110: You Can’t Afford to Ignore These Crypto Ponzi Schemes
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November 2022 was a disastrous month for FTX and FTT holders.
Over 8 billion dollars were “mismanaged”, “stolen”, “and hacked”, and the worst part of all is that the retail investors (that’s us “common” folks) are likely the ones that get affected the most. Because this was someone’s life-savings, someone’s nest egg. 😨😨
It’s mind-blowing 🤯🤯 to us that large hedge funds can easily afford to write off a $250 million dollars investment. Unfortunately, that’s not the case for you and us. This loss cuts deep; for us the only solace we can find is that hopefully, people for once will understand that if something is too good to be true, then it probably is.
In today’s episode, we’ll rewind back a few months and break down what the man behind these sophisticated marketing schemes, Sam Bankman-Fried, said in the infamous interview with Matt Levine on OddLots podcast and what lessons, we real estate investors can take from this catastrophe.
To Be or Not to Be a Ponzi Scheme?
Let’s first talk about what a Ponzi scheme actually is for a second.
Ponzi scheme is a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.
Today, according to the SEC, there’s a number of things you should look out for in Ponzi schemes, like unregistered investments, unlicensed sellers, high returns with little to no risk, secret strategies, etc.
Back up seven months ago, when Sam Bankman-Fried, or SBF as he’s known, was still viewed by most as this genius “adult” that is cleaning up the grimy world of crypto exchanges, when he sat down to do an interview with Matt Levine on OddLots podcast. 👀
As he was trying to explain what crypto’s yield farming functions, he ended up describing a Ponzi scheme – and when confronted by the host about this, he pretty much bold-faced sat there and said yes, this is how it works in my world.
Pretty wild that this was actually pointed out in an interview and now here we are, seven months later (at the time of the recording), armed with the knowledge that backs up all the red flags. We will share a few quotes that stood out to us and should make everyone wonder why someone believed in him and crypto current as a whole. ❤️️
In one quote, he stated “let’s just check out a surprising amount of legitimacy for what farming could mean, you know, where do you start, you start with a company that builds the blocks. And in practice this box, they probably dress it up to look like a life-changing world-altering protocol that’s going to replace all the big banks in 38 days or whatever, maybe for now actually ignore what it does, or pretend it does literally nothing. It’s just a box.”
This lie is the first red flag 🚩, here SBF literally describes the thesis for how all cryptocurrency works. It gets dressed up, in this analogy he uses a box 📦, with a nice bow and ribbon.
It’s a very pretty box, but a box nonetheless, and packaging can hide a truly crappy gift. When it comes down to it, the box intrinsically isn’t worth anything because it doesn’t provide any utility in the economic sense.
➡️ The only reason it has any value is that someone says it does and he/she was able to convince other people that it does as well. You’re literally trying to speak things into existence here.
Before we go any further, we want to acknowledge that there is some blockchain technology that also has a cryptocurrency attached to it that does have utility, think Ethereum or Ripple, but the ones SBF is talking about do not, from his own mouth!
He goes on to state in the interview “and then this protocol issues a token, we’ll call it whatever X token. And X token promises that anything cool that happens because of this box is going to ultimately be usable by, you know, governance vote of holders of the X tokens, they can vote on what to do with any proceeds or other cool things that happen from this box.
And of course, so far, we haven’t exactly given a compelling reason for why there ever would be any proceeds from this box. Like, I don’t know, you know, maybe there will be. So that’s sort of where you start. And now what happens? Well, x token has some market cap, right? It’s probably not zero. What let’s say it’s, you know, a $20 million market cap.”
In the real world financial realm, what SBF said just there made literally zero sense. No one will just randomly assign a value to a box with a minimum utility as high as $20 million market cap. But in the world of crypto, due to the fear of missing out and the herd mentality, people are “open-minded” to this possibility, which is the kindest way we can think to put it. 😲😲
These two elements from the interview already smell like a Ponzi scheme, but you just wait, there’s more.
SBF is no dummy, he clearly understands the human condition and how greed distorts reality. He says, as long as there are people who believe in the Ponzi scheme, people like him will always win. Now, fast forward 7 months, and he is now the poster boy for all that is heinous and degenerating about cryptocurrency. But how come people weren’t having these conversations months ago? 🤔 🤔
The newly appointed CEO of FTX, John Ray III, stated that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” And this is coming from someone who was sent to clean up the Enron mess…
And it appears that FTX, SBF, and all their C-suite marauders never intended to make FTX legitimate from the beginning. It’s so sad, but it was truly set up to scheme hard-working people out of their savings to the benefit of a few assholes.
So what lessons can we learn from this?
1️⃣ There are so many lessons we can learn from this hot mess. First of all, we hope this is obvious, but please only invest in an asset class that has true intrinsic value.
This can be anything from a business, to commodities, to precious metals, etc. For us, we choose 🏢 apartments because we believe they hold very strong intrinsic value i.e., it meets the basic human need for shelter. 😇😇
2️⃣ Second… make sure that you don’t let greed or FOMO distract you from investing in things that actually make sense.
The reason why crypto had such a strong hold on people is that it promised an outsized return on investment. That’s such a red flag, straight from the mouth of the SEC as we learned earlier. Put in $1,000, and it becomes a million, things like that would drive the greed gauge up pretty high.
3️⃣ Third… make sure you get educated on the investment assets before investing.
We’ve talked in the past about how knowledge is power, which applies to everything but especially investing your hard-earned money. 📖
4️⃣ Fourth… invest only what you can afford to lose. This means, don’t take your rent check to invest and don’t borrow. You wouldn’t buy shoes that would break the bank, and you shouldn’t with your investments either.
5️⃣ Fifth… but definitely not least, only take financial advice from those who own their assets, not those who rent or borrow it, and definitely steer clear of those Bitcoin Bros buying crypto when they themselves are renters and not owners of things. 👀
Ultimately, all investments carry a risk of a total loss, but of course, the risk is greater in some asset classes than others. Think of crypto as being extremely risky vs real estate which is a tangible asset.
That’s from us today, and thank you for tuning in all the way to the end. Don’t forget to join the Kitti Freedom Club, because to be a well-informed investor, and steer clear of all those hot messes out there, you got to align yourself with the right team. 🥳️🥳️
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