SBF is a fraud. But he was never the problem [Finance Fridays]

How mainstream establishments and social media create an environment of misinformation, billion dollar scams, and giant collapses.

Sam Bankman-Fried (SBF) has been arrested on multiple charges, including wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering (source). To those of you that have been following Finance Fridays, you will know that I have been talking about how the Crypto Industry was a mess built on a shaky foundation of overleveraged positions, unfounded hype, and a lack of intrinsic value. The collapse of FTX was inevitable. As further proof of how problematic this industry is, take a look at this video which breaks down how problematic the situation at Binance (FTX’s biggest competitor) is.

At this point, it won’t come as a shock to you when I say that the Crypto Industry needs a massive overhaul. It constantly rewards people like SBF and CZ, who overpromise, under-deliver, and cheat their followers. However, having observed the discourse and mania around crypto, I’ve reached a conclusion that I don’t see being discussed- people like SBF are frauds, but the problem is much deeper. The crypto scams that have become all too common are merely the symptom of a much deeper problem, something that has almost nothing to do with Cryptocurrency. If this issue is not fixed, then we will continue to see ordinary folk lose their life savings as they are misguided into investing in flawed products.

Covered the collapse of the Crypto Giant Celsius here. You saw many people saw their life savings investing into what was marketed as a no-risk product.

Sound like something you should know more about? Read on.

Key Highlights

1. The underlying issue- People like SBF merely exploited Social Media and the way that mainstream media works to generate a lot of hype for themselves as the next great revolutionaries. They leverage this hype into attention and money. Cryptocurrency is just the flavor of the month these people adopted.

2. How mainstream media feeds you lies- These revolutionaries use the media to create narratives around themselves. Go back a few months, and what you saw about SBF was how great he was and how he would save the world. When Theranos was scamming people, the narrative around Elizabeth Holmes was that she was a genius.

3. How SBF Learned from Warren Buffet- Pretty much every investor hears the story of how Warren Buffet still lives in the same house he got in 1958. Newer-age investors might hear about how frugal Mark Zuckerberg is. This is meant to show us how great investors are frugal.

   

   This is from Business Insider. You’ll see such pieces a lot if you get into personal finance and investing.

   This is paid PR, meant to build a certain image and make these icons more relatable. These pieces miss the many other expenses that these frugal millionaires have (Zuck, for eg, owns a private island). SBF paid for pressers about how he dressed simply, gave to charity, and drove a simple car, to highlight that he didn’t care for money. He was in it to save the world. Noone mentioned the 100 Million USD+ portfolio of luxury houses for ‘key FTX personnel’. The marketing behind the frugal billionaire is very complex so I will cover it separately. Till then, read the excellent writeup- The appealing myth of the frugal billionaire by Vox.

4. How to protect yourself- There is no 100% foolproof method for keeping yourself safe from falling for scammers. As social creatures, we will be susceptible to being swept up by the hype these people generated. But you can make sure that you are better protected. The key is to recognize that these scammers often resort to social proof and appeals to authority to sell their products. Start looking beyond that. For every idea pitched to you, think about it independently. We’ll cover some questions you can ask yourself to judge the products people try to sell.

Let’s get into the details.

Image Source, “Sam Bankman-Fried and FTX execs received billions in hidden loans”

You’re being lied to

At this point, I won’t shock you when I say that social media is a hotbed of misinformation. However, what most people don’t realize is how easy it is to game that system. Most people hear about how it can be used to spread political lies and slander your opposition. This is true, but there are more banal ways that you deal with misinformation every day. And no, I’m not talking about photoshop and filters people use to look better for the Gram.

There are thousands of influencers and ‘thought leaders’ that have established their credibility and social media following by paying for it. Your favorite celebrity is paying for their clout (they just also have a lot of actual followers).

Kourtney Kardashian tops the list with 28% fakes among her 116 million "followers." That includes celebs with even more followers—like that another Kardashian, Kim, with 214 million followers but only 26% fake ones. Sister Khloe is also at 26%. Other big names are entertainers, including Taylor Swift, JLo, Miley Cyrus, Katy Perry, and Nicki Minaj—plus one Brazilian footballer, Neymar.

