Every time we invest, aren’t we hoping the price will go up? But if we’re relying solely on that hope, are we just waiting for a bigger fool to come along?
This question cuts to the heart of the greater fool theory, a concept that’s particularly relevant in the world of cryptocurrency. It’s a game where each investor hopes to sell to someone else at a higher price. But what happens when you’re the last one holding the bag?
Nassim Taleb’s turkey problem offers a vivid illustration of this dilemma:
Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ’looking out for its best interests,’ as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.
- Nassim Taleb, The Black Swan: The Impact of the Highly Improbable
This captures my experience with cryptocurrency investing. In April 2021, I made my first crypto purchase on Binance. I had given in to the crypto mania, deciding I didn’t want to miss out on an opportunity that seemed to be propelling so many people to overnight riches.
I approached crypto with confidence from my experience in stocks and ETFs. My mistake was applying a buy-and-hold mentality to assets that had no underlying cash flows or fundamentals. As I watched my portfolio grow, I was like Taleb’s turkey, unaware of the true nature of my situation.
The crypto market fed my ego in those early days. Every upward price movement reinforced my belief that I understood this new asset class. The green candles on my trading charts were like the friendly humans in Taleb’s analogy, seemingly looking out for my best interests.
Halfway across the world was Nathaniel Eliason also started dabbling in crypto in April 2021. However, he approached the crypto market differently. He has penned down his adventures in crypto land in his book “Crypto Confidential: Winning and Losing Millions in the New Frontier of Finance.” While I applied conventional wisdom to an unconventional market, Eliason took time to understand the unique dynamics at play.
My moment of realization came sooner than expected. The crypto market’s volatility struck, giving me a harsh revision of belief. My portfolio, built on misunderstood principles, crumbled quickly.
In retrospect, I had been the turkey all along. I learned my lesson the hard way. Eliason’s book, on the other hand, offers a different perspective on navigating the crypto world.
“Crypto Confidential” isn’t just another guide to digital currencies. It’s a journey through the highs and lows of a new financial frontier. As we explore Eliason’s experiences, we’ll uncover insights that go beyond just crypto trading. We’ll see how his approach differs from conventional wisdom, and why these differences matter for anyone considering a venture into speculative investments.
What Did I Get Out of It?
Eliason’s “Crypto Confidential” isn’t just a play-by-play of his crypto adventures. It’s a treasure trove of hard-earned wisdom, offering insights that go beyond just digital currencies. As I read through his experiences, I found myself nodding along, sometimes cringing, and often scribbling notes in the margins. Here are the key lessons that stood out to me, each backed by Eliason’s own words and experiences. Whether you’re a crypto novice or a seasoned trader, these insights might just save you from becoming the turkey at the feast.
Understand the asset you’re investing in:
Eliason’s book hammers home a crucial lesson: truly understand what you’re investing in, especially in the crypto world. This resonated deeply with my own experience. Like many, I entered the crypto market with a mindset shaped by traditional investing, desperately trying to convince myself that I wasn’t just speculating.
Eliason explains the original purpose of Bitcoin:
Bitcoin was launched in 2009 to create a ‘peer-to-peer electronic cash system,’ per the subtitle of the white paper attributed to Satoshi Nakamoto. The goal, according to the white paper, was to make it possible for anyone in the world to send money to anyone else without needing to go through a bank, money-transfer service, or even using a particular country’s currency.
He then highlights Bitcoin’s key use cases:
Bitcoin provides two compelling use cases besides speculation: It offers a digitally native currency you can send anywhere in the world without going through a financial institution, and it offers a way to store your wealth digitally in a form that, like gold, can’t have its value destroyed by currency manipulation.
However, understanding Bitcoin is just the beginning. The crypto world is filled with countless other tokens and projects, many of which lack clear utility. Eliason warns:
If the only ‘utility’ you can come up with for some new cryptocurrency existing is speculation, then it’s probably a risky investment. Again, if you want to speculate, have fun. Just remember, it’s eventually going to zero.
