One of this year’s biggest business stories was the trial and conviction of Sam Bankman-Fried, the 31-year-old founder and CEO of failed cryptocurrency exchange FTX. Bankman-Fried is only the latest in a long list of multi-billion-dollar fraudsters who were able to swindle money out of everyone on not much more than charisma and hype. You can include Bernie Madoff in this club.
In the case of FTX, Bankman-Fried was the mastermind behind the mishandling, fraud, and loss of more than $8 billion in customer funds, in which FTX funneled money to sister company, Alameda Research, to engage in high-risk and, as it turns out, high-loss crypto investments.
Bankman-Fried founded FTX when he was 27 and, by the age of 29, was the richest 29-year-old ever with a net worth of $29 billion, even beating out Mark Zuckerberg, who had a $23 billion net worth at that age. This year, at the age of 31, Bankman-Fried’s fortune has completely vanished.
In the aftermath of the failure of FTX in November 2022, Bankman-Fried was indicted by the Justice Department on eight counts of fraud, money laundering, and campaign finance offenses. After the trial that started on October 3rd, Bankman-Fried was found guilty by a New York federal court on all seven criminal fraud counts. He will be sentenced next March and faces a maximum sentence of 115 years in prison.
Besides its thousands of customers, which included middle-class individuals who could ill-afford to lose all their money, the list of Bankman-Fried’s victims is long and distinguished. This list included high-profile VCs like Sequoia Capital, which wrote off a $213.5 million loss from its investment; celebrities like Tom Brady, Steph Curry, and Katy Perry; politicians including Bill Clinton and Tony Blair; and multiple regulators and journalists.
Recognized for his big hair and unkempt appearance, highlighted by rumpled t-shirts and cargo shorts, his nerdy look and persona drew in and fooled even the most sophisticated investors and individuals. It turns out, it wasn’t just FTX that was a fraud but Bankman-Fried’s persona as well, with revelations coming out behind the scenes that the whole “nerd” look was manufactured to generate likability and relatability.
The whole FTX debacle demonstrates once again how even the most sophisticated investors (i.e., Sequoia Capital) can get caught up in emotions and be blinded to the risks of an investment. It comes as a surprise, but it also doesn’t come as a surprise. Investors have been getting caught up in “too good to be true” investments for decades by letting hype, emotions, and greed cloud their common sense. Think of the dot-com bubble in the early 2000s and the mortgage-backed securities collapse in 2008 that led to the Great Recession.
The lesson in all of this is that investors will never learn their lesson.
Whether it’s dotcoms, mortgage-backed securities, crypto, or the next big thing, investors will always jump on the next investment bandwagon as long as humans are controlled by their emotions and biases.
Humans are victims of their own human nature, but they don’t have to let their emotions control everything. There are ways to prevent your emotions and biases from taking over in order to make sound investment judgments. It can be as simple as three easy steps: Stop. Think. Invest.
In his book Stop, Think, Invest., author Michael Bailey explores how human emotions and biases affect their investment decision-making and how individuals can combat these biases to avoid financial catastrophes by making a few simple tweaks.
The first step is to stop. Don’t get caught up in the hype of what everyone around you and social media are buzzing about. Don’t just go head-first into an investment you know little to nothing about.
The second step is to think. Do your own research and analysis. Ask the hard questions. In the case of FTX, nobody really asked the hard questions. If someone had asked the question of what value cryptocurrency had besides what investors were willing to pay for it, they would have come to the conclusion that crypto has no intrinsic value—value in and of itself, independent of what the market prices it at. It’s not widely accepted as a medium of exchange, and it lacks backing from any government. Trading crypto is no better than trading beanie babies. The market price is well beyond what the asset is actually worth. Anyone asking this hard question would be hard-pressed to engage in multimillion-dollar investments in crypto.
The third step is to invest. If an investment passes your in-depth scrutiny, the final step is to invest. Don’t let the hard lessons learned by others deter you from investing. There are assets out there that are tried and true and pass muster under the microscope. Don’t be afraid to invest in these assets.