave to making money” and yet, they jump on ideas that were designed to make money. Just do it with the least amount of hard work and intelligence.
The examples of this “Make the most money for the least amount of effort” philosophy are many. Social media influencers, for example. These are attractive people who add nothing of value to anyone, anywhere, yet they reap millions. Do little, make a lot. Another example was that short lived Reddit meme stock craze during the pandemic. Use no effort, get on the momentum train and make millions. Yeah, if it were only that easy.
Crypto is just another example of younger generations grabbing onto something they think is their own and they are all going to get rich. Uh, it doesn’t work that way.
Seeing the FTX fiasco is just another block in the Crypto Jenga tower that these nerds have created. While that Jenga tower may still be standing, it surely is a bit more wobbly. The possible crash of this Jenga tower is very real and when it does crash, the ramifications won’t be just those college kids that trade on Coinbase. It will be much deeper.
Think about it simplistically. A fund hold some of assets in some form of crypto. Either in shares of Coinbase or any number of Greyscale products along with conventional assets such as stock or US Treasuries. The collapse of the crypto market will force the asset managers to liquidate their crypto assets but also traditional assets as well as redemptions in one will cause redemptions in another. Of course, over time, this will self correct but that period will be one of financial ruin similar to what happened in 2008.
My concern is more on the banking side than on the investment side. Do we really have any understanding of how deep banks are involved with Cryptocurrencies? I don’t think so. I think that just like the collapse of CMO’s and the like, we may see the very same thing happen again. Banks and other financial institutions investing in things that they can’t explain to a high schooler, just like 2008.
Honestly, I have spent way more time thinking and talking about cryptocurrencies then I really want to. I have stood by my arguments from the very beginning and not one bullet point I have mentioned in the past has been adequately refuted. The prophets of this Ponzi scheme are true believers and little I say will ever change their minds. Seeing billions of dollars disappear every so often from different Crypto exchanges and funds hasn’t woken them up to the risks yet. It seems only the collapse of that jenga tower will.
Eli,
Thank you for the well thought out response. You and people like you are the reason I write these columns. Get a fresh perspective on things. Yours certainly is a fresh perspective.
I do agree that the media, as in everything else, may have overplayed the impact. I hope that’s all it turns out to be.
I agree with a lot of what you've written, but comparing it to the financial ruin of 2008 seem to be harsh. The entire market cap of crypto is only a small fraction of the outstanding MBS or treasuries. The turmoil from the fallout will be decently large, but feels it will stay pretty contained. I could see it having some spillover to VC world, but I would think (and hope) banks are not too caught up in this.
Seems that crypto has always captured the publics imagination and so it's easy for publications to over report this story. On top of that, there seems to be this personality cult built into the space which makes the public all the more interested.
Nice article though, I like the "explain it to a high schooler" advice.