This warning hit close to home. How many times had I invested in tokens without being able to articulate their real-world use? Eliason suggests a simple test for new projects:
Is this project using the blockchain-based technology in some kind of new and interesting way? Or is it doing what another project is doing, just ‘faster and cheaper.’
This question cuts through the hype and forces us to consider the fundamental value of a crypto asset. It’s not enough for a project to exist; it needs to solve a real problem or offer genuine utility.
In retrospect, my early crypto investments were often based on complex jargon and grandiose promises rather than a clear understanding of the underlying assets. Eliason’s insights serve as a sobering reminder: in the world of crypto, understanding what you’re investing in isn’t just important—it’s essential.
Be wary of the greater fool theory:
By the end of it all, I realized that I had been that “greater fool” all along.
Eliason explains the theory succinctly:
There’s a concept in investing called the greater fool theory. It says that, in a bubble or an overheated market, you can justify buying something for almost any price because there will always be a greater fool you can sell it to.
This perfectly captures the mindset I had when I first dove into crypto. I was buying tokens not because I understood their value, but because I hoped someone else would pay more for them later.
Eliason goes on to describe how this plays out in the crypto space:
The vast majority of cryptocurrencies don’t have any fundamental underlying value. You aren’t buying stock in a company, and you usually aren’t buying a cash-flowing asset. You are buying a speculative token in the hopes you can sell it for more later.
This stark reality check made me reconsider many of my holdings. How many of my investments were based on actual utility versus the hope of finding a “greater fool”?
The book also reveals how the crypto community often perpetuates this cycle:
A great way to make sure you can sell that asset for more later is to spread the gospel of diamond hands. It has a certain camaraderie embedded in it: if we all hold this together and don’t sell, then the price has to go up!
I cringed as I read this, remembering the countless “HODL” memes I’d shared and the times I’d encouraged others to “keep holding” without really understanding why.
Eliason’s insights made me realize that in the world of crypto, it’s all too easy to become part of a collective delusion. The greater fool theory isn’t just an abstract concept—it’s a real trap that many of us fall into, often without realizing it.
This lesson taught me to question my motivations for every crypto purchase. Am I buying because I truly believe in the project’s value, or am I just hoping to pass it off to someone else at a higher price? It’s a uncomfortable question, but one that’s crucial for any serious crypto investor to grapple with.
Set clear rules for buying and selling:
I had always told myself I was “playing the long game,” but, does gambling really have a long game?
Eliason cuts through this self-deception with a stark reminder:
If you treat shitcoins and NFTs like a Vanguard index fund… and keep piling money into them and never sell them, you will be exit liquidity. Full stop.
This hit home hard. How many times had I held onto a plummeting token, convincing myself it was just part of my long-term strategy?
The book emphasizes the importance of having a plan:
Whenever you buy something like DOGE or a Bored Ape, you need to know in what situation you will sell it. You need to have a rule on both ends: a rule for if it goes up and a rule for if it goes down.
I realized I’d never done this. I’d buy on impulse and then cling to my purchases, regardless of performance.
Eliason offers a practical approach to decision-making:
One rule that I did follow, and the rule that helped me decide when to sell the ape, was what I called the money-pile rule. If you had all the money that this investment is now worth sitting right in front of you in a pile, would you put it back into this investment at this price?
This simple mental exercise could have saved me from numerous bad decisions. How often had I held onto assets that I wouldn’t have bought at their current price?
The book also warns against the sunk-cost fallacy:
The sunk-cost fallacy is a common failure in reasoning in which we overvalue something because of how much we spent on it. But the amount you spent is already gone, it’s a sunk cost, and the token doesn’t care what you spent on it.
This was a painful realization. I’d often held onto losing positions simply because I couldn’t bear to admit I’d made a mistake.
Eliason’s insights made me understand that in the volatile world of crypto, having clear, predefined rules isn’t just helpful—it’s essential. Without them, we’re not investors or even speculators. We’re just gamblers hoping for a lucky break.
Be cautious of “diamond hands” mentality:
The concept of “diamond hands” is seductive, promising riches to those who hold on long enough. I fell for this trap too, believing that if I just held my alt coins long enough, I’d strike it rich. Eliason’s book exposes the dangers of this mindset.
