Why You Shouldn’t Feel Bad About Losing Money in Crypto

If you are suffering from a crypto hangover, my condolences.

I’m not going to pile on and make it worse. Losing money to fraud or bad investments in a moment of FOMO mob madness is as old as the hills and as common as dirt. It’s when our fear of not having enough makes us vulnerable to cons, Ponzi schemes, and rampant speculation.

That’s when we let our money have unsafe sex with dubious partners.

When befogged by lust, syphilis is not top of mind. In the middle of a financial feeding frenzy, neither is fraud.

This has been true forever.

The first recorded speculative bubble in history involved tulips in 17th century Holland.

In 18th century Britain, the South Sea Bubble (worthless monopoly) ruined thousands of investors across Europe.

The South Sea Scheme by William Hogarth, 1721

In the 19th century, railway stocks in the UK (New technology! Sure thing!) boomed, then went bust, ruining countless investors, including Lord Grantham of Downton Abbey. 😉

Every so often, some hot “It Girl” investment catches on –

The 1968 “nifty fifty” stocks (growth stocks priced for perfection).

The 2000 dotcom explosion.

The 2008 real estate boom/bust caused by too much leverage and shitty credit risks that were masked by financial engineering.

While each “It Girl” is different, there are commonalities. A “This time it’s different” mindset, new technology justifying new valuations, easy money, too much leverage, and way too much risk.

The crypto debacle has a few interesting angles:

One is how much of the boom was fueled by a distrust of regulators, the monetary system, and central bankers, and not just by shiny new digital toys. Crypto was supposed to be protection against currencies that can be debased, manipulated, traced, and seized by the authorities. Crypto was something that operated outside the reach of Big Brother and supposedly gave power to the people.

But here’s the thing.

Regulators may fuck up from time to time. They can also get conned because, hello, they’re human. Look no further than Bernie Madoff. Boiler room operators still work “pump and dump” schemes successfully (pitch penny stocks, move the price up to suck more people in, and then sell into the demand). For every Martha Stewart who gets busted for insider trading, many others don’t get prosecuted (including members of Congress).

“Martha Stewart 2011 Shankbone” by david_shankbone is marked with Public Domain Mark 1.0.

Still, jail time and immense legal bills can act as a deterrent. Regulators may not be perfect, but they do throw sand in the gears of bad actors. It’s like locking your doors and having an alarm won’t guarantee not getting robbed, but it’s much less likely than leaving the windows wide open and the silver glittering on the dining room table.

In short, the crypto landscape was similar to the 1928 US market, where looting and pillaging of small investors was all too easy and legal.

The carnage of the 1929 crash led to the creation of The Securities and Exchange Commission to protect small investors. The SEC’s mandate is to ensure that companies tell the truth about the stocks and bonds they’re peddling and the risks involved. And those who sell and trade securities must treat investors fairly and honestly. What a concept!

A solemn crowd gathers outside the Stock Exchange after the crash. 1929.

When people get their hands on other people’s money, the temptation to lie and scam is just too great to resist, as has been shown time and again.

Why would crypto be any different?

“Crypto was meant to democratise finance. Instead, because crypto assets are unregulated and “deeply manipulated” hedge funds and others have managed to pump and dump. “This looks like a giant wealth transfer from a lot of really unsophisticated retail investors to a lot of sophisticated investors.” ”

Financial Times 11/21/2022 Stephen Diehl: Crypto is the ‘commodisation of populist anger, gambling and crime’

What IS interesting is how some sophisticated investors were also scammed.

When I read that large, seasoned venture capital firms like Sequoia DID NOT EVEN HAVE BOARD SEATS in FTX, the crypto exchange helmed by one-time-billionaire-soon-to-be-jailbird Sam Bankman-Fried (a.k.a. SBF), I almost fell out of my chair.

Venture capitalists and private equity guys are NOTORIOUS for rummaging around the underwear drawers of their investments. They ALWAYS have board representation. Normally if a company wanted funding without providing board representation, that would be a giant red flag. No self-respecting funder would agree to that. That SBF could have gotten hundreds of millions in funding with no oversight is just unheard of.

I guess there was so much money to be made, so fast, that no one, not even the most cynical and jaded of investors like Sequoia, could escape FOMO.

It’s no surprise that you couldn’t either, so don’t feel bad.