Motley Fool Hidden Gems Investing - Number Go Up

Episode Date: September 17, 2023

“I’d pull back the curtain and there was nothing there.” The hype of crypto was real. Many of the use cases are still to be determined. Deidre Woollard caught up with Zeke Faux, an investigative reporter for Bloomberg and the author of “Number Go Up: Inside Crypto's Wild Rise and Staggering Fall.” They discuss:  - Why investors are quick to throw belief out the window - What really happens at an NFT party with Snoop Dogg, Eminem, and Jimmy Fallon - Questions around stablecoins, and one company “quilted out of red flags”  - What happens when you spend a book advance on a JPEG image Tickers discussed: USDT Host: Deidre Woollard Guest: Zeke Faux Producers: Ricky Mulvey, Mary Long Engineers: Dan Boyd, Annie Pope Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. it boils down to how would you like to keep your money in like the ad blocker in your browser like one of those little icons like next to the the url and like if you lose the password it's gone forever and everyone's telling me that that you're gonna get it stolen I'm Mary Long, and that's Zeke Fox, investigative reporter for Bloomberg and the author of the new book, Number Go Up, Inside Crypto's Wild Rise and Staggering Fall. Pedro Willard caught up with Fox to talk about how FOMO hit crypto speculators, the problems of actually using crypto, what Jimmy Fallon said to Zeke about his promotion of NFTs, and Zeke's time hanging out with none other than Sam Bankman Freed. Well, this book, I think I read it faster than I've read any business book I've read in a long time. It feels like a beach read a bit. It starts with some splashy parties,

you've got definitely some wild characters. What is it about crypto that you have found so fascinating to cover. I know you've been covering it for a while. I feel like I got really lucky because I, since I was a teenager, I always loved these like adventure stories. I loved books by like John Krakauer, Ben Mesrich, who did the MIT blackjack story. But I never thought that I had found a story like good enough that I should write a book. This is my first one. And when I got into this crypto world, I was kind of skeptical of it, not just as an investment but even as like a topic to write about because I felt like I knew it I'd seen these guys with their Lamborghinis saying like their coins were the best but once

I dived in I realized that like first of all I'm like yeah I find myself I'm on some billionaire's yacht like people are talking openly about like scams that they're running and about like finding drugs for the after party and I'm like pitching myself like am I really here and I'm I'm realizing that but also like something interesting is happening in like world history like if you don't even care about crypto but this is you you still should care that this is like one of the craziest financial manias and biggest that's ever happened in like the history of the world and i'm sitting there i'm realizing like i'm here i'm hanging out with the people at the center of it like sam bankman freed and like i'm i should start taking really good notes because this is going to

make an amazing book. Like this is the adventure that I've been waiting for and like it's happening to me. So it was super fun while it was happening. And yeah, I just feel lucky that I was, I was there to see it all. Yeah. You've put, you have seen a lot, you know, that the title of the book number go up. It feels like it's being shouted in a Reddit forum, which I think is kind of the idea of, of crypto. A lot of people just wanted to believe so much in this. I've been studying financial history lately. This is nothing new. You know, we've seen this throughout, you know, from, you know, like 1700s on, at least in the U.S. Why as investors are we so willing to just throw belief out the window and just, you know, throw, you know, logic out?

We just want to surrender to the belief when it comes to our finances. Why do you think that is and what made crypto so appealing for people? I really think that like fear of missing out is really powerful and if you see your friends like making money on something like i saw i had a good friend who was making money on dogecoin he was telling me i should buy dogecoin and i was like it was annoying to me because i'm more of like a motley fool type investor like my portfolio is all um per bloomberg rules it's all in index funds like i would i'm not someone who's like chasing the latest trend and i'm like i'm saying this is like this is so transparently dumb why would i want to get involved but then i see him making money and i'm kicking myself that i didn't

