Nathaniel Eliason is the author of Crypto Confidential: Winning and Losing Millions in the New Frontier of Finance.

The Motley Fool's Scott Kassing caught up with Eliason for a conversation about:

• How Eliason's journey in crypto affected how he thinks about risk.

• Why speculative crypto games were rigged against retail traders.

• How fast money corrupts those grabbing for it.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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Nathaniel Eliason: That was when I felt like trying to win a speculative game against ruthless sharks who will do whatever it takes to make a quick buck, even if it means cannibalizing something they've invested in, you maybe don't want to get too caught up in the belief that you can win that game.

Ricky Mulvey: I'm Ricky Mulvey and that's Nathaniel Eliason, the author of Crypto Confidential, Winning and Losing Millions in the New Frontier of Finance. Motley Fool's Scott Kassing caught up with Eliason for a conversation about how crypto became an addictive video game for him. The yield promises in this space like making 4% per day, they were impossible to keep, and what investors looking at artificial intelligence opportunities can learn from past crypto hype cycles. Now, parts of today's show get to the complete opposite of Foolish investing, and I think you'll get something out of it.

Scott Kassing: Nat, the world of cryptocurrency tokens is unchartered territory for many of our listeners, but we love speaking with those with unique life experiences, and you certainly qualify. I'm always fascinated with those who have tried ways to reduce the time required to retire. With that, what did your early attempts to make money in cryptocurrency look like?

Nathaniel Eliason: Well, I got excited about it a couple of times in the past. The first time I tried to make some money quickly, and crypto was in 2017, 2018. If anybody remembers that first mania back then with the ICOs, the initial coin offerings, when people were launching whatever new token they could, in that era trying to follow on Bitcoin and Ethereum price run-up, and then the market crash then I forgot about it for a little while. Then 2020 came around, and suddenly we were back in another crazy cryptomania. I had remembered some of the patterns from last time, and I remembered that I had some friends who had gotten pretty into it in the interim. I was in a situation, I had my first kid coming, I didn't know what my financial life was going to look like on the other side of that, and I was trying to figure out what to do career-wise. It became this perfect storm of seeing all of these people supposedly making tons of money, speculating on Dogecoin and whatever else. Me, having a lot of free time and a little bit of a gambling purse to start with, and then getting it in my head that, well, if these other people are speculating, gambling, trading, whatever, and making all this money, then why not me? I should try too.

Scott Kassing: You start day trading in Dogecoin, and I remember at the beginning of the book, you go to bed over the moon because you made a $110 profit from crypto farming.

Nathaniel Eliason: Yeah.

Scott Kassing: How did it go from the day trading to the farming?

Nathaniel Eliason: Yes, what I realized relatively early on that I think most people know to some extent is that when you're just speculating, you always run the risk of losing what you're putting into it. You could be the person who buys SHIB for $5,000, and then it's worth hundreds of millions of dollars a year later but in many more cases, you're putting money into whatever new main coin is launching, and then you're losing it, you're coming in late. I had talked to a friend who was deep in crypto, and she had said that if a coin like Doge is on the news, if Elon's talking about it on SNL, you're probably too late to that, and you don't want to be the dumb money that rushes in at the end and provides the exit liquidity for everybody who was there in the beginning. But the funny thing with crypto is that there are always these new little games happening within it, and so meme coins were the first game that was going on but then there was this new one that was emerging around farming. Farming was this interesting thing in crypto, where after the ICOs in 2017, most companies decided that launching a token and selling it directly to the public was illegal, unregistered security sale, not worth the risk so you didn't see that happening that much anymore. What companies figured out instead, was that they could just give their tokens away to you in exchange for you using the app, providing some initial trading liquidity, engaging with it in one fashion or another. I launch an app, I say, I'll give away 10% of the tokens to you who use it in the early days, and then a market will pop up for those tokens so you could go sell them, and that's your reward for engaging with the app. Not that different from giving away free Uber credits to people who want to try out Uber, except that it was like money, it was a crypto Token. There's a good version of that, farming is not necessarily all bad because it is a great way to attract users, and a lot of apps do it over a very long period. They say, we're going to give away this many tokens over four years, and that's going to attract our early users.

