Well, that was interesting.
I get many more private emails in response to blog posts than comments. Yesterday, in response to Reflecting on Ponzi Schemes, I got a few that said anyone under 35 needs a net native currency, and that’s crypto. A few others said some versions of all governments are Ponzi schemes. And I got a few that implied I hated crypto.
Earlier last year, one of my partners told me that I’d developed a reputation with other VCs (presumably our partner funds) that I hate crypto. At the time, I deflected and said that I didn’t hate crypto; I just thought there was considerable Ponzi-like behavior in crypto. I’m regularly cynical about things on our internal Slack channel and periodically post about big blowups, including in crypto.
I realize that I’m conflating speculation vs. investment. The part of crypto I don’t like is the rampant speculation. This morning, a friend of mine sent me an email about some money I owed him for a thing we are doing together. He said, “If you paypal me I’ll buy some bitcoin with it. Looks like it’s starting to firm up.”
Here were the bitcoin prices when he sent me the email and when I Paypalled him the money ($1,456.42).
1/15/23 9:51 PM MT: $21,158.55
1/16/23 7:28 PM MT: $20,879.14
That’s a 1.33% difference. It cost me nothing to Paypal him the money. It would have cost me $19.37 to pay him via Bitcoin just because of the timing difference. That has nothing to do with the transaction cost. It’s entirely a result of speculative activity.
I mean, c’mon. Yeah, I know credit cards have fees, and endless payment rails in the system extract money along the way. But there are also ACH and Debit Cards. And free checking accounts, although I guess it would cost me $0.60 for a stamp. Wait, $0.60 for a stamp? The last time I bought a stamp, they were $0.29. And yes, I know some of you out there have never bought a stamp.
It’s hard for me to hate crypto. It’s been economically very good to me. I accidentally bought twice as many bitcoins as I needed for an online programming course I took in 2013 for about $100 each. I sold the FIL I got from investing in their SAFT as it vested (daily) and was amazed at how much money resulted. The Helium that I earned, which seemed to have no functional utility whatsoever, generated a nice multiple on the cost of all the routers I bought, even though today I earn nothing because of whatever algorithm changes they’ve made, so the network is now functionally and economically worthless. And, the crypto funds we have invested in have done exceptionally well … mostly.
I regularly hear to be patient. It’s like the Internet was in 1999 – ahead of its time. The builders are building, and it’ll take over everything in the future.
Ok. That’s cool. Just beware of the Ponzi schemes.
At the end of 2022, some people started shouting that Crypto was a Ponzi Scheme following earlier declarations by Bill Gates, Warren Buffett, and Charlie Munger.
Others, especially those in the crypto industry, were saying some version of “Well, FTX Might Looking Like a Ponzi Scheme, But Crypto is Legit and Isn’t a Ponzi Scheme.” But then someone else in the Crypto industry, on the same website, wrote Crypto Ponzi Schemes: How to Identify and Protect Yourself From These Scams. Ok. How confusing.
What should an investor believe? The SEC has an official publication, Ponzi schemes Using virtual Currencies. It’s … not helpful … and implies almost everything in crypto is a Ponzi scheme. At least it has some phone numbers you can call if you have questions. Yeah, still not helpful.
Yesterday, I binge-watched MADOFF: The Monster of Wall Street. I was tired, so I just sat around and absorbed four hours of a $65 billion, over 20-year Ponzi scheme. It’s worth watching for historical context.
While longer and less dramatic, it’s more informative than The Wizard of Lies, which stars Robert De Niro and Michelle Pfeiffer as Bernie and Ruth Madoff. However, De Niro completely nails the role of the monster of wall street.
As crypto continues to evolve, it’s worth remembering the part human nature and greed play in all of this. Whenever an economic bubble bursts, Ponzi’s and fraud are revealed. And there’s plenty of it, especially human nature and greed, all the time, everywhere, in finance.
Amy and I watch The Big Short every couple of years to stay grounded in reality.
Pro tip: whenever you see the phrase “guaranteed returns,” close your browser tab.
I got the following email from Reid Hoffman this morning.
Inspired by Lin-Manuel Miranda’s Hamilton, I produced a battle rap music video about centralized and decentralized currencies, pitting Alexander Hamilton against Satoshi Nakamoto. I hope the video gets more people talking about crypto and its evolving role in global commerce.
It seemed oddly coincidental with Fred Wilson’s post from yesterday titled Some Thoughts on Crypto.
I’m waiting patiently for someone to start talking about Crypto AI.
While it’s easy to tell people things, it’s much more powerful to learn things. And, as I get older, I see the same lessons being learned by subsequent generations. While this isn’t a post that says “everything is the same as it was before”, there are foundational lessons in life that play out over and over again.
