How the Lessons of Enron and Theranos can Inform Crypto Investors

Business leaders and investors are naturally drawn to the next big thing. Being an early investor in an exciting project can bring not only massive returns, but it can also bring much needed innovation and credibility to your investment portfolio. What if you are the first to see promise in the next Bitcoin?

However, for every exciting new venture, there are just as many fraudulent companies. The collapse of Enron, the mortgage-backed security failures, Theranos, and the massive swings in the crypto market are the direct consequence of ignoring the fundamentals and riding the hype, greed, and ignorance train.

Despite the naysayers and FUD surrounding it, blockchain technology and crypto have a viable future. So, how can blockchain investors stay away from bad investments?

Yes, due diligence is up to investors

Elizabeth Holmes of Theranos infamy presented many red flags over the years. The books made no sense and promises were made over the years with no viable value added over time. Combine these warning signs with the fact that at the executive level there was a complete lack of relevant experience in bio-tech, and we see a pattern of fraud, or at the very least, misrepresentation.

Sure, there are a fair number of crypto companies and projects created or endorsed by celebrities, or individuals who have no subject matter expertise wanting to take advantage of the hype. These companies will crop up and will have stellar marketing but won’t have any of the necessary knowledge or expertise in crypto to back up their claims. There are, however, many companies and projects founded by economists, technologists, and experts.

Investors must look at the technology, use-case(s), organizational structure, and leadership of these projects to look into the future and see if and how these projects create value beyond speculative hype. Look at the leadership and those that sit on the board or directly work to develop the company – are they people who could, realistically, work on a project of this type and bring it to fruition?

We all love charisma. Until we don’t.

Charisma and promises to get rich quick are overwhelmingly seductive, but when no value is created over a period of years after investing thousands or even millions, it’s hard to assess the sunk cost and admit that fraud is taking place. When the few begin to look past the veil and question a project, fund, or company’s credibility, it’s usually too late for the passive many to get out unscathed.

As Enron grew in the 90s, people were dazzled by the company’s charismatic leadership. Fortune magazine dubbed the firm “America’s Most Innovative Company” six years in a row. Kenneth Lay and Jeffrey Skilling were seen as magnetic leaders who built a modest Texas firm into the seventh largest company in the world with a market capitalization beyond $60 billion. This charisma helped create an environment of “corporate cultism” where dissent was dissuaded and questions were brushed under the rug with charming and vague answers.

Crypto is not immune to the seduction of charming people. If you want to ensure that you are making a sound investment, look beyond the alluring leadership and ask the hard-hitting questions. Are they saying anything of value through industry expertise and subject matter know-how? Have they returned on initial investment either in the current company or former ventures? Are they actually answering the questions?

Is it all hubris?

Hubris was a major contributor to the issues surrounding the banks and mortgage-backed security failures of 2006-2008; Too big to fail, irrational amounts of leverage, and a misuse of trust between leadership and the public.

When Lehman Brothers released its financial report in 2008, it cited revenues of $60 billion and earnings of $4 billion. The report went on to list all its achievements but failed to mention that their share price had declined for the first time in five years and that they had closed BNC Mortgage and the Korea Central Mortgage business. Instead, CEO Dick Fuld stated that they had “successfully navigated difficult markets before.” In March of that year, cracks in the company’s hubris began to emerge.

The Luna Terra/ UST scandal of late can for the most part be attributed to the hubris of leadership. The ignorance of believing a hedge backed by the exact asset values you are aiming to protect people against in a crash is casuistry and speciousness. In crypto it may not be “too big to fail,” but many times it’s certainly “too good to be true.”

Crypto isn’t new, but the excitement and hype around the technology continues to grow. As issues like security and the current bear market cause a dip in consumer-confidence, it’s more essential than ever to remain cautious. Before investing in the latest crypto project, it’s important to assess, perform due-diligence, look beyond the charisma and above all, stay grounded among the hubris.