How To Spot The Charlatans In Crypto (Or Anywhere)

How to spot the magic trick (in crypto and elsewhere, for non-experts).

Let’s face it — there are more sharks on the shore than there are in the water. And, it’s still an exception to find a person or a business that doesn’t have an underlying hidden agenda. This is especially true in politics and when it comes to money; and crypto is not an exception. While crypto and tech enthusiasts are busy building skyscrapers, magicians are quietly moving through the crowd doing their thing turning trading alt-coins into money.

So, how do you spot the magic trick? And, how can you innoculate yourself (and your wallet) from potential snake/shit/shark-housery? Do you remember kindergarten? Here are the most important stories (warnings) from the Brother’s Grimm about pretense that we’ve unfortunately phased out for Bob the Builder and Charlie and Lola.

The Rumpelstiltskin.

The miller boasts that his daughter can spin straw into gold. The king promises to marry her if she can do it. She is trapped into the lie, a malicious imp offers to make it true in exchange for her firstborn child. Her only out, to guess his name before the child is born.

1. Straw into gold? If you can’t see the value proposition and it isn’t clear how the company will be successful in the long run based on genuine value creation, then stay away. Where is the business adding substance to the world?
2. But she married the king! If you are going to base a relationship on a lie, then it’s probably not a good idea in the long-run: We often seduce ourselves with the promise of the future, only to find out that the experience we got into was agonizing. What experience do you want to have when you invest into something?
3. It all worked out fine in the end. The imp is set up to be the fall guy in this story, but the miller and the king, and the girl are all equally culpable. It’s only the girl that redeems herself by going through the pain of the ‘rare event’ – finding out the name. Who will carry the ‘sweat-equity’ of the business? (Here is a hint: If you are doing network-marketing, then it’s you. If you are across the table from an entrepreneur that just put everything on the line, then it’s them.)

The Emperor’s New Clothes.

The Emporer and all his advisors are fooled by a few snake-oil clothes salesmen. Nobody wants to admit to the obvious until a child points out that the Emporer is naked.

1. The magic trick? The salesmen found a blind-spot in the Emporer’s own thinking and took advantage of it. We are genuinely lousy at evaluating our own blind spots and biases. And, since we tend to spend time with people that share our patterns, thoughts, beliefs, and biases we are quite vulnerable to being duped in the same way as the Emporer. Where are your blind spots?                                                                  (Hint: What fears do you have and what mistakes have you made in the past? Can you think like a beginner? Can you get research and support from multiple perspectives? Do you spend time with people that would actively disagree with you? What principles do you make decisions from? Are those implicit or have you stated them explicitly?)
2. The beginner’s mind. The child is the hero of this particular story for being able to see and speak the truth. In Zen terms, children have a beginner’s mind — a mind without preconceptions. This enables them to see the things that we as adults either can’t see or don’t want to see because we’re too in love with the story. Of course, it’s difficult as an adult to go back to the beginning and actually that’s not really the aim, we want to step out of our old patterns into conscious thinking and make an assessment that is accurate to the situation at hand. In this sense, it’s good to build your own mental diagnostic so you can spot the lemons. Is this person fooling me? Is this person appealing to my sense of self-worth to sell this product or is there genuine value? Another trick is to put yourself into someone else’s shoes as an exercise. How would someone with 10X more money handle this situation? How would someone with 10X less money handle this situation? Can I adopt another perspective or the beginner’s mind?

3. Value at Risk. There is a calculation that bankers use when assessing collections of loans, and the bank as a whole. It’s called the value at risk or VAR for short. The emperor in this situation has literally and figuratively overexposed himself due to a few false assumptions. Now, we can all fall into that trap. But if you have some clear pre-determined guidelines with regard to what you are and aren’t willing to risk (money, time, effort) as well as an exit strategy when and if things go south, then you go into a crypto-venture with your eyes open, rather than in blind hope. Information and understanding as well as experience do help too. So. What’s the VAR?

The Twelve Huntsman.

