Proof of Work – Of Dollars And Data

I saw the early warning signs, but later excused them all. First there was the friend of a friend who made 10x his money trading crypto in 2021 and told me that he “only needed to make 8x this year” to permanently retire.

Then there was the high school acquaintance who called me up to ask for money advice. The company he worked for had just IPO’d and now he was worth in the high six figures. He wasn’t a founder or even senior in the company, but he had received stock as an early employee and was now almost a millionaire.

Lastly, there was the cousin of an ex coworker who made enough money launching his own cryptocurrency that he paid off his medical school debt before day trading his way to the “mid seven figures.” In fact, he was so bullish on crypto that he moved to Puerto Rico to avoid capital gains taxes on the future growth he expected in his portfolio.

I’m not gonna lie, with each of these stories I became a bit more shocked. How in the hell did these people have all this money? I had straight As in high school, went to a great college, got a great job, saved and invested diligently, yet I was nowhere near being a millionaire. What was I doing wrong?

After a lot of back and forth, I thought I’d figured out the answer—I wasn’t paying attention. More specifically, I wasn’t paying attention to what was happening in the crypto and tech space. But, they were. They were identifying (and capitalizing on) new opportunities while I wrote evermore blog posts on the stock market. That was my problem.

To fix this, I bought two individual tech stocks in late 2021 and invested in some altcoins earlier this year. I wasn’t going to sit on the sidelines while others (who hadn’t worked as long and hard as I had) got rich. Warren Buffett summarized how I was feeling at the time quite well:

People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t.

This is why I got in. However, it wasn’t long before I got out.

As soon as I got invested, it felt like everything came undone. My altcoins started plummeting and my tech stocks eventually followed suit. By the time I exited all of my positions, I was down about 80%. That’s the bad news. The good news is that my initial investment into these speculative assets only comprised 2% of my net worth.

Unfortunately, the individuals that I mentioned at the beginning of this post weren’t so conservative. After the recent bankruptcy of FTX (one of the largest crypto exchanges) and the general decline in tech this year, not one of them still has the fortunes they had a year ago. Not one. The crypto trader is down at least 75%, the IPO guy is down 90%, and Mr. Puerto Rico owes more in taxes to the IRS than it has invested. It’s awful and I genuinely feel bad for them.

I’ve heard other such stories of boom and bust (from friends in the industry) that are equally sad. Anecdotally, most of the people who got rich in 2021 from tech or crypto seem to be back to where they started (or worse). While some of them liquidated to buy a house or get out of the game, most didn’t. I don’t say this to poke fun at these people, but to highlight the deeper lesson underlying all of this.

When you see a lot of people making a lot of money that wouldn’t usually be making a lot of money, that’s a sign that something’s off. When you have 29 year-olds worth $26 trillion naming sports stadiums, look out. When individuals are going from unemployment to retirement in a few months, proceed with caution. Ultimately, when too many people are getting too lucky too often, that’s your wakeup call. That’s your hint that the good times won’t last forever. Why?

Because the world trends towards equilibrium. The world trends towards proof of work. It’s rare for fortunes to be created so effortlessly. Therefore, if you see easy money being made, it’s one of the strongest signals that something’s not right. Of course, some people will hit the lottery or be born into wealth. They are the lucky ones. But, most of us aren’t. Most of us have to work for it. We have to show the proof.

This explains why 70% of wealthy families lose their fortunes by the second generation and 90% lose it by the third generation. They didn’t have the proof. These future generations didn’t know how to build or preserve wealth like their ancestors did, so they squandered it.

The same thing happens during moments of financial excess. Those who got rich overnight don’t understand how their wealth was actually generated (ie a bubble). So they keep doing the same things that got them rich in the first place, in an effort to further increase their fortunes. But, once the bubble pops, the behavior that got them rich leads to their ruin. As they create, so they destroy. It’s a double-edged sword all the way down.

But the bigger problem underlying every get-rich-quick scheme is the belief that there’s an easier way to get rich. That there’s some sort of shortcut. But, there isn’t. There are no secrets when it comes to building wealth. If there were, then we would all be rich already. Think about it. If it takes 32 years for the typical self-made millionaire to gain their wealth, why would you expect to do it in just one? It makes no sense.

Nevertheless, people will continue to believe that there is an easier way. That you can enjoy great rewards with little effort. That you can ignore proof of work. I was guilty of this during this bubble, but I won’t be during the next one. I learned my lesson. Have you?

Happy investing and thank you for reading.

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This is post 321. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data


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