But people who wanted to just play the casino side of the game, they just wanted to do the aggressive speculation, or they just wanted to launch projects to try to get rich quickly. They would say, "Well, we're going to launch a copycat application because we can copy some of the code, and we can make it look like this hot new thing. But instead of giving away all the tokens over four years, we're going to give them all away in three or four days." Everybody would rush in, they would use the app, do whatever they had to do to farm the tokens they were giving away, and then they would just go dump them on the market to try to make money, and then the natural follow-up question to that is, why would anybody buy these tokens, if this is clearly not a real application, if everybody's just using it to get their tokens, to try to sell them in the short term, who's buying them? Who's on the other side?

Well, most of the apps, would give you more tokens if you deposited their token back into the app. I launch Fool token, and I say, I'm going to give you 100 Fool for every minute of this podcast that you listen to, but if you deposit your Fool tokens back in, you might get a 2X or a 3X or a 4X multiplier, so now you're buying tokens to get more tokens to redeposit more tokens to get more tokens, and you're trying to find out how high is this going to go and when can I exit to get the most profit. Then eventually too when people start exiting, the whole thing collapses, but then somebody launches a new farm, and you just go to that one in two or three days instead. The appeal with that was you weren't totally speculating, you weren't completely just buying a meme coin and hoping it went up, there was this game element to it, It was like playing a video game. The analogy I make is to a cookie clicker or any of these idle mobile games, where you like tap on things to get gold or whatever. It felt a lot like that, except you might make money doing it, and that was a pretty addictive game to play.

Scott Kassing: One of your most successful farms, I understand involved a project called Iron Finance, and you may not know I'm a huge fan of the Mark Cuban-owned Dallas Mavericks.

Nathaniel Eliason: Cool.

Scott Kassing: I got to know the backstory there.

Nathaniel Eliason: Yeah, This was a crazy story because a lot of people know about Terra Luna, you put your money into Luna's stablecoin or Terra's stablecoin, UST, and you got, like, 20% fixed APR, and that kept getting bigger and bigger, and then it exploded, and it wiped out $70 billion in four or five days. It was the biggest product failure of last crypto cycle, and everything else that crashed followed from that. Well, before Terra Luna, there was Iron Finance, which was trying to do something similar. Where they said, we're going to launch a stablecoin, we're going to launch a crypto token that's pegged to the dollar. Every one of their iron tokens should be worth $1, and you can always trade one iron for $1 of collateral back and forth.

But the thing that they did that was a little bit different is there's a popular stablecoin called USDC, and one USDC is worth $1, and it's run by the Circle corporation, and they have $1 in cash or treasury bills in a bank account custody or whatever to back up every single one USDC, so you know that it's backed by something. What Iron wanted to do is they said," We'll back 75% of an iron token with dollars, using USDC, but we'll back the other 25% with our token, with our titan token, which would be like if you guys had Fool token or it'd be like the Luna token, I'd be the thing that you're speculating on the value of the platform with, and they launched this, and it was exciting to a lot of crypto people because back then, Luna was still going well, people believed that these algorithmic stablecoins that aren't fully backed by US dollars might work. This was a new company trying to do a new version of it, and so people started pouring money into it, because the thing that they did is they created these farms for their stablecoin, where you could put your iron stablecoin into their app and leave it there, and you'd be making like four or 5% per day on what should be effectively the same as $1. Back then, interest rates are basically zero, and so you're making nothing in a savings account, but you get this stablecoin and you're making four or 5% per day that's even better than the 20% per year that you were getting in Luna. Everybody got excited about it, and everybody's rushing in and putting all this money into it.

In the course of a month, Iron went from zero to having about $2 billion worth of crypto invested in it, mostly from people who were farming this 5% daily APR, and it kept getting bigger and bigger. It kept getting more and more popular, and we had bought in at the very beginning when it was much smaller, and so we're just seeing all this interest accumulate. We were up more like two or 3X on our initial investment token was going crazy, it was all over the crypto world, and we started asking ourselves this question of, "When do we get out of this thing? How high can this go?" Because zero to 2 billion a month is insane, and we're looking for the sell signal. Then this news article comes out and it's an interview with Mark Cuban, and in the article, he's talking about crypto, and the interviewer asks him, they say, "Hey, are there any crypto projects that you're looking at that you're excited about?" And he starts talking about Iron, he starts talking about how there's this cool new stablecoin project, and they're trying to come up with interesting ways to create assets that are pegged to the US dollar without having this collateral inefficiency, and he's giving a great explanation of what it is and what's cool about it.