He explains the allure and pitfall of this mentality:
…the concept of diamond hands versus paper hands, the belief that, to make it to the eternal bliss of crypto-funded retirement, you needed to hold on to your coins with hands as strong as diamonds. Any weakness, any wavering in your conviction, and you’ll sell too early and be one of those sad, pathetic, paper-handed fools who missed out on the generational wealth that could have been had by simply sitting around and waiting for deliverance.
Reading this, I realized at how closely it mirrored my own thoughts. But Eliason quickly dismantles this notion:
But outside of those two cryptocurrencies [Bitcoin and Ethereum], and a few choice others, diamond-handers usually went broke. Following the typical buy-and-hold investment advice is an awful idea for 99 percent of cryptocurrencies.
He points out the harsh reality many of us faced:
Most of the coins that took off in the 2013 and ‘17 manias did not hit new highs subsequently. If you had diamond-handed them, you would be slowly bleeding out. Even most of the cryptocurrencies that had taken off earlier in this cycle, in 2021, were slowly bleeding out to nothing.
Eliason explains how the “diamond hands” mentality serves those who promote it:
A great way to make sure you can sell that asset for more later is to spread the gospel of diamond hands. It has a certain camaraderie embedded in it: if we all hold this together and don’t sell, then the price has to go up!
This insight was a wake-up call. How often had I participated in this very behavior, encouraging others to hold while secretly hoping I could sell at the peak?
The book offers a sobering conclusion:
The smart ones say who cares and sell anyway. The dumb ones double down on their diamond hands and ride their shitcoins back to zero.
Eliason’s analysis made me realize that the “diamond hands” mentality often serves as a trap, keeping investors locked into declining assets out of a misplaced sense of loyalty or fear of missing out. In the volatile world of crypto, sometimes the wisest move is to let go, regardless of what the community might say.
Recognize market cycles and hype:
This lesson applies everyone, not just those in crypto. It’s all too easy to get swept up in the hype and cross the line from investing to speculating. Eliason’s book offers valuable insights on recognizing these dangerous moments.
He provides a list of warning signs that a market might be overheating:
When mainstream media starts talking about the narrative. When ’normie’ news outlets started covering DeFi and talking about the profile-picture NFTs, that was a good sign to quit. The mania was spreading to nonexperts who would soon rush in to get their part of it.
I remember feeling a mix of excitement and unease when my non-tech friends started asking about crypto. Eliason suggests this should have been a red flag.
He continues with more indicators:
When your family starts asking about it. Mom and dad asking you to explain Bitcoin to them?
When celebrities are promoting crypto projects. Mark Cuban talking about DeFi? Sell. Lindsay Lohan doing an NFT drop? Sell. Floyd Mayweather Jr. with a token handle on his fight gear? Sell, sell, sell.
These signs are eerily familiar, reminding me of times I should have stepped back but instead doubled down.
Eliason also warns about the pace of new projects:
When projects are launching faster than you can keep up with them.
When the market moves so fast that thorough research becomes impossible, we’re no longer investing – we’re gambling.
He adds another crucial sign:
When price predictions get outrageous. If financial analysts are going on CNBC arguing that BTC could soon reach ten or one hundred times its current price, after it’s already seen some massive gains in the last few months, that’s a sign people are getting too greedy. Get out.
But perhaps his most important warning is this:
But there is one sign that trumps them all, one that you absolutely must listen to, even though it’s the hardest to entertain, even though every part of your mind and body will fight against you, telling you this time it’s different, that you’re wrong, that it’s not a sign of the end. And that sign is: When you think you’ve figured out the game and you’re about to get insanely rich.
This last point hits hard. How often have we convinced ourselves we’ve “cracked the code” just before a market turn?
In any market, recognizing hype cycles is crucial. Without this awareness, we risk turning from investors into speculators – or worse, gamblers – without even realizing it.
Understand the risks of leverage:
Warren Buffett indeed has warned about the dangers of leverage, likening it to a drug that can lead to ruin. While I thankfully never used leverage in my crypto adventures, Eliason’s book highlights how over-leveraged speculators ultimately contributed to the market’s downfall.
