Gilad Edelman
Business May 5, 2022 7:00 AM The Crypto Industry Is Getting Too Honest What if no one cares whether it’s a Ponzi scheme?
Illustration: Jacqui VanLiew
There’s a commercial for the cryptocurrency-trading platform FTX that has been airing throughout the NBA playoffs.It features superstar Steph Curry going through a goofy version of his day—eating cereal, making pasta, carving an ice sculpture—while narrator Shaquille O’Neal insists that Curry knows everything there is to know about crypto.An exasperated Curry repeatedly denies it.“I’m not an expert—and I don’t need to be,” Curry finally says into the camera, holding up the FTX app on his phone.“With FTX, I have everything I need to buy, sell, and trade crypto safely.”
Give Curry and FTX points for honesty.The new commercial says what should have been obvious to anyone paying attention: The countless celebrities who have jumped on the crypto ( and NFT ) bandwagon almost certainly know very little about what they’re selling.This transcends the inherently transactional nature of corporate sponsorships.Everyone knows athletes do commercials because they’re paid to, not because they actually use the product.
(Hulu has a series of genuinely hilarious commercials playing off that fact.) I doubt Curry, who was paid $45 million to play basketball this past season, eats too many Subway sandwiches.Yet I trust that he could pick out the difference between the Steak and Cheese and the All-American Club that he shills in a recent commercial.It would be stunning, on the other hand, to learn that Curry—or Tom Brady, Paris Hilton, Charli D’Amelio, Snoop Dogg, or Matt Damon—could explain what someone is buying when they invest in crypto.
Alas, the honesty of the Curry ad is offset by its cynicism, which sets a new standard for an industry that has plenty to spare.The crypto advertising blitz started in earnest late last year, rising along with the price of digital assets.
The Super Bowl infamously featured several big-budget commercials from the industry.The most noteworthy was an FTX ad featuring the comedian Larry David dismissing crypto as a passing fad, with the kicker, “Don’t be like Larry.” As several observers pointed out , these ads conspicuously omitted anything about the substantive merits of crypto.Rather, they tried to instill a sense of FOMO, or fear of missing out, by suggesting that viewers who don’t buy in now will, like Larry, come to regret it.
These FOMO ads at least left open the possibility that a consumer would learn about crypto before investing in it.
The Curry commercial dispenses with that pretense.To be fair, there is a difference between not being an expert about something and being ignorant about it.But the ad is clearly targeted at people who have hesitated to trade crypto because they don’t understand it.The message to them: Don’t worry, neither does Steph! And perhaps, by extension, neither does anyone! If everyone else is operating in ignorance, maybe you’re not at any big disadvantage.So go ahead, trade away.FTX didn’t respond to requests for comment.
Warren Buffett, the legendary investor, is said to have advised, “Never invest in a business you cannot understand.” (It’s not clear he ever used those exact words, but the saying has taken on a life of its own.) A traditional investment is a wager that the business you’re investing in will grow more valuable over time.
As the fundamentals improve, and the business grows and becomes more profitable, more people will be willing to pay more for a piece of it, increasing the value of your shares.If you can’t understand how the business makes money, you have no basis for making a reasoned judgment about how its stock will perform.Yet as the Curry commercial makes clear, the crypto market has a way of eliding that middle step.Forget the fundamentals: For average investors, deciding to buy a certain cryptocurrency appears to be a pure bet that someone else will want to buy it for more money in the future.
This is also the ethos behind the meme stock phenomenon , which is philosophically closer to the crypto world than to traditional stock-market investing.
There is a name for investments whose value depends purely on finding future buyers willing to pay more than what you put in: Ponzi schemes.Critics have tagged crypto with that label for nearly as long as crypto has been around.Recently, the critique got support from an unlikely source.Sam Bankman-Fried, the founder and CEO of FTX, appeared last week on the Odd Lots podcast .Over the course of the discussion, Bloomberg financial columnist Matt Levine asked Bankman-Fried to explain “yield farming,” a form of crypto investment in which people can buy into “liquidity pools” that can pay super-high interest rates but that can also go south in a hurry.
By way of example, Bankman-Fried asked Levine to imagine “a company that builds a box” that, despite some lofty marketing rhetoric, does nothing.
The company, Bankman-Fried continued, could issue tokens, which people would buy—even though, “so far, we haven’t exactly given a compelling reason for why there ever would be any proceeds from this box.” Finally, the company could promise to distribute more tokens to anyone who puts money in the box, that is, to anyone who lends them money.In such a situation, Bankman-Fried said, the buzz around the token might give it a $20 million market cap.
(Even though, as Levine pointed out, it should be zero.) Then, as more people see that the box is paying out valuable tokens, they’ll want to put more money in, driving the value up even further.“Like, this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box,” Bankman-Fried said.“And who are we to say that they’re wrong about that?”
“I think of myself as a fairly cynical person,” replied Levine.“And that was so much more cynical than how I would’ve described farming.You’re just like, ‘Well, I’m in the Ponzi business and it’s pretty good.’”
Amazingly, Bankman-Fried didn’t push back very hard.“I think that’s a pretty reasonable response,” he said.“And I think there’s a sort of depressing amount of validity.”
Even more depressing is what happened next in the crypto markets: nothing.You might think that the head of a major crypto trading platform saying the quiet part out loud, admitting on a popular podcast that he’s at least partly in the Ponzi business, could cause some kind of crisis or loss of confidence in the sector.
Not so.This suggests that people don’t really care whether they’re putting money in a box that does nothing, as long as they think they will be among the group that pulls out more money later on.In this sense, it might be a mistake to compare the crypto market to the stock market at all.Gambling may be the more apt comparison.A slot machine doesn’t do anything, either; it’s literally a box that takes money in and spits money out.
The betting industry is thriving even though it’s common knowledge that most people who play will come out behind.
As with gambling, you can avoid the risk by not putting money into the pot.But it’s getting harder to truly opt out of the crypto economy.Even if you don’t personally invest in it, you may be living in crypto’s world.
Retirement funds don’t bet on the Super Bowl, but two public pension funds in Fairfax County, Virginia, invested in crypto funds last fall and are now reportedly considering getting into yield farming.Wall Street banks, long skeptical of crypto, are grudgingly entangling themselves more deeply in it, such is their fear of missing out on a big payday.
It’s not just the economy that’s getting more deeply wrapped up with the fate of crypto.
The sector’s rise has minted a generation of overnight millionaires and billionaires, some of whom have political ambitions.As the Washington Post recently reported , crypto investors and executives are pouring millions of dollars into the upcoming midterm elections, seeking to help elect candidates who will support the industry’s preferred regulations.Then there’s Bankman-Fried, who at age 30 is worth an estimated $24 billion and who has been increasing his DC footprint.His political donations appear to have more to do with pandemic preparedness than crypto-friendly regulation; as a practitioner of effective altruism, Bankman-Fried has vowed to give almost all of his money away to the causes where it will have the biggest impact.
So that’s one thing the crypto box does: transfer money from someone else’s bank account to his, so he can direct it as he sees fit.He seems to be making a wager of his own that he can do more good with other people’s money than those people can.
The rest of us will have to hope he and the rest of the crypto nouveau riche are right.After all, we’re not experts..