But it's a pretty mainstream news outlet, and it's Mark Cuban, everybody knows who Mark Cuban is, and so we see that and we all start going, Okay, this has got to be a sell sign. This has to be the end, if it is leaked out of Cryptoworld, and now Mark Cuban is talking about this like Niche crypto app on mainstream news, we got to get out. It was within 24 hours of when that article came out that Iron hit its absolute peak, it crashed 50% overnight, bounced back up, like 50% again the next morning, while everybody in the US was asleep, and then basically everybody in the US woke up, saw that that had happened and started rushing for the exits, and within a day, all of the money in Iron was gone, which was just a wild pacer to fall apart, and what ended up happening was the stablecoin broke. It didn't maintain 25% of the peg because the iron app and the token that backed it called Titan basically became worthless so quickly that people couldn't redeem their stablecoins quickly enough to get the Fool value back. This thing that everybody thought was worth $1 ended up only being worth $0.75, and so when Luna started taking off even more and started getting bigger and bigger and bigger, a lot of us who had seen Iron's collapse had that painful memory in the back of our mind that made us feel like Luna's even more dangerous because there's no US dollars backing it. It could go down 100%, not just 25%, it could go fully to zero, and that ended up being exactly what happened.

Scott Kassing: Iron finance worked out beautifully for you so congratulations on the timing there.

Nathaniel Eliason: [laughs] Thanks.

Scott Kassing: One of the things I loved about the book is there are so many moments of, I've got this figured out, I'm going to make it only for the chapter to conclude with just a moment of pure panic, where you are seemingly on the brink of losing everything.

Nathaniel Eliason: Yeah.

Ricky Mulvey: What crypto rite of passage sticks with you the most to this day?

Nathaniel Eliason: There are two that stand out. One is I had an interesting journey through crypto because I wasn't just trading and speculating, I was also programming, and I was working with a gaming company and trying to help build their crypto gaming app, so I got to see both sides, the programming and business side and the degenerative speculation side. The very first time that I wrote a crypto app, the first time I deployed any code to the blockchain, I screwed up, I made a hilariously careless error, and because of that error, I deployed the code. I was all super excited and super happy about it and went out to dinner with my wife to celebrate, I come back from dinner, and a chunk of the money in my wallet is just gone and I think that's weird. Why would that be gone? I must have messed up when I deployed the contract, and then I start looking at the transaction history of my wallet, and somebody had been able to gain access to it, take over my wallet, and just send themselves almost all of the money in it, and because of how they had done it, and because they were a better programmer than me, I had to just sit in my living room and watch somebody take about $35,000 from me just while I'm sitting there after dinner, and incredibly painful experience. It's really hard to write about in the book, obviously, very tough moment for my wife and I, and it was just so devastating because to go from the high of "My God, I did it, I wrote code. This is a thing that people can use in crypto and they can interact with it and that is so cool." And then, "No, I screwed up." And now everyone can take this money, and literally nothing I could do about it, no way to track down who did it.

I couldn't go to the FBI and try to report them and try to get the money back, I just had to eat it, and accept that that was my fate. But that story did have this other interesting, happy element to it, which was when I told that story online and tried to share what had happened to help other people who might make the same mistake in the future. I started getting all of these messages and all of these DMs from much more senior crypto engineers, people who worked at, like, Coinbase or OPENC, or all of these other big crypto companies telling me that they had made a very similar mistake early on. They'd made another similar careless error, they had done something equally stupid, but they had learned from it, and it had helped make them realize how to take their security more seriously and how to be more professional about it, and it was a bit of a gauntlet that a lot of crypto engineers had to go through. It did create this interesting obviously devastating experience, but also this hopeful, OK, I've had the bad thing happen, now I understand the real risks here, and I can be smarter going forward hopefully.