do it and as you said it really is this like universal emotion uh in the book i write about alexander pope a british poet from the 1700s who invested in the south sea company which was like an early bubble and he wrote this letter to his stockbroker that was very poetic but boiled down to the fact that like he really wanted a giant carriage with like 10 horses pulling it which would have been like the Lamborghini of his times and he was like let's just give it a shot let's go for it give me some of that South Sea bubble and like yeah it's just it's very in the moment when you see it's happening it's hard to be the one the naysayer it's really like no fun why not uh get in on it and everyone thinks they're going to be the one who's getting in early and making money and

they don't think they're going to be the one left holding the bag yeah that is a big part of it is that people think that they've they've caught it early enough because they've heard from enough people which of course usually means that you've caught it too late unfortunately yeah i mean i i Personally, I feel like, I'm not that cool, so by the time I hear about it, it's probably too late. But there are so many examples of people. You read about people in the newspaper who are becoming overnight millionaires or billionaires, and there is that thought like, why not me? Why don't I try my luck? I'm not earning any interest at the bank. The stock market goes up, maybe it goes up 5%, that's not really that fun.

Yeah, it's why people buy lottery tickets. I want to talk about one of the, I think it's kind of one of the biggest lies of crypto that you chase throughout the book, which is, Heather, it's a stablecoin. I mean, stablecoin in quotes, supposed to be pegged to the U.S. dollar. Stablecoin is kind of an oxymoron, right? I mean, it feels like the stablecoins have proved not to be stable so far. But is there a place for stablecoins? I mean, like the idea is correct, but the execution just is not it's a pretty complicated one i mean the and still standing now so they've uh they've held up but the idea is that it's always worth a dollar it's a token a cryptocurrency that's always worth a dollar because each token is backed by a real dollar

in the bank so you could almost think of it like chips that you buy at the casino you give them your real money they give you these chips and they are promising that when you go back with the chips you're going to get the real money and in the case of tether actually so far that's been true but the mystery that i'm trying to uncover in the book is like what are they doing with all this money because when i start investigating they're supposed to have 50 billion dollars in the bank like enough that would make them like a really large financial firm and the company is just like totally i write in the book they're quilted out of red flags like i've never seen a company with so many red flags the the ceo and the cfo are totally elusive they never give

interviews they both have like strange pasts the company's been proven to have lied about its reserves in the past by the new york attorney general and at when i started investigating they're not really saying what they're doing with this money and it turns out that like the mystery of trying to figure out where this money is would take me years to investigate and would lead me to meet all of the biggest players in crypto because this tether coin is almost like central bank for crypto it's connecting all the biggest companies it's how they're moving billions of dollars around the world it's a way for people to get real money into this world of virtual currencies so it turned out to be like one of the best things i've ever been able to

investigate and just like this sort of bottomless mystery yeah you just pulled pulled one thread and it just like led you all over the world yeah i mean by the end i'm in this i start looking out for tether's money by talking to like traders on wall street to see if they've handled any of it And by the end, kind of insane, but I'm in Cambodia looking into this human trafficking ring run by Chinese gangsters who use Tether to run scams. And like, it sounds like the kind of conspiracy theory stuff that like you wouldn't believe if you read it on the Internet. But like I was there, I saw it and like Tether brought me there. yeah yeah yeah definitely an interesting adventure another adventure you had in the book that kind of gave me a little bit of anxiety is you bought an nft uh you you bought a bored ape nft the

parts of the book i thought was pretty funny is you sort of explaining this to your wife and why why you needed to do this uh so tell us why did you feel like it was necessary to to participate in the nft craze as you were covering it so nfts if you have forgotten were because it was a quick craze but it was quick yeah they were images that like digital art and they were selling the board apes were images of apes like these kind of ugly cartoons of apes wearing silly costumes and they were selling for hundreds of thousands of dollars even millions of and it was crypto because your ownership of the ape was recorded on the blockchain forever but the kind of funny part was that i mean there's nothing stopping anyone from downloading this ape