A prince makes a promise to his dying father to marry the woman of his father’s choice instead of his beloved fiancée. The father dies and the prince becomes king. The fiancée asks her father to find eleven girls in his kingdom that are similar to her in stature and appearance. They dress as huntsmen and go to the court of her beloved in disguise. The new king cannot tell the difference, but his most trusted truth-speaking lion tells him about the disguise and suggests two different tests to find out the truth. The disguised girls get wind of the test and find ways around these. Now, the new king refuses to believe the lion’s integrity and authority anymore! So one day as his false bride/wedding is approaching  the fiancée/princess/huntsmen collapses with faint from a sore heart. The king catches his swooning huntsmen and recognizes his fiancée. And, then the fairytale kiss of true love.

Okay. It’s a long story. But here is what you can take from it.

1. Don’t keep dead promises. We get into agreements all the time and lawyers along with the (flawed) legal systems in place can keep us locked into stuck/unfulfilling/uncreative relationships. If you feel that a promise/decision/venture takes more out than it puts in, then it is actually OK to break that agreement weigh the value at risk. An agreement made at one level of thinking doesn’t necessary hold anymore when your thinking has evolved. Everyone in crypto agrees (implicitly) that a time machine investment into Bitcoin in 2009 would be excellent. On the other hand, the world has moved on — the people that invested into Bitcoin early took the first, and biggest risks on new technology and got the best “returns”. Yes, there is still an opportunity for the new in the crypto space. Yes, you “should” have got engaged/married to the Bitcoin/Alt-Coin princess that was successful instead of losing faith, and perhaps your financial life would look rosier now. But no there isn’t a “new Bitcoin” out there the wave passed, so don’t fall for that as a sales pitch. The next technological wonder will be something that (1) genuinely solves a global scale problem (2) solves it significantly cheaper than other alternatives (3) scales to a global level (4) can get past the tollgates and trolls that would crush it. All of the top ten cryptos by market cap have done something similar. So, if you buy something and have “new Bitcoin” FOMO hopes, then you’d better believe that the leadership can do (1)-(4). What are the right questions to ask, and am I committing for my own reasons?

2. The best of us can be fooled. The human inmmune system works by threat identification and sequestration. But, sometimes, bad things make it past our detection mechanisms and potentially good things fail to make it onto our radar. It happens. There are two direct mitigation mechanisms that we can adopt (1) we can take progressively larger risks as the relationship gets established and (2) we can build better diagnostics. Rather consider this question: Does my investment immune system have enough fail safes and error correcting mechanisms to keep me safe/sane?

3. It’s okay to be late to the party. Persist. The current BTC price is around USD10,000 in a recovering market. The peak was around USD30,000. There is still time, but don’t consider this investment advice about BTC. If there is genuine long term value in an alt-coin, then chances are that the value will only be realized with a lot of volatility amongst many short-term failures. Restaurants fail, but the restaurant business persists. Is this a restaurant or is the restaurant business that I am invested in here? The princess got her plan together and went after what she wanted, there wasn’t any certainty in it either. But, the right moment arrived. How can I bear the uncertainty and continue to plan, investigate, educate, gather resources and allies, and wait for the right moment?

Did you notice the diagnostic?

I am a fan of using diagnostics to make decisions instead of weighing the pros and cons. It’s something that I learned from the book Too Good to Leave, Too Bad to Stay by Mira Kirschenbaum.  Decision making gets easier when you have diagnostics that you can test new situations against instead of falling into complexification and sales traps.

Here is the diagnostic that’s been built over the course of this article.

1. Where is the business adding substance to the world?
2. What experience do you want to have when you invest into something?
3. Who will carry the ‘sweat-equity’ of the business?
4. Where are your blind spots?
5. Is this person fooling me?
6. Can I adopt another perspective or the beginner’s mind?
7. What’s the VAR?
8. What are the right questions to ask, and am I committing for the my own reasons?
9. Does my investment immune system have enough fail safes and error correcting mechanisms to keep me safe/sane?
10. Is this the restaurant or is it the restaurant business that I am invested in here?
11. How can I bear the uncertainty and continue to plan, investigate, educate, gather resources and allies, and wait for the right moment?

Good luck, and I hope that you found this useful.