Discover more from The Intellectual Investor
How Greed and Leverage Destroyed the Crypto Tulip Market
Crypto currency was touted as antidote to central banking. But with its own flaws, is the system itself to blame for this crypto market crash?
You can listen to a professional narration of this article below:
Cryptocurrencies were supposed to offer a new, virtual alternative to the current, mundane, "corrupt" system, in which a few dozen bureaucrats in conference rooms around the world - central bankers - manipulate the most important commodity of all - interest rates - the price of money.
The collapse of FTX (a cryptocurrency exchange that was valued at $30 billion just a few months ago) and the subsequent bankruptcies revealed what may have started as a kernel of sincere libertarian ideas to stand up to endless money printing and debt creation in our financial system, has been hijacked by what appears to be an immutable flaw of the human condition: our greed and desire to get rich fast.
The cryptocurrency world transformed into an even more corrupt and leveraged system than the one it was attempting to replace. Theft committed by thousands of cryptocurrency and NFT creators made Wall Street, which society loves to hate, look like a group of nuns, as they were stealing money from the public in broad daylight.
With every bubble, we are reminded that there is nothing new under the sun. The most recent iteration has benefited from technology and social media which just expedited the ascent and widened the reach of its perpetrators.
Sam Bankman-Fried (SBF), a twenty-something nobody, stepped into the bright spotlight of the media and began buying off politicians by the dozen. In fact, SBF made Madoff, the reclusive chairman of NASDAQ who had been lurking in the shadows for decades, look like an amateur. What took Madoff decades, SBF accomplished in a few years.
By calling the zeros and ones stored in a decentralized database a currency, our society has normalized something that has no intrinsic value, as it has no cash flows and limited utility. Yes, the words we use matter; just because something is limited in quantity does not automatically make it valuable and turn it into a medium of exchange for goods and services (that is, a currency) or valuable art (referring to NFTs here).
Get new articles as they come out + a lot of content that’s not on Substack:
Crypto tulips were touted as a decentralized, grass-roots alternative to the centralized, regulated government-run system that was involved in endless QE and money printing. Though the crypto ledger (the database) is decentralized, unless you are going to store the digital key that unlocks your digital treasure on USB stick and risk losing it, you’ll have to rely on exchanges and digital wallets that are unregulated, expensive to use, and have proven to be a significant point of weakness.
As you look through the ruins of the crypto collapse, you will find that the crypto tulip market is nothing more than a giant, unregulated, leveraged casino, whose sole purpose is not to improve the world or deliver technology of the future, but to enrich its creators and provide degenerate gamblers with an avenue to speculate or offer a get-rich-quick opportunity disguised as investing. This is the entire reason for the existence of the crypto world.
Leverage drove speculation and prices upwards. Conversely, it is driving prices downwards and destroying confidence in the system which was built on the quicksand of hope and greed. It is fracturing the narrative that was the only thing crypto tulips had going for them.
The collapse of FTX may have been a "Lehman moment" for the crypto universe, but it is unlikely to have a significant impact on our financial system. It will spill into the real world, but only on the margins. Unfortunately, many everyday people were infatuated by the prospect of getting rich quickly and predictably lost their life savings. Some venture capitalists will lose other people's money and their own reputation. The crypto decline will reduce the demand for microchips that were used to produce crypto garbage, as well as digital advertising which was used to spread the lie. There will be some other second- and third-order effects that will become obvious in hindsight.
Ironically, as much as I criticize the current flawed system, the collapse of crypto was a fascinating experiment. It showed that leaving the financial system to complete anarchy without safeguards, regulation and a fear of the law brings out the worst in us and thus results in thievery and complete chaos.
Soul in the Game Highlight:
Vitaliy's book is hard to put down. He is the ultimate student of life, and my only regret is that I didn't find him until a few years ago. I have learned personally from his experiences, as well as benefited from his sound financial investment philosophy.
This is an excerpt from my music article: Music Throughout My Life – 2023 Edition.
