I like to think I’m a pretty rational investor. Not too emotional, not too prone to FOMO, willing to wait for good deals. So, let me tell you about a bad and embarrassing decision I made. This story may seem pretty dumb to you, as it does to me today. I often read about great financial disasters and think “that’s so stupid! I would never screw up this badly.” It turns out that’s easier said than done; some theoretical lessons are very hard to internalize in practice.
In late 2014, I was cautiously bullish on Bitcoin. I saw the appeal of finite-supply assets in other markets, leaned cypherpunk-libertarian, and had run into many issues with fiat payment processors in my poker days. However, I had also seen Liberty Reserve shut down by the FBI, watched quaint early scams like Auroracoin, and thought it seemed clear that the government would eventually need to shut down this state-threatening Wild West.
So I was bullish, but hesitant to put real skin in the game. Along came an opportunity to bet on Bitcoin with no personal downside: I met a young founder who had just raised $2M from a few investors for the purpose of getting them Bitcoin exposure. Let’s call him Mephisto. He had negotiated 25% carry on the profits of his small fund, which was an excellent deal. His track record made sense: he’d been in the industry since 2012, and had made some good money on Bitcoin and trading FPGAs. He had brought on a young woman – let’s call her Bellatrix – to help manage operations. As we talked, we realized I could help them generate alpha beyond pure Bitcoin exposure. I knew financial derivatives very well, so my task was broadly to profit off inefficiencies in these nascent markets.
I was 23. Working with Mephisto and Bellatrix was like sitting on the Hindenburg. While I was combing the market for inefficiencies, they were struggling to get the operations fully set up. A few weeks in, it turned out that Mephisto and Bellatrix had been fucking in secret. They had an equity dispute. He went off his medication, and suffered a psychotic breakdown. She accused him of rape. They called the cops on each other. He disappeared and re-encountered the substance abuse problem that had put him on anti-psychotic medication in the first place. To top it all off, they lost the cold storage credentials for a few weeks.
I pulled the escape cord and resigned cleanly. Ironically, I took a financial loss here, since I had to have my lawyers review everything and ensure I wasn’t liable for any fiduciary mismanagement these two chaos clowns might undertake.
At this point it was early 2015. Bitcoin hovered between $200 and $250 per coin. I was totally over it. The cautiously bullish view I had gotten around to was eviscerated by my distaste for the Mephisto episode. I was exasperated, liquidated nearly my entire position and sat, for a long time, more in the bear camp than not. Thinking about Mephisto and Bellatrix, I said to myself, if this is who is managing money in Bitcoin, there’s no hope for the sector. Bearish on Bitcoin at a $3B market cap.
Part of my attitude was a spiteful emotional hedge. I think my reasoning went like this: investing in Bitcoin could go two ways. I could lose money, and I would be disappointed. I could also make money, but in that case, Mephisto and his ilk would make wildly more money, and I would be upset. If I were to invest and succeed holding the same position as Mephisto, I’d be envious of someone I despised. I wanted Mephisto to fail, so I wanted Bitcoin to fail. It’s a twisted rationalization – silly in retrospect, of course.1
It’s easy to be a rational investor when the seas are calm. It’s hard when it gets emotional. Importantly, everyone has a threshold – if the personal relationships are close enough, or if the stress is great enough, suddenly even the most rational actors crack. I saw it all the time playing poker: your opponents are stone-faced rational actors until something gets to them. They’re tired or distracted, and suddenly they get pissed off when they normally wouldn’t, and make bets they shouldn’t. Very few people manage to stay rational in charged moments. The better-disciplined folks will summon all their willpower just to walk away.
In this episode, I let emotional stress override my assessment of the market. Stupidly, I let my subjective, one-off personal experience bias me against an entire industry. Stress had me do a 180 on a carefully considered position of conviction. Refusing to take a position out of spite, or in order to pre-empt envy in the case of success, is even more embarrassing.
Finally, there was one other important thing I hadn’t considered or realized at the time: the cutting edge is always full of idiots. It’s a common trope that people who are all-in on frontier tech are usually somewhat crazy. We have a romantic view of folks on the frontier – eccentric geniuses – but much of the time it’s gullible bozos and scammers feeding off them. In a historical analogy, the Wild West does not just create outlaws, it necessarily attracts them. My mistake here was to let the worst people color my representation of the market. It doesn’t matter how many scammers and con-men there are, it matters how many people are building stable infrastructure. It doesn’t matter how many ways there are for it to fail, it only matters that there’s one plausible way to succeed.
I’d bet that the big-name no-coiners like Nouriel Roubini, Peter Schiff, and David Girard have a similar emotional hedge. They’ve been calling Bitcoin snake oil for years. Their nocoinery has been a core part of their public identities. Knowing that you’ve been wrong all along and that all your opponents have become millionaires would be devastating. They’re stuck now: if they were ever to become bullish, they would be tormented by their past decisions. So they remain permabears, fingers in their ears, calling it a scam and praying it’ll eventually go to zero, even while the number keeps going up. ↩