Anyways, What's Crypto?
Thinking about an industry with a reputation problem
The Teardown
Saturday :: November 12th, 2022
I know I know, you’re not supposed to send newsletters on Saturdays. But I churned through this draft yesterday and wanted to send it before later deciding to scrap the whole thing. I wrote about the FTX fiasco and somewhat more broadly about crypto, topics I don’t intend to cover to regularly. But it’s fascinating to see industries and companies evolve this quickly.
My question is rhetorical, of course. You know, roughly, what crypto is. It’s cryptocurrency at the core, I think. But it’s so much more. It’s the leading edge of a wave of innovation that might produce lots of meaningful things. It’s for scam artists. It’s for your average Joe or Jane to invest a buck and make one hundred bucks overnight. It’s for smart contracts. It’s for decentralized decision-making, something that I vaguely agree with in concept but understand well in practice.
The crypto industry will be part of our lives for quite some time, either centrally or peripherally depending on your view. If you’re a crypto VC, proponent, currency investor, or cheerleader for some other reason, crypto is in your crosshairs of your motivation. Antagonists might target you with heat-seeking Twitter posts. But for lots of us, like me, crypto is sort of just there. Maybe you have a Coinbase account. Maybe you have a few thousand dollars tied to a handful of coins. Maybe you care. Maybe you don’t.
One thing that’s interesting about crypto is the tendency to unveil lots of emotions. Haters will hate, lovers will fall head over heels. It’s sort of the Scientology of finance, because once you believe it’s hard to shake that belief. Successes are hard-fought. Failures are a necessary evil. Powerfully focusing your scope on succeeding might mean you’ll persevere if you’re a crypto entrepreneur, but it might also cause you to forget the mistakes of the past.
What does a visionary founder look like? There’s no one answer that makes sense in broad strokes, but there are examples, and here’s the outcome from one that did some stuff:
The details will take time to trickle out and ultimately congeal into a story for the record books. But, Sam Bankman-Fried (colloquially, SBF), formerly of FTX, is that visionary founder. He convinced people, perhaps legitimately, that he was going to create the future of exchanging money, but also did a few other things that didn’t really work out. Notably, he did a whole bunch of lending and speculating and got burned and took a completely-vertical nose dive off the Forbes billionaires list. That culminated in an unfortunate ending for FTX, filing for bankruptcy.
I say unfortunate because I don’t want crypto pioneers to fail. I don’t think crypto is entirely illogical in every way, but certainly, the failures don’t help you believe that. There is a certain amount of unchecked optimism that’s required to create a visionary company and push it forward. SBF created an exchange, which itself isn’t all that notable, but his vision for what it could be tickled the imagination, and clearly others bought the story. He needed people to bet that he could make his proclamations reality. Matt Levine’s latest Money Stuff highlights some of that optimism from a finance-guy-turned-journalist perspective:
This is a little weird, but I do feel like I ought to disclose a bias here, which is that I like Sam Bankman-Fried. I have done a few podcast interviewsand events with him, and I have always found him likable, smart, thoughtful, well-intentioned and candid. That is not in any sense investing advice or whatever; it’s just how I feel. I am rooting for this all to work out for him and FTX.
And:
People on Twitter now are like “he admitted that FTX is a Ponzi!” but of course that’s not true. He conceded a certain validity to my claim that some crypto businesses — not his — are Ponzis. He is just in the business of trading their tokens.
In fact, I came away from that conversation bullish on FTX and Bankman-Fried. My view was, and is, that if you talk to a crypto exchange operator and he is like “crypto is changing the world, your old-fashioned economics are just FUD, HODL,” then that’s bad. A wild-eyed crypto true believer is not the person to operate an exchange. The person you want operating an exchange is a clear-eyed trader. You want someone whose basic attitude to financial assets is, like, “if someone wants to buy and someone wants to sell, I will put them together and collect a fee.” You want someone whose perspective is driven by markets, not ideology, who cares about risk, not futurism. A certain cynicism about the products he is trading is probably healthy.
One person - Matt Levine - didn’t believe that SBF was totally full of shit. And that was true for numerous professional investors as well, so much so that they took several steps through the crypto mud to invest in FTX. The NY Times posted an interesting article about those investors, saying:
Some of FTX’s investors declined to comment or did not respond to requests.
Four FTX investors, who declined to be identified, said they were shocked by the company’s sudden collapse. They said they had properly researched the company’s financials, which showed a healthy, growing business that provided an easy-to-use platform for people to buy, sell and store crypto. And they were completely in the dark about FTX’s possible self-dealing with Alameda, they said.
Investing in FTX gave them a piece of the hottest start-up in an emerging sector that promised to be as big as smartphone apps or the internet itself. Many investors had trumpeted their support of the deal. Sequoia even published a glowing profile of Mr. Bankman-Fried to its website.
What I’m finding most interesting is what people didn’t know. There was, apparently, lots of self-dealing, secret or disguised financial engineering, and overall just some bad decision-making. Lots of people have been caught for making these mistakes before, but some have succeeded. And so the cycle repeated here. If you’re not 100% guaranteed to get caught, then you can bet that you won’t get caught and see what happens. That seems to be roughly what happened.
Also, not knowing is sometimes tied to not asking, or worse, not giving yourself the chance to ask. Benchmark’s Bill Gurley says it eloquently:
In general, sure, but I think you can blame SBF too. But the point stands well on its own. Investors gave money to a company without getting board seats, and more to my point, without the option to ask questions on an ongoing basis.
My tag line was “Anyways, What’s Crypto” because we’re again at this juncture where we wonder what this crypto thing is all about. Is it real? Is it all scams? I still don’t know the answer. I’m not ready to say it’s all scams but recent events don’t help support conclusions about responsible behaviors. Professional investors were, well, scammed, I think?
What’s sad is that it didn’t have to happen this way. SBF didn’t have to trade back and forth between Alameda. He didn’t have to buy the other companies he bought this year because he didn’t have to make all the risky bets he made in those companies that subsequently suffered their own crises, before FTX suffered its own swift demise in public. Everything could have been more honest. There is another big dent on the industry that makes it harder for entrepreneurs to push forward legitimate use-cases.
So, I’ll end with another question, what’s crypto now?