In the summer of 1991, I was 18 years old. My family was preparing to emigrate to the United States. I was sent to a summer camp on the Black Sea. A few weeks later, I was expelled from the camp. I only vaguely remember the reason, but I am pretty sure it had to do with my refusal to stay within the camp’s borders, as well as probably drinking and breaking other rules.
When given a choice by camp administrators as to where I should be sent, I chose Saratov. My Aunt Natasha, my mother’s sister and the closest person I had to a mother (my mom passed away when I was 11), lived in Saratov, a 400-year-old Russian city on the Volga River. My mother’s side of the family had been evacuated to Saratov during World War II from Vitebsk, Belarus.
Though my father and mother lived in Murmansk, my mom was from Saratov and she wanted to be close to her parents when she gave birth to her children. So in the last few months of each pregnancy, she’d move to Saratov. A few months after our births, my brothers and I were taken home to Murmansk.
My grandparents did not own a crib, so it made no sense to buy one, as we were going to go back to Murmansk in a few months. Though my brothers and I were born six and ten years apart, each of us had spent the first few months of our lives in the same giant black suitcase.
When my own kids were born, I told my wife about this, hinting that we didn’t need to spend our full paycheck on a crib. After all, my brothers and I had turned out okay, in spite of the suitcase. She questioned my judgment of my “okayness.”
But I digress. Here I am, heading straight for Aunt Natasha, who unfortunately did not have a phone. When I suddenly appeared at her door, almost giving her a heart attack, she told me she was leaving on a four-week business trip in two hours.
I was supposed to spend my time in Saratov with her husband, Uncle Isaak. He and I were left to our own devices. Uncle Isaak was a programmer for a government factory that made something for the military. We had a strange but good relationship. He was an introvert’s introvert. We could go days without exchanging more than a few necessary sentences. He would leave early in the morning to go to work and come back late in the evening.
I was in a city where I had no friends, but I was not alone; I was surrounded by books and music. Uncle Isaak was a collector of books. For decades, every day after work, he would stop by a bookstore and pick up a book or two. Their small apartment was transformed into a giant library; books were stacked everywhere. My aunt Natasha must have loved him dearly; I never heard her complain. They did not have any children, but books made Uncle Isaak happy.
Uncle Isaak made oatmeal (his signature dish) for me before he left for work. My aunt had a country house (dacha) where they grew zucchinis. For the four weeks my aunt was away on business, I ate zucchinis for lunch and dinner. They were the only thing I had any idea how to cook. Today my cooking repertoire has extended to eggs.
I spent those warm summer days on the balcony reading books. Every few hours, I would take a break from reading and conduct along with my aunt and uncle’s classical music records. The one that I fell in love with was Carmen Suite. Arranged for ballet by Soviet composer Rodion Shchedrin, Carmen Suite is based on George Bizet’s opera Carmen, one of the most popular operas ever written.
From my perspective today, I must admit that I love the suite much more than the opera. The opera has half a dozen incredible melodies and arias, but it is filled with songs and dances that seem to me to be fillers that subtract, not add to the opera. The suite removes those fillers and just keeps the beautiful essence.
No, I did not have a score in front of me; nor could I read music. Now that I think about it, for me, then, conducting was a very mindful form of absorbing and internalizing music. I would close my eyes and imagine the orchestra arrayed before me. I listened intensely to the music and, as I grew to know the piece, would assign each part of the melody to the appropriate instruments. Conducting, if you can call what I was doing conducting, gave me immense pleasure. I tell my kids that in my next life I want to be a conductor.
This was one the happiest summers of my life. It is amazing how little we need to be happy.
Thanks for reading Vitaliy Katsenelson's ContrarianEdge! Subscribe for free to receive new posts and support my work.
Vitaliy Katsenelson is the CEO at IMA, a value investing firm in Denver. He has written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. Soul in the Game: The Art of a Meaningful Life (Harriman House, 2022) is his first non-investing book. You can get unpublished bonus chapters by forwarding your purchase receipt to firstname.lastname@example.org.
Please read the following important disclosure here.