The collapse of crypto shows the limitations of expertise and track records

Last week Silvergate Capital, a bank that is involved with crypto lending, plunged 60% on fears of defaulting. Bitcoin fell 5% in sympathy on the news, compared to the Nasdaq which was up 2% that Friday. My prediction of Bitcoin going back to $17k and or lagging the Nasdaq is coming true, as I said 2 weeks ago it would.

It’s an understatement that the past 1-2 years has been bad for crypto. According to the WSJ, which is a publication that generally takes a pro-business tone, even they have to admit that crypto has been a cash incinerator for investors. Andreessen Horowitz Went All In on Crypto at the Worst Possible Time:

Andreessen’s flagship crypto fund shed around 40% of its value in the first half of this year, according to people familiar with the matter. That decline is much larger than the 10% to 20% drops recorded by other venture funds, which have largely avoided the risky practice of purchasing volatile cryptocurrencies, according to fund investors.

Despite the record cash pile, Andreessen has dramatically slowed the pace of its crypto investments this year.

Now Mr. Dixon has to convince nervous investors that Andreessen didn’t overplay its hand for the May fund, which other crypto venture capitalists said is too large for a sector headed into a so-called crypto winter.

“They’ve just pushed it so far with crypto that I’m not sure they can rebalance,” said Ben Narasin, a general partner at the VC firm Tenacity Venture Capital.

The fact that all these highly-experienced, wealthy, credentialed experts, like Balaji Srinivasan, Peter Thiel, Chamath, Cathie Wood, Marc Andreessen, Chris Dixon, Ben Evans, etc. were hyping a worse investment than even subprime mortgages, and have continued to dig in despite being so demonstrably wrong, is further evidence of the so-called expertise misallocation problem.

Here is Andreessen hyping Peter Thiel’s Miami Bitcoin conference keynote speech, in April 2022. This aged well; Bitcoin is down 50% since the keynote:

Most of the crypto shilling is done by his associates like Chris Dixon, and others like Miles Jennings and Ben Evans, along with Ben Horowitz, the co-founder of the firm bears their name, Andreessen-Horowitz, also known as a16z.

Mr. Andreessen is smart to keep the shilling to a minimum, focusing more on politics and punditry, and having his associates do most of the shilling instead, for liability reasons I am guessing.

Admittedly, Facebook was a good investment on his part, and I own FBL (and ETF that is a 1.5x leveraged version of Facebook), but I would have told him and others to “stay the hell away from crypto,” and that crypto is not at all like “the next Facebook.” I remember in 2021, in November especially when Bitcoin had peaked at $69k, being asked by family members and others about investing in crypto. I told them the what I have told everyone else, in no uncertain terms, to stay away. Even if it was a good investment, most people don’t have the patience to not panic and sell at the worst time.

Facebook/META earns $30 billion in annual profits (excluding Metaverse). Blockchain and crypto, being more of a protocol than intellectual property, earns nothing. This makes crypto more like a commodity than an equity, and long-term returns for commodities tend to be way worse than stocks. Even companies that are built on crypto or are involved in crypto trading, such as exchanges, lose money or have minimal adoption.

Not to mention, crypto is too big. Investing in something that is already worth trillions in 2021 seems coming too late to the party for a VC fund.

In fairness, Andreessen’s earlier crypto funds were a success as mentioned in the above WSJ article, such as early investments in Coinbase, but this is like winning at roulette and then saying that playing roulette is a good business model or a good investment. The world wide web and social networks saw rapid adoption, huge profits, and are convenient, but crypto is none of those. Tim Berners-Lee created the original specifications for the hypertext protocol in 1990 and the first first webpage, in 1992. The first browser, Mosaic, was created in 1993. AltaVista, Amazon, AOL, Yahoo, Lycos, and others followed just 2-4 years later and were major commercial successes.

It’s been over a decade since ‘Bitcoin Core 0.1’ and still hardly any mainstream adoption or penetration, just mostly gambling. Sure, there was some commercial adoption early on, but for ‘facilitating criminal activity’, so the cudgel of regulation pretty much dashed those early hopes of crypto being a ‘decentralized alterative to banking’. As it turns out, the blockchain makes it very easy to track transactions. Monero offers some privacy, but still it’s possible to trace capital flows to/from bitcoin to/from Monero. Most crypto criminals are identified and caught when trying to convert unusable crypto into spendable fiat. Otherwise, for non-illicit/illegal purchases, crypto has seen minimal adoption.

The failure of experts, whether it’s crypto, the Iraq War, Covid, the 2008 global financial crisis, Enron, etc. is why resumes, clout, or even track records are not that useful. Or how having too much experience may be detrimental. Top tech companies and hedge funds care more about how applicants think or process information, not experience, which only tells how someone performed in the past and is of limited usefulness for predicting how such a person will perform in the future under different or unforeseen circumstances.

Thiel, Chamath, and Andreessen were all right about Facebook early on (Mr. Thiel famously investing $500k in the then-fledgling social media start-up in 2005), so collectively they had a great track record and were eminently qualified by almost any quantifiable measure (Mr. Andreessen being a ‘web pioneer’ and co-founder of Netscape), only for it to go up in smoke with crypto. But it’s not his (or their) money, so what does he have to lose. As long as there are people chasing the latest thing in the hope of getting rich, there will be people selling shovels and tickets.