The other big experience that stands out was, I was working with this gaming company and they were trying to raise a fundraising round from crypto venture capitalists because the market was so hot. There was just so much money flying around in crypto during that period. If you were working on basically anything and you had a pulse, you could probably raise some money so they were raising money. They ended up getting this great investment from these big crypto VCs, and the big one was Three Arrows Capital, and a lot of people now know Three Arrows because they got way over-leveraged. They had taken out the same debt or they'd taken out debt with multiple parties on the same assets, they did not have all the collateral they said they had. They were a big reason that so many companies blew up as the market crashed, but back then, they were the heroes. They were the profits, they were the ones who knew that the market was going to go up so much, they were the big investors, and so they were investing in the company, and it was so exciting and we were all thrilled about it, and then leading up to the investment news, we start to realize that somebody is buying the token on the public market in large chunks, and we go down the rabbit hole and we're trying to figure out who's buying all of the tokens? We eventually figure out that it's Three Arrows, and so you start to wonder, OK, if they just invested $2.5 million privately, why are they now buying over a million dollars of tokens publicly?

It starts to dawn on us that Three Arrows knows when the fundraising news is coming out because they're the ones who decide when everybody finds out that Three Arrows invested in it, which meant that they had some of the more valuable insider information on when the token might take off, and so they could buy all of these tokens in the public market, wait for the news about their investment to drop, and then dump all of them and make a crazy profit because they had that information, and that was just such a realization of wow this game is rigged against retail investors especially some of these international folks who aren't constrained by US securities laws and things. Like US VCs and crypto, you don't see this behavior in the same way, but there were a lot of international bad actors who would just blatantly do this, and that was when I felt like, trying to win a speculative game against ruthless sharks who will do whatever it takes to make a quick buck, even if it means cannibalizing something they've invested in. You maybe don't want to get too caught up in the belief that you can win that game.

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Scott Kassing: There's a point in the book where you look in your crypto wallet and you see a balance of over $10 million how did your relationship with money and your perspective on risk evolve the deeper you got into the crypto sphere?

Nathaniel Eliason: It got messed up, it's hard for me to talk about sometimes because I got in just wanting to make enough to replace my income not a crazy amount, and I had of course, said that once I get to a couple of hundred grand or something like that, then I'll quit, and that'll be good, that'll be all I need. Then I hit those first goals, and like you said, it starts to get more in my head that I've figured the game out, and it's now no longer just covering a couple of years of income. I might be done working forever like my kids might not have to work, if this keeps going up, then it could be insanely wealthy. I look at my wallet that day, and it's over $10 million and it's pretty much all in these game tokens, I can't take it out into my bank account, there's a tiny fraction of that in trading liquidity so it's all paper wealth, it's not that number. But it feels real, you see it on a spreadsheet, and you think, like, this is real, and I wasn't thinking, my gosh, this is so unreasonable, this is ridiculous I have to get out now." I was thinking, this might go to 50 million or 100 million, and I would be stupid to try to exit it right now. It corrupted me so deeply, so quickly in ways that I was completely unprepared for, and unfortunately, it's a pretty common story. I knew a lot of people who were up millions of dollars and didn't sell, didn't cash out, or they did have a good sale, but then they just rolled it into the next thing to try to double down and go for more, and ended up losing most of it. You never think that you're going to be the person who gets immediately corrupted by the financial success and keeps stumbling down for more. But there's a reason that story recurs so much in history, there's something just deeply corrupting about money, and especially fast money because you don't have the respect for it that you would if you made money from working on a business for ten years or saving from your job. You just think that it's coming from nowhere, it's going to keep coming from nowhere, and you'd be an idiot to stop now. You hope that that bad thing happens to you that you run into those problems, but no matter how prepared you think you are, it gets its hooks into you and had pretty tough impacts on my mental health, my relationship health, every other part of my life.

Scott Kassing: I love how you mentioned that you constantly moved the goalpost for your magic target retirement number, how do you think about finding enough today? Do you have a number in mind?

