Against crypto boy kings
Imagine two hypothetical founders/inventors/futurists/icons.
Person A identifies an opportunity (say, cryptocurrencies), allocates a portion of his or her wealth and efforts to capitalizing on that opportunity, but caps their risk in a way that prevents against total ruin in case they are wrong. So for example, they start a crypto trading firm, but they don’t liquidate their 401k and take out a second mortgage on their home to become >100% leveraged long in crypto. When crypto becomes a hot bull market, they sell a few coins and become millionaires — not billionaires — and go on to live happy, anonymous lives.
Person B identifies the same opportunity but leverages their entire net worth plus margin into being long the opportunity. If the crypto market never ignites, nobody ever hears about them. If the crypto market gets hot, they become Sam Bankman-Fried.
This is maybe a useful heuristic: When you see someone on the cover of Forbes, a billionaire before age 30, wearing a t-shirt and advocating for some new thing, that new thing may or may not end up being real, but the individual in question almost certainly has the most risky and over-leveraged balance sheet you could possibly imagine.
By this I mean that Person B on the cover of Forbes is categorically the person least hedged against a pullback in whichever market made them rich and famous. Which is why everyone who’s ever headlined a web3 conference is in the process of having their net worth go supernova this past week.
“Only when the tide goes out that do you discover who's been swimming naked.” Warren Buffett
It’s actually breathtaking (though maybe unsurprising), the degree to which all the famous crypto billionaires did absolutely no contingency planning for what might happen if some of the stablecoins lost their peg or if BTC dipped below $20k.
“We believed in everything to the fullest. We had all of our, almost all of our assets in there. And then in the good times we did the best. And then in the bad times we lost the most.” Kyle Davies, 3AC
I’m not writing this to dance on the grave of the crypto industry. I just think people need to be aware of who they’re getting advice from. Vulnerable people put their life savings into Luna, Celsius, FTX because Do Kwon, Alex Mashinsky, and Sam Bankman-Fried told them it was a good idea. This is like taking retirement planning advice from the guy who bet his life savings on one spin in roulette (while high on peyote) and then hit.
There’s nothing wrong with being a speculator and hitting it big — fortune favors the brave! — but these are not the sorts of people who should be giving advice about risk management or downside protection.
As the degens like to say… DYODD.