like it's a jpeg image you could just right click it and save it on your computer without paying but still people were paying huge sums just so that they could prove that they were the one who technically owned it and it it's just like like so much of crypto is baffling to me it was impenetrable and crypto people were telling me i got this question a lot they'd be like hey do you own any crypto and i'd be like well i got like a little so i could test it out and they'd be like you don't understand if you're not invested in crypto you're not qualified to write about crypto which i mean is that's not how it works it's not like you know uh it's not like robert carroll was president and he's like our great like presidential biographer but i still

sort of felt like they had a little bit of a point and like if the appeal of crypto is like gambling and getting rich how could i understand the psychology of it if i don't try it there must be something i'm missing so and i had been approached so this guy was telling me i needed to buy something called Solana Monkey Business to go to this party. And it costs $25,000. And it was really just an imitation of these bored apes. And I'm like, if I'm paying tens of thousands of dollars for a really dumb picture of an ape, at least I'm going to get the original. So I, you know, I had an advance for writing the book. And I went to my wife, Nikki, and I said, listen, I think that i need to i need to for my research i really want to try this out and i think i should

buy one of these bored apes and they have mutant apes these are like worse pictures they look really gross it's like the ape got they say the ape like drank this potion this they call it like slurping the potion and then their face kind of melts these images cost a lot less they were like 90 off so you could get one for 40 000 and i'm telling nikki and she's just like oh and she makes like this horrible face but she's like the she's really been super supportive of the whole project and she got it when i explained it to her that like if i got one of these apes i could go to their ape fest which was like a week-long party and i could see like behind the curtain like what's going on with these nfts and it could it would it's something that the

reader if they're look if somebody's paying 30 bucks to like read this book i want to deliver i don't want to be like i couldn't i couldn't go to the ape party because you had to buy an ape no i'm buying the ape like the reader wants me to so i got the by the time i went to actually buy the mutant ape the price had declined to about twenty thousand dollars which was cool because that's a lot less than forty thousand dollars but it was also terrible because it just showed that you could lose $20,000 like really quick. But I was determined to go through with it. And it was actually like more educational than I expected because I had to actually send $20,000 and into the crypto world. And the process of doing this was truly horrible. At any point,

I could have like lost my money if I made a typo. It boils down to how would you like to keep your money instead of in the bank where there's like a customer service person you can call if like something goes wrong how would you like to keep it in like the ad blocker in your browser like one of those little icons like next to the the url and like if you lose the password it's gone forever and everyone's telling me that that you're gonna get it stolen like there was a the actor uh seth green um he was one of the many celebrities who bought apes for like he paid like i think 300 grand it got stolen he had made like a he was trying to make a tv show there was this idea that these apes would turn into tv shows it was really confusing um i don't know why people would want

these like ape tv shows but like anything seemed possible for a couple years there at the crypto bubble and yeah he's his ape was stolen he lost he had to buy it back and he lost another 300 grand or something the ape i got it had uh very it was especially ugly because i got the cheapest one, had a very melty face. It was wearing a sweater made of maggots. And it really cost $20,000. It was not lost in transit. And I was able to go to this ape fest, which was headlined by Snoop. Eminem sort of performed. He appeared and played a music video. But it was definitely like the best crypto party that i've ever been to but at the same time the thing that i realized was like the point of these nfts the idea is that it's like a good way to show off like buying a fancy

watch or something but the people who like i showed my friends and they were like that ape is ugly what is this you're so dumb i can't believe you did it so they were not impressed and then at the party i was showing everybody but these people were like pimply teenagers and they'd be like your ape sucks i have a million dollar ape like you're a loser this is the worst ape i can't even believe they let you into this party so like the ape served no purpose and one of the original uh or a very influential promoter of the the board apes was jimmy fallon he had gotten one and he featured on his show and he interviewed Paris Hilton who had one and I saw him he did come to the ape fest and I was like well maybe I should show him my ape see what he thinks so he was sort of up in

