“The world only exists in your eyes… You can make it as big or as small as you want.”
F. Scott Fitzgerald.
The majority of my crypto holdings are gone. My assets are frozen in the custodial custody of BlockFi, who halted all withdrawals on their platform this past Thursday. I will give you my raw thoughts on the situation, what I learned, and what I plan on doing in the future.
Warren Buffett was right:
“To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.”
Sam Bankman-Fried is a pretty smart guy, maybe even a genius. He is one of the smartest people in the world, based on IQ. Unfortunately, he and his inner circle only had a little experience running a crypto empire.
SBF fooled everyone. He misled his sponsors, institutional investors, retail investors, the media, news outlets, and even members of congress to build a $32 billion crypto kingdom. SBF could go down as one of the greatest fraudsters of all-time, even worse than Bernie Madoff and Elizabeth Holmes.
Blame the exchanges and not crypto
I am hearing through Twitter and Reddit that many people will stop investing in crypto altogether. We have to remember the exchange represents the custodian or gatekeeper of your assets. The assets, such as Bitcoin and Ethereum, have value. The exchanges failing, like FTX, Voyager Digital, Celsius Network, and others, were caused by a mix of bad actors, incompetent management, a lack of financial regulation, and a broader downturn in financial markets.
In short, crypto and crypto exchanges are not the same thing.
Why I held my crypto in BlockFi:
You may ask why I kept my money in BlockFi instead of a hard wallet. Honestly, I do not have a good answer. I got complacent. Clients who put their money on exchanges are not investing in them. Just as if you are putting your money in a bank, you are not investing in the bank; you are using the bank as a custodian to safeguard your account.
Part of it was laziness on my end. Call it the ‘Boiling Frog’ syndrome. Another part of me believed in BlockFi CEO Zac Prince, who explained why Blockfi was a safer exchange compared to Celsius and Voyager. There was no exchange token, and the company acted like a legitimate financial holding company.
From my research and due diligence, putting my assets with BlockFi was a safe decision.
Despite the turmoil, Marquez and Prince thought they’d built a cyber-winter-proof organization. BlockFi is a centralized finance (CeFi) company, structured more like a bank, with an audit and risk committee that reports to the board. The committee was peopled with Wall Street types who had experienced the financial crisis of 2008. “We didn’t offer Luna to our U.S. clients,” says Marquez. “We didn’t have direct exposure to that market event.”
In Crypto’s Crosshairs, Superstar BlockFi Makes a Great Escape
By trusting BlockFi, I was de facto trusting FTX since FTX agreed to buy BlockFi in the summer. I was duped and made the wrong decision, but I was not alone and made the best decision at the time.
From my interpretation, a group of entitled millennials from prominent wealthy families took advantage of a highly unregulated market. SBF and his inner circle were highly educated, understood a market better than most of everyone else, and used that to their advantage, running a Ponzi scheme. SBF is a likely sociopath with no moral compass; his squad wreaked financial havoc but was done in by his arrogance or greed, probably a mix of both.
FTX built a pyramid scheme of trust. You assume they are credible when you see big-name backers like Paradigm, SoftBank, and Sequoia Capital and partnerships with Tom Brady, Stephen Curry, and Major League Baseball. Tom Brady, for example, likely has his own paid team that researches the best partnerships and investments for him.
On a scale of 1-10, 1, having no trust and 10, having complete trust, when I signed up with BlockFi originally in 2021, my trust level was at 8. At the beginning of 2022, I enjoyed the platform and weekly emails from BlockFi. I would assess my level of trust in January at a 9.
During the summer, when FTX agreed to buy BlockFi, my confidence level fell to a 7, but I assumed the worst was over, and I was satisfied by Zac Prince and Flori Marquez’s responses in interviews and podcasts. They said all the right things and passed my BS test.
When FTX collapsed, my confidence had fallen to a 6, but BlockFi kept assuring me my money was safe all week! I was contemplating, even preparing to transfer my assets into Coinbase by Thursday afternoon, but by that evening, it was too late.
Do not blame the victim:
A lesson in emotional intelligence. Saying, “not your keys, not your crypto,” to someone that just had their funds frozen on FTX or BlockFi is a bit insensitive and cold. It would be like telling someone uninsured that got hit by a car “should have signed up for coverage.”
There is a time and place to talk about hard wallets and cold storage, but this isn’t it
- Many advocates of “not your keys, not your crypto” still have a portion of their assets in exchanges like Crypto.com, Coinbase, and Kraken.
- Exchanges falling will cause a niche market to get smaller as many crypto supporters will leave permanently.
- The crypto ecosystem does not need more bank runs and exchanges to fall. This will depress the price of BTC further and longer. For selfish reasons, crypto holders should want their assets to increase in value, not decrease.
None of us have the benefit of hindsight. It is easy to play Monday morning quarterback after the events have unfolded.
The actual assets didn’t default; the exchanges did, and you had bad actors who committed crimes.
For the people who are saying crypto is a scam, remember that many clients of FTX and BlockFi did not buy speculative coins and weren’t even trading. A lot of us bought USDC or other stablecoins. Some of us were gaining interest from Crypto Asset Interest-bearing Accounts.