I spent the weekend with a friend from the last 1990s who was the lead banker on the Interliant IPO (I was a co-founder and co-chairman.) Last night, at the Aspen Entrepreneurs event, I was asked to describe several failures and I rolled out my story about Interliant, which, for a period of time (1999 – 2000) appeared to be hugely successful before going bankrupt in 2002. If you like to read IPO prospectuses, here’s the final S-1 filing after INIT went effective and started trading on July 8, 1999.
A few days ago, Fred Wilson wrote a post titled Capitulation? In the middle, he’s got a sentence about the theme of the post.
“Now, the crypto markets are in the eighth month of a long and painful bear market and we are starting to see some signs of capitulation, particularly in the assets that went up the most last year.”
On January 16, 2018 (almost seven months ago) I wrote a post titled It Can All Go To Zero. While I included a lesson from the Interliant experience, I highlighted the top 10 crypto prices, which had already fallen 30% – 50% from their high points a few weeks earlier.
Compare those to the prices right now.
Bitcoin is down another 50% (from 12,001 to 6,157). Ethereum is down over 75% (from 1,118 to 264). XRP, holding strong as the third most valuable cryptocurrency, is down 81% (from 1.37 to 0.26). Stellar, which rallied from #9 to #5, is only down 55% (0.49 to 0.22).
My guess is there are a lot of people who wish they sold their XRP at 1.37. Or, maybe around its all time high of 3.83 on January 4, 2018.
Capitulation in markets is one of those endless lessons that gets learned over and over and over again. My first moment with this was Black Monday in 1987. But that’s not when I learned the lesson. My foundational moment, where I really learned the lesson, happened during the collapse of the Internet bubble in 2000 and 2001.
It’ll be interesting to see if this is the crypto generation’s capitulation lesson moment.
Google just banned ICO and cryptocurrency-related advertising. For the official policy, see Financial Services: New restricted financial products policy (June 2018).
Oh – and happy Pi Day. And MIT Admission Notification Day. And Einstein’s birthday. And Amy’s half birthday. And the day that Stephen Hawking transitioned to the next quantum energy level.
I never understood why ICO advertising has been allowed. I’ve heard the phrase “wild west” applied to ICOs for the past few years and it’s clear the regulatory regimes are finally hustling to catch up with the phenomenon. Up to this point, the phrase “consumer protection” hasn’t really been in my head around ICOs, but it is today.
When I was in college and my early 20s, I read Forbes Magazine religiously. Dave Jilk turned me on to it when I was a freshman (he was a senior) and from 1983 to 1995 I read almost every issue cover to cover. The pink sheet and penny stock phenomenon crested in the 1980s with intricate pump and dump schemes, boiler rooms, and an entire layer of the investment banking industry that promoted worthless public companies. Forbes covered this extensively and by the time firms collapsed and people went to jail I had a healthy skepticism about broad-based advertising and promotion scheme around any financial instrument.
When I first heard the phrase “ICO” three or four years ago, my immediate thought was something like “that’s just an invitation to the SEC to regulate that. Why do a play off the acronym IPO – call them something innocuous like “Papayas” instead. Knowing the SEC would move very slowly, I didn’t pay much attention. Last year, the SEC finally started putting out some vague statements that are now starting to get crisper and more precise.
From where I sit, it seems like similar rules to selling private equity should apply to ICOs. In addition, there are some rules associated with selling public equity that should apply. In both cases, the idea of advertising an ICO is ludicrous to me.
When a company we are investors in is raising a new round of financing, I’m not allowed to even write a blog post about the financing, let alone run an advertisement about it. Tweeting isn’t allowed. Neither is giving a speech in a public forum. Promoting it on Youtube would bring down the wrath of Jason Mendelson on my head.
Now that we are a “registered investment advisor” (since we also invest in other venture funds), we have an entire compliance infrastructure that I have to go through to even get blog posts approved (like the one about Glowforge yesterday) when I simply mention a company of ours on the web. While I can argue that the regulations around what I can write and/or promote are over-reaching, they are the rules that I, and our companies, have to live with.
The idea that a company can do an ICO, raise money, and ignore this set of rules makes no sense to me. I can imagine a category (currently being called “utility tokens”) that look more like frequent flyer miles or tokens at a video arcade than equity, but the boundaries around this are very blurry to me right now.
Anyone that is paying attention to cryptocurrencies and ICOs knows that there is a huge amount of fraud going on. A Google search on ICO Pump and Dump turns up a bunch of current stuff that is fascinating to read. Telegram, which is home to a huge ICO that is ongoing, is a popular platform for organizing ICO pump and dump schemes. If you think this kind of action is healthy long term, just go watch The Big Short.
I learned the phrase “buyer beware” in my early 20s while reading all those Forbes Magazines. Today, we have John Oliver to help us out.