After just four and a half hours of deliberation the jury in the Sam Bankman-Fried trial returned guilty verdicts on all counts. This is the culmination of a dramatic fall from grace for one of the former kingpins of crypto. The regulatory cleanup of crypto continues. What does all of this tell us about crypto, investing in general, and trusting what we hear about ways to make money? What is the Sam Bankman-Fried lesson? Various pundits are already weighing in on this issue.
Stealing Money and Getting Caught in the Crypto World
Success is like a drug, addictive. When companies like FTX are riding high they find it easy to convince investors and customers that by joining in they will be on the path to success. The two worst enemies of any investor are fear and greed. In the case of FTX, greed was the issue both for those who ran the company and for those who threw money at it in hopes that FTX success would rub off on them. The simple lesson in this case is that if you do something illegal you are often likely to get caught and have to pay a price. But, what else is there to learn from this riches to rags story?
Glory in Life is Fleeting
In ancient Rome a conquering general would be given a celebration of their triumphs. The conquering hero rode past cheering crowds in a chariot. At his shoulder stood a slave whose only task was to remind the conqueror that all glories in life are transitory by repeating the Latin words, Sic transit gloria mundi. In the stock market one does not have a profit from a stock until they sell the stock. Successful investors commonly “take a little off of the table.” Folks like Bernie Madoff, Michael Milken, and now, Sam Bankman-Fried all kept going, doubling down, until their luck ran out. Greed seems to be the common factor although so does a belief in one’s own infallibility. Each of these folks needed a slave at their shoulder repeating over and over, Sic Transit Gloria Mundi.
Where Does Your Investment Success Come From?
As often as not when someone is hugely successful a big part of it is luck. Yes, they have skills and a great idea. They are also fortunate to be in the right place at the right time. FTX and Sam Bankman-Fried benefitted from the meteoric rise of crypto and suffered largely because of its fall. FTX was founded in May of 2019 when Bitcoin was $5,000 and soared in value as Bitcoin peaked at $58,000 and then at $64,000. Its collapse occurred as Bitcoin and the rest of crypto bottomed out during crypto winter. In retrospect, Bankman-Fried and his partner founded FTX just in time to benefit from crypto’s salad days. Like all too many in the upper echelons of crypto he believed his own hype that crypto would just keep going up. Rather than cutting his losses, he covered up problems, lied to customers and investors, and played fast and loose with the books. A good question to consider in the aftermath of the FTX downfall and Bankman-Fried’s conviction is who was the bigger fool, Bankman-Fried or the folks who bought the easy money, crypto will go up forever, and we are all so very smart story.
Lessons from Successful Investors
Here at Profitable Investing Tips we like to use Warren Buffett, an extremely successful investor, as an example. Buffett never invests in a company until he fully understands what it does to make money. He never invests until he is convinced that the company’s business plan will continue to make money far into the future. He uses what is called intrinsic value as a guide. Intrinsic value is the value of an investment based on forward looking earnings far into the future. Anyone who was assuming that crypto would keep going up forever was basing their assumptions on hype and not on any sound evaluation of value for Bitcoin and the rest. The sad thing is that there will always be another Sam Bankman-Fried because there will always be someone who is there with their bags packed when a new technology or trend arrives. When there is a fundamental basis for the profits from a sector, like with desktop computers and the necessary software, there is always the possibility of another Bill Gates or Steve Jobs. When there is not any stable foundation under an investment sector, the odds are greater that we will see another Sam Bankman-Fried and FTX.