the back there's sort of a VIP area but walked by and I said showed him I called my ape Dr. Scum and like everyone at the party he's like whatever that he when everyone has an ape no one cares about the ape it's a flaw in the system so he didn't really want to look at my ape and i'm like hey at this point like i said the prices had come down a lot so i was like jimmy fallon what do you think like you had this on your show and then people really bought these for tons of money like anyone who's here they probably lost like a hundred grand or more and he was like oh you know it's not like i don't know about investing and then he said something that all these eight people said that i found kind of offensive uh which was just oh like i did it for the community

that was the idea oh i bought like hundreds of this hundred thousand dollar ape not because i wanted to get rich but because i wanted to hang out with a bunch of other random dudes who paid hundreds of thousands of dollars for an ape time and again in the crypto world like i felt like i would pull back the curtain and there would be nothing there like it was not this like the future of art. It was not the future of finance. It was just like all hype. And there wasn't as much to it as had been, uh, promised. These board apes are still kicking and the, they, the prices are way down, but still the, the good ones cost like 50 or a hundred grand or more, which is wild to me that, that people are still paying for them. Yeah. Well, I'm glad you were able to sell yours.

Let's, let's talk about, uh, you know, talk about like pulling behind the curtain and seeing nothing there. You have Sam Bankman Freed is on the cover of your book in sort of a Roman coin form, which I thought was pretty cool. And in the book, you talk about him, you sort of lay out the beginning of his story. And, you know, he started with Alameda, which was sort of his like crypto kind of hedge thing, then moved on to FTX. And part of the thing I think is interesting is the idea of effective altruism which starts off logically as this idea that you you kind of like the more you the more money you make the more money you can that maximizes the good you can do in the world sounds sort of logical but then everything kind of goes hyperbolic what what

led sam bankman freed from like i'm going to make money and do and and spend it doing good to wherever he ended up next that is what appealed to me about his story because by the time i met him he's this guy he's 29 years old he's worth tens of billions of dollars um he's running ftx like one of the seemingly most successful crypto companies but just 10 years earlier he'd been a student at mit and he'd been like a vegan activist he tried like handing out pamphlets he met with this philosopher who was like hey so sam he had said even as a teenager he was really committed to trying to do good in the world and this philosopher was like listen you're not going to do that much good handing out pamphlets you're not especially good at it you're the same as the

next guy but you're great at math what if you just earned a lot of money and gave it away you could hire you know lots of people to give out pamphlets or whatever and sam was like yeah good idea and like less than a decade later he was one of the richest people in the world so i was just like i found this story really fascinating and by the time when i met him he had given away like a lot of money by most standards maybe like a hundred million dollars but not really that much for someone who is worth like 20 or 30 billion dollars on paper so my question was and to be clear this was not the right question but i was like has he been corrupted by the hunt for money and will he actually give it away or is he just going to

become like most billionaires where you make tons and tons and tons of money and you pledge to give it away like some sometime in the future but meanwhile you just keep getting richer and richer because it's really appealing to like a mass money in power but we now know that in fact his drive to get rich had corrupted him so much that he ran apparently like a massive fraud at ftx and uh by the end of the book i'm at his apartment the company has collapsed and you know the authorities are closing in and he's got eight billion dollars missing and he's making up like crazy sounding excuses for what happened to all this money yeah i think there's a there's an interesting mix there because at first you go and you see him in his office and

he's like eating eating like at his desk and he's got the bean bag next to him where he sleeps at it like he just seems like this guy who's completely like focused on this and then you go at you get the you get sort of you get the great interview you get the one after he's filed after ftx is filed for bankruptcy the the authorities are closing in and he's in this this massive penthouse and you start to see that there is a difference between how he's been portraying himself as like just some smart guy out there doing stuff to this person for whom it seems like prestige really actually did matter a lot yes and like there so he really liked people to he he could tell it was this really it was successful like he built this image of like i'm a guy who doesn't care about