Eliason points out a particularly dangerous sign in the crypto market:
When leverage becomes the norm. If everyone is borrowing against their incredibly volatile assets to buy more assets, that leverage in the system is making it weaker and weaker…
This observation is chilling. In the crypto world, where assets are already highly volatile, adding leverage to the mix is like playing with fire in a room full of dynamite.
The book explains how leverage amplifies both gains and losses:
If you’re fortunate enough to make some incredible trades, or launch a successful project, you might see your crypto net worth tip over into truly ludicrous numbers. Then you run into a new problem: liquidity.
This liquidity problem is exacerbated by leverage. Eliason shares a cautionary tale:
One friend on a crypto journey briefly thought he was a millionaire. Then he realized this liquidity problem… When he went to start selling his tokens, there was less than $20,000 of trading volume per day and less than $100,000 of liquidity. Even if he tried to sell ten thousand dollars’ worth per day, he would destroy the price, and his tokens would soon be worthless.
Now imagine if this friend had been using leverage. The losses would have been catastrophic.
This lesson extends beyond just individual investors. The systemic risk of widespread leverage use in crypto became painfully apparent during market downturns. Over-leveraged positions led to cascading liquidations, exacerbating price drops and causing entire platforms to collapse.
While I avoided leverage, Eliason’s insights made me realize how close you can come ruin. The temptation to amplify gains can be strong, especially in a bull market. But in the volatile world of crypto, leverage can turn a bad situation into a catastrophic one in the blink of an eye.
Be aware of liquidity issues:
Eliason’s book offers a stark reminder that there’s often a vast gulf between paper wealth and realized gains in the crypto world. While I never saw crypto millions myself, this lesson made me skeptical of the outrageous claims of wealth often advertised on Discord channels and social media.
Eliason illustrates this point with a sobering anecdote:
One friend on a crypto journey briefly thought he was a millionaire. Then he realized this liquidity problem… When he went to start selling his tokens, there was less than $20,000 of trading volume per day and less than $100,000 of liquidity. Even if he tried to sell ten thousand dollars’ worth per day, he would destroy the price, and his tokens would soon be worthless.
This story made me realize how easily one could be misled by paper gains. It’s not just about the current price or the total value of your portfolio. Without sufficient liquidity, those numbers can be meaningless.
Eliason explains the mechanics behind this problem:
The worst part is that removing liquidity doesn’t necessarily change the price of a token. If a DEX has $10 million of ETH and $10 million of CRAFT, the price of one CRAFT token would be $1. If someone removes $9 million of each, the price of the token would still be $1, but now there is 90 percent less ETH backing up the value of the token, so it is worth 90 percent less, even though you can’t see that in the price.
This insight was eye-opening. It revealed how deceptive token prices could be, especially for smaller or less traded cryptocurrencies.
Eliason drives the point home:
It doesn’t matter if you have $1 million on paper. If there are only a few hundred thousand dollars of ETH in the DEX to trade your token with, then that’s all your token is really worth. Thus, when gambling on shitcoins and new launches, you always have to keep the liquidity in mind.
This lesson made me reassess how I viewed crypto claims of wealth. While some people may have been able to cash out significant amounts, you never really know the full story. The book serves as a reality check against the allure of overnight crypto riches often touted in online communities.
It’s a reminder that true wealth in crypto isn’t just about accumulating tokens or watching prices rise on a screen. It’s about being able to convert those gains into real-world value without destroying the market in the process. This insight has made me much more cautious about believing in or celebrating paper gains, no matter how impressive they might seem.
Don’t neglect tax implications:
While I’m fortunate to reside in a tax-free jurisdiction like the UAE, Eliason’s book highlights the complex and often overlooked issue of crypto taxation. It’s a minefield that many investors, especially in tax-liable countries, fail to navigate properly.
Eliason points out the lack of regulatory clarity:
The Commodities and Futures Trading Commission classified Bitcoin and Ethereum as commodities, but it hasn’t made judgments on every other cryptocurrency, and certainly not on a little one like CRAFT. So, we had to assume the CFTC would treat the smaller coins like they treated Bitcoin and Ethereum, as commodities or as securities.