Source

How does this work? Typically, these people work with specialized agencies which have various ways they increase the presence of their clients. These can involve (but are not limited to) paying for followers/engagement, paying for press releases in big-name magazines/media hubs (including your favorite big news corp), and paying ghostwriters for content. How do I know this? Multiple such agencies have reached out to me. Today, one person even reached out to me with a bot that generates comments on LinkedIn using ChatGPT, so that I didn’t have to spend the effort to write intelligent comments. Imagine that!

So why does this matter? Because these people often use their social proof to sell their products. They rely on massive ad campaigns, where they pay a lot of celebrities, outlets, and other influencers, to promote their products. Regular Folks following these people/organizations come across these promotions and google the original product. There, they see the paid releases + massive following and think this product is legit. So now real people put real money into this project, which further increases the hype behind this, forming a strong feedback loop.

Don’t forget, this was a thing. The original authors (Sequoia Capital)took it down, but we can still access this article here.

Many legit brands use similar strategies for growth. The difference is in what is sold. A normal company paying for press releases, ad campaigns, and celebs is selling a product with utility. They are trying to increase reach, but the performance of the product will be based on the quality. Taylor Swift will stop running ads for her newest album after 1 month, but people will continue to engage with her work. Scammers like SBF need to keep generating hype because that is how money comes in for them. Their products have no value, so they need to keep injecting investor money to keep the businesses afloat.

This problem is not unique to crypto. I’ve covered how various Tech firms reach obscene valuations w/o ever making a profit. They use these valuations to build up hype and interest, creating extremely overvalued stocks. At this point, most of the early investors have exited, and the ones left holding the bag are regular retail investors (like you or me). You can read more about it below.

Why Tech and Crypto Stocks are so extreme [Finance Fridays]

To really build a fan following and audience, these influencers will often adopt various personas. This makes them feel more relatable and makes their audience vibe with them more. Generally, they will adopt some variant of the outsider persona, appealing strongly to certain parts of their identity. FTX played up the ‘Genius, Generous Billionaire out to save the world’. Elizabeth Holmes used to dress like Steve Jobs, speak in a lower voice, and hit the dropout founder+ woman in Tech notes. Adam Neumann was a visionary who would revolutionize Work. The founders of 3Arrows Capital portrayed themselves as prodigy traders that let them take billions from others. Kevin David was an automation guru, who sold millions worth of courses under false pretenses. His scams got so out of control that the FTC has stepped in and there is a lawsuit against him.

With that out of the way, let’s cover how you can protect yourself from these grifters.

Devansh’s Checklist for Spotting Dodgy Groups

Here are a few of the things that you can look for. This will help you differentiate the fakes from the real ones. I ask these questions before investing my time/money into any project that has some hype around it-

1. Is this a useful product/project?

2. Is it too good to be true?

3. Is this something that will make money (hard to replicate, competitive advantages, etc)- If it was easy for everyone to sit at home and get rich quickly, what would stop everyone from doing it? And if everyone became rich, then the relative wealth would stay the same, making the whole endeavor pointless.

4. How are the leaders responding to the bad press- Bad actors tend to downplay criticism as haters/people too stupid to understand. They give unfounded projections and don’t talk about the worst cases. They will spend a lot of time insulting the people who critique them/talking about their credentials instead of addressing the critiques themselves.

5. They will justify deviating from standard practices by claiming that they are revolutionizing the world and that the SOPs are useless. As many crypto bros have realized- financial regulations existed for a reason. People are crying for the same regulations they ran from. If the leader/project deviates from the norm, trashes the old ways, sells their vision, and can’t give concrete details about how their ways are better, you should go the other way.

6. They rely mostly on social proof and appeals to authority- This is a huge red flag. If a product only has social proof/appeals to authority, then it’s not worth it. It doesn’t matter how many followers the product has, who is backing it, or which big name put money into it. Any solid product should have other alternative checks for quality. These include replicable (and verifiable) results, a trial period (or refunds), clear utility (why someone would use your product), and clear disqualifiers (not everything is applicable to everyone).

These are some of the things that I look for when evaluating the quality of the product. Are there any things you look for? Let me know. If you found this writeup useful, consider a premium subscription for access to more in-depth writing about the topics you need to know to excel in Tech. More details below. And share this with people who might like this to help me get more people into the cult <3.

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