money i'm like the boy genius of crypto i'm seemingly so unstudied that like he had this way of presenting as very authentic where he's like i'm just a big nerd i can't even be bothered to comb my hair i drive a toyota camry i i don't you know when i showed up at his office i was i was in the break room and i'm chatting with his assistant he just walks in and wearing you know athletic shorts t-shirt crew socks no shoes reaches into a cabinet takes down a packet of shelf stable chickpea korma like you might get at trader joe's or something rips it open doesn't microwave it and just starts like spooning it into his mouth and the assistant's like hey this is like the reporter who flew here to edit to profile you for bloomberg and he's just like oh hey what's

up you know and shuffles out he had me just pull up a chair next to him at his at his office he's answering emails he's got his calendar up he's on slack and seemingly i could see everything that he was doing and he's just seemingly as open as can be meanwhile like we now know that like all sorts of shady stuff was going on i mean it's wild to think now that i was sitting there next to somebody who was like potentially like the biggest con man since birdie madoff and you know looking at his inbox looking at like his chat with his traders and i had no idea but he was really good at convincing everyone that he was trustworthy i mean he was uh testifying before congress and senators were speaking to him like in a fawning way and venture capitalists were throwing money

at him it was really impressive what he was able to pull off i really think that i mean you mentioned the effect of altruism and i think in some weird way that that was genuine and that he did set out with this goal of like helping the world and he pictured himself as like the hero of the story and it was that desire to be the hero and that that belief that like if he made money, he would know what to do with it and that he could save the world, that made it so that he could justify whatever it was that he felt needed to be done, whatever risks he took. And I should say his trial is coming up. He's pleaded not guilty. He's saying that he did not commit a fraud. And I look forward to seeing what happens at the trial, though the evidence looks pretty

strong that there was a big fraud here. Right now, you've got the SEC, which has been trying to figure out where it fits in the crypto world. Now, it seems to be stepping into the spotlight. We had some news recently about a Bitcoin ETF. So, what do you think is next for crypto? Is this something that's going to have legs in the future and maybe the scams and the and the nfts and the crazy hype was just part of growing pains or is or does this go down an even darker road i would say first of all the book is not about investment advice it's about like the crazy adventure of these last two years the people who made billions and then lost it all and are now facing jail and like whatever happens this was an insane bubble and i think people are

gonna it's gonna like go down in history now that said when it comes to the future of crypto i think you have to judge it by i do think you have to judge it by like what's happened so far and bitcoin's been around as long as uber whatsapp like and ask yourself like do you do anything with it do you know anybody who does anything with it are people doing anything with it besides buying it and hoping that it will go up the story of the board ape was kind of silly but that was like my one time using crypto for real how it's supposed to be used where you actually like have a crypto wallet and you're not just gambling on it on like coinbase or robinhood or something and what i found was that it's incredibly hard it is not something that like my mom would ever do and

the user experience is just so uh terrible that i can it would have to improve so much for before it would attract a big uh like a mass mass audience and i i do think that like things have to make money to be valuable like it can't just be hyped forever and i kept asking myself when i beat crypto people show me how this is being used in the real world like let me try this out and i was like continually disappointed so could somebody like come up with some new coin that could actually be good like sure but will i be the one to be able to differentiate that coin from like the next one that's a scam like i don't think so um so i think that the crypto people like to say do your own research but i think that's actually kind of a bit dangerous because in the

crypto world there's so little transparency about these companies and time and again they're shown even like the seemingly most reputable ones have turned out to be frauds and there really was no way for like the average person to figure that out ahead of time um and even if you bought the right coin and you made lots of money, what if you had your money on FTX and then it failed, or on Celsius or Voyager or whatever? That happened to some smart investors in crypto. Nobody who's paid attention to these last couple of years is going to be optimistic about crypto now, I think. Yeah, I think that's true. Well, the book is Number Go Up. Zeke Fox, Thank you so much for your time today. Thanks for having me on. It was really fun.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow. Thank you.