This ambiguity creates a challenging environment for investors trying to stay compliant. The book goes on to explain the basic principle:
If you are buying and selling crypto, you have to know how much you paid for it, how much you sold it for, and report how much you gained or lost on the transaction. At the end of the year, if you are in the black, you pay taxes on your gains like you would for stocks or bonds.
However, the complexity increases exponentially when dealing with DeFi transactions:
But then there is everything in DeFi. If you swap between two tokens on Uniswap, no one is reporting that to the IRS. If you claim farming rewards from a project, the project isn’t reporting that as part of your income. It’s not like you have to put your Social Security number into HawkDex before you start farming.
This lack of reporting infrastructure puts the onus entirely on the investor to track and report their activities accurately. It’s a daunting task, especially given the frequency and complexity of many DeFi transactions.
But perhaps the most troubling aspect is the disconnect between paper gains and realized gains. If an investor’s crypto holdings appreciate significantly, they may owe taxes on those gains even if they haven’t converted them to fiat currency. This could lead to a situation where an investor owes more in taxes than they can liquidate without crashing the price of their holdings.
This lesson underscores the importance of considering the tax implications of crypto investing from the outset. It’s not enough to focus on potential gains; investors must also plan for how they’ll manage their tax liabilities, especially in volatile and illiquid markets.
For those in tax-liable jurisdictions, this might mean setting aside a portion of gains in a more liquid form to cover potential tax bills, or carefully timing trades to manage tax exposure. It’s a sobering reminder that in the world of crypto, even paper millionaires can find themselves in real-world financial trouble if they neglect the tax man.
Be skeptical of influencers and “experts”
Eliason’s book sheds light on a pervasive issue in the crypto world: the allure of so-called influencers and experts. As I scrolled through Twitter (now X) and Instagram, I too felt that mix of envy and desperation seeing these crypto “gurus” flaunt their supposed wealth and success.
Eliason cuts through this facade:
It was a common mistake in crypto: people thought that if someone had a bunch of followers and an expensive profile picture, they were an expert and knew what the next big thing would be. It was an especially common mistake for newcomers, which is how the more malicious influencers were able to scam people so easily.
This resonated deeply with me. How many times do you get tempted to follow the advice of someone with a Bored Ape profile picture and thousands of followers?
The book explains the reality behind many of these influencers:
In most cases, people with tons of crypto money were either early to the party or lucky. Say you bought a thousand ETH back when it was only worth a few dollars, and you happened to hold it until now. You’d have nearly $3 million and would probably think you’re a genius.
Eliason then describes how these early adopters often pivot to “trading”:
If you then took a small portion of that $3 million and started day-trading with it, you could post charts on Twitter all day about all the trades you were making and show off how much money you had. But you didn’t make money trading; you made it from being early. Trading was an effect of being rich, not the cause.
I feel this holds true for a lot of people selling day trading courses for forex, crypto and equities also.
The book even outlines the playbook some influencers use:
Find a dozen or so of these shitcoins and tweet out screenshots or make short videos talking about how you think they’re going to go up. To be clear, you don’t need to actually believe that. Then, wait a few days. If any of them do start to take off, re-share your original posts about that currency or make more videos referencing the earlier prediction and bragging that you ‘called it.’ Then delete all the predictions that didn’t come true.
Eliason concludes with a stark warning:
Remember, if someone actually knows how to make money in the market, they won’t share those secrets publicly. Don’t get tricked into being someone else’s exit liquidity.
This lesson is a wake-up call. We are susceptible to envy and jealousy when looking at these influencers, and these emotions can push us towards making rash decisions. Eliason’s insight that those who truly know how to make money don’t freely share their secrets holds true not just for crypto, but for any financial endeavor.
Learning to see through the smoke and mirrors is crucial. Skepticism isn’t just useful in crypto - it’s a vital survival skill in all aspects of money management. As I reflected on this, I realized that many so-called experts selling courses on making it big in stocks or crypto likely derive their main income from these courses, not from market success.
This lesson has made me much more cautious about who I trust for financial advice, whether in crypto or any other investment realm.
