The biggest mistake you can make in crypto

It's hard to imagine why the richest 29-year-old in the world would think he's made any money mistakes.

Yet, for the CEO of crypto exchange FTX Sam Bankman-Fried and his more than $20 billion in net worth, that's somehow still the case. When I was interviewing him for the Yahoo Finance and Decrypt conference a couple months ago, I asked what his biggest crypto mistake was and his response was as simple as it was relatable:

"The biggest mistake I made, which is only sort-of an answer to the question, is not getting involved sooner," he said.

(I think you did just fine, Sam.)

But then again, there is a lot to unpack in that "mistake" of not getting involved sooner. For all of us, it's likely we could have gotten in sooner. If you think about what may have stopped you from doing so, I suspect there was some level of risk assessment you made at the time you first heard of bitcoin.

Thinking back to my own thought process in 2018 when I was pitching the idea of a crypto show at a major financial network and getting laughed out of the room, there was a lot of pessimism. Bitcoin was collapsing more than 50% on the year and there were still huge regulatory questions around if the government could ban cryptocurrencies all together.

We're clearly past that question now, but in comparing now to then, there's still a mistake I see being made that might be related to "not getting in sooner" yet far more problematic. To me, the biggest mistake I see people making now is even simpler: thinking crypto is still what it was in 2018. That might seem obvious, but stick with me because I promise it isn't.

If you're reading this, you're either already into crypto or you're maybe rethinking if you should have gotten into crypto sooner. If it's the latter, it's likely not your fault. In fact, there is a lot to be said about the blame all of us in the media share in the way we've covered cryptocurrencies for the last few years. For example, there was a line that was repeated again and again in 2018 and surprisingly still gets repeated by "financial experts" talking about crypto in 2022:

"Only risk what you're willing to lose."

Now, let's think about this. Aside from it being extremely vague advice, what does it really mean? I guess that there is an extremely bad outcome with some attached probability. By the same logic, I imagine asking the same person for advice at a blood drive might sound something like this:

"Hello, Mr. Nurse. How much blood can I give today?"

"Only donate enough to where you're pretty sure you ain't gonna die."

"Right on, my good man."

At the extreme, with any amount invested there is a chance you could lose everything (as in, it goes to $0.) There is a mathematical probability you could put on that, which, in turn, would allow you to calculate what investors call an expected rate of return. In theory, summing up all the probabilities multiplied by various returns, would give you a final expected rate of return:

Expected Rate of Return = (Probability 1 x Return Scenario 1) + (Probability 2 x Return Scenario 2) + …

Where I believe the vast majority of people are making the biggest mistake in crypto (and have made in the past) is over-estimating the probability of catastrophe, or that bitcoin goes to $0.

There are a lot of reasons I could list to back up that assumption (I will in a second) but let's play it out for fun. Let's say bitcoin fell 95%. That would take it all the way down to about $1,900. Obviously that's not ideal if you just bought it today, but backing up over a more fair five-year time horizon, bitcoin trading at $1,900 would still reflect about a 50% return. Stocks, as measured by the S&P 500, are up 81% over that same time horizon.

Now to be fair, that comparison doesn't take into account dividend payments or stock splits and it says absolutely nothing about forward return probabilities, but my point (as you'll see) will remain the same: "Only risk what you're willing to lose" is ludicrous advice to apply to bitcoin now. Why? Because it's getting less risky.

First off, many bitcoin advocates are quick to point out the phenomenon referred to as the Lindy effect. Basically, the theory posits that the longer something has survived, the longer it's likely to exist. For Bitcoin, the network has been humming along un-hacked and undeterred since it was created in 2009. Every day that remains true, the less likely it is that Bitcoin ceases to function (or becomes replaced by something else.)

Second, bitcoin is increasingly correlated with stocks. Take a look at this chart from Fundstrat's annual crypto report which shows how the correlation between bitcoin and the basket of Nasdaq 100 tech stocks (QQQ) has evolved from 2017 to now. Bitcoin used to be largely uncorrelated with broader market moves (left.) Now, it moves a lot more closely with traditional big cap tech stocks (right.)

One reason for that is that huge, billionaire investors and hedge funds have piled into bitcoin over the last couple of years. Does that by itself mean bitcoin could never see a substantial drop? Of course not. In fact, hedge funds can often bet against things just as often, but having more liquidity in the space has certainly reduced volatility. So, what else has changed?

Well, perhaps more important to the entire crypto space is the amount of money venture capital firms have poured into the companies building out crypto's infrastructure. By that, I mean the funds that once seeded the money that let Facebook and Google scale so quickly are insanely sizing up their bets in crypto.

Last year, the amount that venture capital tossed into crypto companies absolutely exploded. In fact, data in Fundstrat's same crypto report shows that VCs invested more in crypto companies than they have in all prior years combined. That trend has only accelerated in 2022.

Of course, it would be fair to point out that just because VCs are throwing money at crypto companies doesn't mean it will amount to anything in the short-term. A prime example would be the tech bubble boom and bust in 2000. But only looking at the money being invested would also overlook arguably a more important sea change happening. What about the people?

I've had a front row seat to a lot of the turnover happening. Very smart people are quitting traditional tech jobs or even their cushy Wall Street jobs to build in crypto. This past week, I stopped by Ethereum Denver, the longest-running conference of its kind, and was frankly blown away by what I saw (below is just a sprint through the main hallway at one of five venues.)

More than 12,000 people from more than 100 countries attended the conference to mix and mingle and discuss all the splinter projects being built in crypto. Admittedly, some projects might not be doing all that much to improve the overall user experience, but a lot of the larger projects are. Even then, these are some of the brightest minds getting sucked in to help make the entire experience better. Undoubtedly, that means something to de-risk where adoption goes in the shorter-term.

My point is, it has become increasingly obvious that a bet on crypto is not just a bet on the price of a thing (or things) going up. It's instead a broader bet on the people, the means, and the technology they are using to improve inefficient and outdated systems. At his Ethereum Denver keynote, Ethereum founder Vitalik Buterin kicked off his talk with an interesting observation about any of the prior technological waves in history. It's not necessarily what a new invention does to improve on the old system that changes everything — it's what it does to introduce what we never even thought about. As he says, it's not just about a car replacing a horse, or what the internet even replaced:

A wild thought: Money could actually just be the first fundamental problem crypto is solving.

As a final disclaimer, I should note "Only risk what you're willing to lose" might still be applicable to more fringe crypto projects that are yet unproven. However, it's largely as outdated now as it was in 2018 when being applied to what Bitcoin and Ethereum have already been able to prove. They are networks that people are paying to access. Simple as that.

In the case of bitcoin, there is more than a decade of history to point to there. For those who haven't yet taken the time to appreciate how Bitcoin (the network) functions in relation to bitcoin (the cryptocurrency) I suggest you go back to my post on the easiest way to get started. For those who already have, stay tuned for a deeper dive on more specific profiles of what more recent crypto advancements have unlocked (including the right way to be thinking about NFTs.) Some of those profiles might soon land behind a paywall, but you can still get in at the lowest price I am legally allowed to charge (just $4.99 a month.)

Buckle up!

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