If you searched for the most secure and best crypto exchanges, FTX and BlockFi were on that list. I am a crypto novice, which is a leg up on the average person, but this industry is still very new and foreign. If the “experts,” who did their due diligence on evaluating how safe and secure an exchange was, got duped, what hope does an average investor have in making what should be a simple decision on where to store their assets safely?
I can live with a stock or asset falling 90% as an investor. I assume the risk. Unfortunately, many clients who lost money are not investors or have an investors mindset. They viewed these exchanges as pseudo-banks like Venmo or Cash App and may not be prepared to handle such a loss. We are victims of a likely crime and shouldn’t be labeled degenerate gamblers.
If you need help, dial or chat 988 for the Suicide and Crisis Lifeline. For the Crisis Text Line, text 741741. Help is available if you need it.
What this means for crypto:
The amount of damage done to institutional/retail interest in crypto and the crypto ecosystem is immense. You can look at this as a “buy the dip” moment for BTC or ETH but what happened this past week is not good for the industry. It will likely take at least a few years, if not more, to recover.
I could see this as a possible great depression for crypto. Imagine waking up and hearing your bank is filing for Chapter 11 bankruptcy, and all your holdings are frozen. You contact the Federal Deposit Insurance Corporation, which says the bank owns your money according to the Terms of Service you agreed to. The good news is after the bankruptcy procedures; you might receive 10% of your original holdings.
That’s what the crypto community is going through. Unless there is quick regulation, I do not see any recovery in the price of BTC or ETH anytime soon. The price of BTC is more likely to fall below 10,000 and stay there for a while than shoot above 30,000.
The idea of having to own a hardware wallet in cold storage is something I will entertain, but I am not happy. Exchanges provide convenience and simplicity. If people cannot trust exchanges, it will destroy widespread adoption and erode trust in crypto. If we cannot trust the exchanges, many investors will have no confidence to hold.
Many people do not want to store a bunch of gold bricks in their homes or store their cash under their mattresses. The industry will take a big hit if hard wallets are the only way to store crypto securely.
I would like to see all crypto exchanges with something similar to FDIC or SIPC insurance protection in the future. Financial regulation is required for investors to stay invested.
These exchanges were less secure and solvent than regular banks. The influencers, media, credible blogs, and financial publications marketed and advertised these products like banks.
I take full responsibility for my actions; however, the DOJ or whoever will investigate this must prioritize providing restitution to the defrauded depositors first, much before the investors who assumed the risk to receive a potentially greater reward.
Where do I go from here:
Crypto represented about 5% of my net worth. Not a lot, but still painful.
Watching the price of BTC and ETH holdings fall 70% this year barely fazed me. The **** show that happened this past week rattled me. At this point, the trust is gone. I would be nervous if my crypto were under the custody of Coinbase, Binance, Gemini, or even a “real” bank like SoFi or Robinhood.
Most of my holdings are in stocks, and it has been a while since I bought sizeable amounts of crypto. Ultimately, the course remains the same. I view this similarly to an investment in a small-cap growth company that went south. I am mentally writing this off as a 100% loss. I am still pro-crypto, but I need to figure out where I stand with crypto exchanges now. I had no intentions of buying any crypto before this mess, and I do not see the contagion ending soon. I will reassess when the crypto market stabilizes, which may take years.
I made a mistake, and I will continue to make mistakes. I will learn and move on. The three worst traits for an investor are fear, arrogance, and complacency. It is easy to be fearful at this moment. I will continue investing but do more rigorous due diligence. I will still take a lot of risks. Proper dd is important but only sometimes possible. Investing in an index seems prudent, but can most investors even name 20 companies in the S&P 500? The QQQ has Pinduoduo as a holding. How can one do proper dd on a company based in China? I advise taking risks, especially if you have a long investing time horizon.
I am numb to the news and the duplicity of SBF. I wonder if Flori Marquez and Zac Prince were maliciously deceitful actors or pawns in SBF’s shell game. At best, they were poor stewards of my assets and lost my complete trust.
Could a white knight rescue BlockFi? CZ, Jack Dorsey, Brian Armstrong?
Possibly. PayPal is worth over $100 billion and is considered the mature adult of fintech. If they want to enter the crypto market at a floor-bottom price, this would be an excellent opportunity for pennies on the dollar.
PayPal would acquire many new users as there is a low overlap between Paypal and BlockFi users. Venmo, owned by PayPal, already offers crypto, so they are interested in the space and already have a team that can run BlockFi. If the SEC approves BlockFi Interest Accounts, the value of BlockFi could be 10x. Pure speculation and ramblings at this point, or just pure hopium.
BlockFi is filing for Chapter 11 bankruptcy. That is my educated guess, as the BlockFi credit card no longer works, and the “Meet The Team” page has gone dark on the main website.
I hope Prince keeps true to his words and protects BlockFi’s clients first. “As a matter of principle, we believe in protecting client funds,” Prince tweeted; doing so was both good business and promoted crypto financial services generally.
Make good on your word Zac and Flori and do everything in your power to return us whole again and help restore faith in your clients and the crypto community.
I wish everyone the best during this cold crypto winter. As a community, we can learn and grow with each other. We can flesh out the bad actors and achieve widespread crypto adoption. 2023 could be even bumpier. Stay hopeful and reach out if you need help. We will grieve but get through this ordeal much stronger.
Invest in Myself 