Recognize addiction signs
Eliason’s book provides a sobering look at the addictive nature of crypto trading. While it’s easy to read about these signs, reflecting on and recognizing them in ourselves requires a great deal of self-awareness and honesty - qualities that are often in short supply when we’re caught up in the excitement of trading.
The book lists several warning signs of crypto addiction:
You check prices every day. You abandon your other hobbies. It’s all your friends talk about. You debate selling things to buy crypto. You believe that, with diamond hands, you’ll ‘make it.’ You don’t tell your partner how much money you’re investing. You tell yourself you can ‘make it all back.’ You stop following your rules.
Reading through this list, I found myself uncomfortably ticking off more than a few boxes. The easiest thing to do in life is to lie to yourself, and that self-deception can be incredibly harmful, especially in the world of investing.
Eliason astutely notes:
Unfortunately, you and I both know that reading a list of symptoms like this won’t pull your head out of the mania. After all, there’s life-changing wealth on the line here. You can get your life back in order later. No, the only way you snap out of it is by having something truly terrifying happen to you.
This observation hits hard. Even though I’ve stepped back from the crypto world, I still find myself falling victim to these habits and behaviors in stock investing, especially during times of market volatility or greed. Keeping your emotions and psychology in check is probably the hardest skill to master in investing.
You can learn all the technical stuff about stock valuations, correlations, and portfolio construction, but if you’re not able to keep your emotions and psyche in check, there isn’t much hope for you in investing. This lesson from crypto applies equally to all forms of investing and trading.
Eliason’s book serves as a reminder that self-awareness and emotional control are just as important as market knowledge. It’s a lesson I’m still working to internalize, constantly checking myself for signs of addictive behavior or emotional decision-making in my investment choices.
In the end, recognizing these signs in ourselves might be the most valuable skill we can develop as investors. It’s an ongoing process, requiring constant vigilance and honesty with oneself. But it’s also the key to long-term success and financial well-being, in crypto, stocks, or any other form of investing.
Who is This Book For?
“Crypto Confidential” by Nathaniel Eliason is, first and foremost, one of the best books available on the world of cryptocurrency and crypto investing. For anyone who has found the realm of cryptocurrencies, DeFi, layer 1s, layer 2s, and other crypto jargon bewildering, this book is a revelation.
I spent countless hours watching YouTube videos trying to understand tokenomics and other crypto concepts, often feeling more confused than enlightened. Eliason’s book cut through the noise, making it clear that much of what I was struggling to understand was, in fact, largely nonsensical. It’s a sobering yet liberating realization that much of the complexity in the crypto world is often just smoke and mirrors.
However, the appeal of this book extends far beyond those interested in crypto. Even if you’re averse to the idea of cryptocurrency investing, “Crypto Confidential” stands on its own as a captivating story. Eliason’s narrative skills shine through, making it an engaging read (or listen) from start to finish. I found myself so engrossed in the audiobook that I finished it in just three days.
What sets this book apart is how it weaves valuable investing lessons into its excellent narrative. While these insights are explained through the lens of crypto, they’re applicable to any form of investing. Eliason’s experiences serve as a cautionary tale and a source of wisdom for anyone venturing into speculative markets.
For those curious about the crypto world but wary of its risks, this book provides a safe way to explore the landscape without putting any money on the line. It offers an insider’s view of the highs and lows, the innovations and the scams, all from the comfort of your reading chair.
Seasoned investors will find value in the book’s exploration of market psychology, the dangers of hype cycles, and the importance of maintaining emotional discipline. These are universal truths in investing, vividly illustrated through Eliason’s crypto journey.
Ultimately, “Crypto Confidential” is for anyone interested in understanding not just crypto, but the broader dynamics of speculative markets and human behavior in the face of potential riches. It’s a book that entertains, educates, and most importantly, equips readers with the skepticism and insight needed to navigate any high-risk, high-reward financial landscape.
Whether you’re a crypto enthusiast, a skeptic, or simply someone interested in a good story with valuable life lessons, Eliason’s book has something to offer. It’s a reminder that in the world of investing, understanding yourself is just as important as understanding the market.