Saturday, December 30, 2023

"Cryptocurrency and Cognitive Dissonance"

From the Milken Institute Review, December 12:

While it came as no surprise after three of his closest associates testified against him, Sam Bankman-Fried’s conviction on seven counts of fraud and conspiracy in a Federal courtroom should nonetheless have served as a warning to players in the cryptocurrency market. Bankman-Fried (known as SBF) is of course the founder of, and chief puppeteer behind, the FTX cryptocurrency exchange, whose customers were unknowingly funding his money-losing hedge fund, called Alameda. Even as the case against SBF was in preparation in March 2023, listed at least ten other cryptocurrency exchanges and traders under investigation.

And after the verdict, Politico reported that “crypto giants like Binance, Coinbase and Gemini, among others, are still heading for courtroom clashes with regulators that could prove an even greater peril to the market’s future than FTX’s collapse in late 2022 ever did.” Indeed. Binance just agreed to pay a $4.3 billion (!) fine to the U.S. government for money laundering, and its disgraced CEO may yet face jail time.

But those who expected a chilling effect on the price of bitcoin (still the flagship cryptocurrency) could not have been more mistaken. When FTX declared bankruptcy in November 2022, the price of bitcoin stood at $17,056. On November 19, 2023, it hit $36,449.

What Gives?
While the details of SBF’s misappropriation of investors’ funds to cover losses in his Alameda hedge fund are still elusive, it is conceivable that, had SBF been able to arrange a buyout to stop the run on FTX, cryptocurrencies’ ongoing appreciation would have let him repay the stolen coin — and spare SBF his catastrophe.

There is a precedent of sorts. In the 1990s a young Austrian, Michael Berger, established a hedge fund betting that the exuberantly priced technology stocks of the late 1990s were overvalued. But because he could not cover his short positions as prices continued to rise, he falsified his statements to investors, leading to a loss of $400 million by the time he was charged in August 2000.

Arguably, if Berger had been able to fend off reality for only a few months until the dot-com bubble burst in March 2000, he would have achieved his dreams. By this reckoning, unlucky timing turned the prescient financial genius into a fugitive criminal when he successfully jumped bail while awaiting sentencing. He was arrested by Austrian authorities, but beat a U.S. extradition request.

Just as Berger quickly became a historical footnote, SBF already seems to be a relic in crypto circles. Faith in cryptocurrencies seems not only undiminished but even strengthened by the FTX scandal and the billions of dollars in losses to investors.

Part of the reason may be that his fraud was revealed not by the mainstream press but by the crypto news site CoinDesk, a scoop suggesting that the crypto community can police itself. But there is more to the crypto renaissance than tribal self-congratulation.

Skeptics like the investor Mark Mobius have long explained cryptocurrencies as a religion, and while many buyers must consider their choice entirely rational, libertarian utopianism and evangelical zeal underpin much of the scene. Indeed, the social psychology of faith may help explain the paradoxical sequel of the FTX scandal.

In 1954, a group of social psychologists from the University of Minnesota studied the followers of a Chicago woman who foretold a catastrophic flood on a specific date and promised her followers rescue by flying saucers. When the fatal day passed uneventfully, some believers defected. But others interpreted the non-apocalypse as a sign of their leader’s powers to hold back the flood and reaffirmed their faith.

Like so much of social psychology, the study has been controversial for decades. But the concept of cognitive dissonance it introduced — that people look for evidence to reinforce their beliefs rather than change them in the light of strong evidence to the contrary — is still going strong.

The most obvious explanation for the paradox of soaring bitcoin prices is that the failure of FTX will stimulate effective regulation as well as new instruments like exchange-traded funds that will permit investors to benefit from crypto’s rise without taking some of the more notorious crypto risks — especially losing digital keys and thereby, their money....


That's the second reference I've seen to "If only he could have hung on a little longer" thinking.

The guy is a crook. 
And his parents are so deep in power-politics that President Biden is going to pardon him.