Nathaniel Eliason: Yeah, I didn't cash out that 10 million or anywhere particularly close to it. I did thankfully get out enough to be able to leave crypto and focus on something else for the next few years, and I think what it made me realize was that just chasing that number was not going to make me happy and I was probably going to keep moving the goalpost again, and I just needed to focus on work where I could be happy continuing to do the work for its own sake and get it to a point where it can make enough to cover the life that I want to have with my wife and my children. It was extremely clarifying because it made me realize that writing is the thing that I've always loved to do. I enjoy it, I can get up every day and I can do it for hours and feel energized by it, it comes very naturally for me. But, writing is a much slower path to having a high income, and it gave me the clarity that it was worth doing that, it was worth taking the time to go after this and to stop chasing more and more money to get back to doing that thing eventually in the future and there was this moment that ended up not making the cup for the book, but where I was very seriously considering joining a crypto VC firm, because after I had the realization that some of these VCs were the only ones who were being successful long term, it made me think well if I want to get all of this money, I need to join a VC firm, I need to get into that level, and then I might hit these multi million dollar payouts, and I started going to therapy during the events of the book because it was having such a bad impact on me, and I just had this moment talk to my therapist where I said, I was like " If I don't get out of this now, I don't know when I will." I've seen that it's starting to have this impact on me, and it's starting to scare me, and so I need to just quit and get back to the writing and have the patience to make money slowly and stop chasing these quick wins, because it wasn't the first get rich quick type of thing that I had chased, and I realized how bad of a pattern that was for me, and I needed to let that dream go in some sense, and just focus on doing something for the long term.

Scott Kassing: You were very good at identifying bubbles in crypto, and it seems to me that a lot of investor interest these days has shifted from crypto to artificial intelligence.

Nathaniel Eliason: Yeah.

Scott Kassing: Do you see any rhyming from the AI storylines today to what you experienced during the height of the crypto boom?

Nathaniel Eliason: The big recurring theme, which is very explicit in crypto, but I think you can see it in any of these hype bubbles is there is often a big innovation, which is very cool and very real. In crypto, it would be first Bitcoin, which is pretty incredible new technology, and then Ethereum, and then these other things like stablecoins, and I think the jury is still out on NFTs, but there's something interesting there, and the first version of it comes out, and it's very cool and it's very exciting and it gets a ton of money invested in it because it's real, and then all these other people see that big exciting thing getting invested in, and so they start to copy it and they start to build their own versions of it. In the beginning, those copycats are also pretty high effort and are pretty high quality, and are not necessarily problematic. But as time goes on, as money starts to flow into the copycats, you start to see more and more and more copycats, and the effort level starts to get lower and lower.

A good version of this that we saw in tech was the scooters, the first scooter company, I think it was Bird. Bird it was just like, "My gosh, this is what a great idea." Then a couple of other big scooter companies come out, and they copy them and do pretty much the same thing with little tweaks. Then suddenly, there were like 10 or 15 or 20 scooter companies all doing the exact same thing, and it was pretty clear that the scooter economy has hit this, like bubble mania. In crypto, what you're looking for is when are the copycats getting just exceptionally stupid, because that's when we're probably hitting a peak in this little micromania. The question in AI is, when do some of these apps start to get stupid but are still raising a lot of money? Because ChatGPT is incredible, Claude is incredible, and Perplexity and Cursor and some of these other apps are all amazing. But I think we are starting to see some of these ridiculous AI companies or AI start-ups, still raising five or $10 million, and you look at it and you go like for what exactly? That might be the sign that we're hitting a bit of the peak in the mania, and there's going to be some degree of a correction. The nice thing in these private markets, with these tech start-ups, is that they're raising private money, and it can't collapse as quickly as crypto tokens can. You'll see the crypto market correct on those things way faster, whereas an AI start-up that raised $20 million, it might take five years for you to realize that that company's going nowhere and for that to pop. It happens slower in some of those industries, and then on the hardware side, it would happen the slowest that's why you see real estate often takes longer to correct in some of these other markets because it just can't respond as quickly as something just hyper reactive and hyper volatile as crypto. when the copycats start to look stupid, that's when you know you might be in for some pain in the near term.

Ricky Mulvey: 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 anything based solely on what you hear, I'm Ricky Mulvey, thanks for listening. We'll be back tomorrow.

Ricky Mulvey has no position in any of the stocks mentioned. Scott Kassing has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Ethereum, and Uber Technologies. The Motley Fool has a disclosure policy.

Learning in the Crypto Whirlwind was originally published by The Motley Fool