Crypto FOMO

Originally posted November 8, 2022 on my LinkedIn page.

Lots of so-called “smart money” investors (sophisticated investors) are caught up in the crash and bankruptcy of crypto company, FTX. It seems many of these investors were seduced by FTX’s 30 year old founder, Sam Bankman-Fried (also known as SBF). Who are some of the smart money names who have written-off their FTX investments to zero?

John J. Ray III, appointed to lead FTX through its bankruptcy, recently said, “Never before in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” It seems there were obvious red flags as reported by The Information, such as FTX having no outside board member and no chief financial officer. There are reports that many of these investors conducted little to no due diligence, believing they discovered “a once-in-a-generation founder running a company with explosive growth.” Yet, other investors like Andreessen Horowitz refused to do business with SBF because they did not trust him. According to Institutional Investor, Dennis Kelleher, CEO of Better Markets, said that when his team met with SBF it became clear that “there wasn’t much to his vision other than hope, smoke, and a desire to make a quick buck.” Other investors asking detailed questions about FTX were told to “take it or leave it” as reported by the New York Times.

In 1978, Charles Kindleberger described why manias occur in his book, Manias Panics and Crashes. He wrote, “there is nothing as disturbing to one’s well-being and judgment as to see a friend get rich…unless it is a non-friend get richer! It’s not long before a follow-the-leader process develops.”

Obviously, one component of the FTX saga is about seasoned investors being duped by SBF, a smooth talking MIT grad who also has Stanford Law School parents helping to give him even more legitimacy. The other part of the saga, however, involve these same investors ignoring the signs of a fraud because they were unable to overcome what became a severe case of “crypto FOMO.”

Disclaimer

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