Article

Beware of gurus and 'finfluencers'

Even professional investors can get hoodwinked by a charismatic guru. It’s best to treat all claims and advice with a critical eye

| 6 min read

Experts are excellent. Specialising in a subject – learning the details of arcane areas of law or accountancy, honing the crafty of communication or understanding the intricacies of the stock market – created professions and professionalism. Specialisation gave birth to the middle classes – the cohort who have always been the foundation of Britain’s wealth.

Despite claims to the contrary, Britons are not dismissive of those with expertise. It is so-called (and often self-appointed) gurus who you should beware).

One area that has more than its fair share of gurus – and where people have lost significant amounts of money through both volatility and downright theft – is cryptocurrency.

One area that has more than its fair share of gurus – and where people have lost significant amounts of money through both volatility and downright theft – is cryptocurrency. With their voices amplified through social media platforms such as Twitter, the crypto-evangelists talked a good story about the future of money.

Fans of cryptocurrencies want to take the government out of money. Many people – arguably justifiably given their recent track record – don’t trust central banks, believing these institutions will devalue their wealth by manipulating the value of money to suit the whims of the state. This subject can inflame passions and has been an ideal stomping ground for the self-appointed gurus – who created many ‘true believers’.

Last year’s most high-profile implosion was the cryptocurrency exchange FTX. Its founder Sam Bankman-Fried, or ‘SBF’ for those in his gilded circle, was cited as “the next Warren Buffett” by Fortune magazine. Venture capital firm Sequoia even hailed SBF as a “future trillionaire”. He now awaits trial after pleading not guilty to numerous federal charges of fraudulent conduct. This is despite guilty pleas from other FTX executives including co-founder Gary Wang, chief executive of the platform’s sister trading firm Alameda Research Caroline Ellison and FTX’s head of engineering Nishad Singh. They are now cooperating with federal investigators.

'Biggest frauds in history'

FTX was a centralised cryptocurrency exchange specialising in derivatives and leveraged products. It filed for bankruptcy protection in the US in November last year. US prosecutors, who have announced an eight-point fraud indictment against Mr. Bankman-Fried, allege that the former chief executive defrauded customers and investors of FTX and lenders to FTX-affiliated hedge fund Alameda Research. Damian Williams, Attorney for the Southern District of New York, has claimed it was one of the “biggest frauds in financial history”. FTX is accused of using customer funds to prop up Alameda Research, a trading company founded and almost entirely owned by Mr. Bankman-Fried.

Digital evangelists created a ‘fear of missing out’ – what the young today refer to as FOMO. They convinced many that digital currencies were the future of money and if you weren’t on the bandwagon, you would be a long-term loser. Unfortunately, for many, the opposite has proved the case.

Clearly, Bitcoin and other such tokens aren’t money at all. One of the most important characteristics of money is that it acts as a store of value. Although it can act as a means of exchange, the volatility of prices of cryptocurrencies means that it does not meet that description. It is not money; it is not an investment – it is a gamble.

One oft-cited guru that has come to regret his digital evangelism is billionaire Elon Musk. At the start of February, a US regulatory filing revealed that his electric vehicle company Tesla made a $140m loss last year on Bitcoin. The electric car maker lost $204m on Bitcoin overall, though it gained back $64m through trading.

Under the direction of chief executive Mr. Musk, Tesla put $1.5bn into Bitcoin in early 2021 and said it would accept the coins as payment for its vehicles. Shareholder pressure caused Mr Musk to U-turn in a matter of weeks and Tesla has since sold most of its Bitcoin holdings, with about $184m left. Mr Musk’s pronouncements on Twitter about Tesla buying into Bitcoin helped to send the Bitcoin price up by a quarter to a record at that time of about $48,000. If you piled into Bitcoin on Mr Musk’s purchase announcement it’s likely that you lost a lot of money. The Bitcoin price currently sits at about $19,000. For more on this, check out my article on the potential dangers of Bitcoin investment.

Wall Street taken in by Theranos

It’s not just the murky world of crypto assets where gurus operate. One of the most brazen frauds over the last few years was Theranos, a consumer healthcare technology start-up, that was once valued at $10bn. Its leadership claimed it would revolutionise the blood-testing industry. However, the technological breakthrough that chief executive Elizabeth Holmes and former president Ramesh Balwani was selling to investors was never demonstrated, it was a deceit.

Ms Holmes set up the company when she was 19 and the company was never listed on the stock market. She managed to talk up the valuation to professional investors, so it was worth $10bn at its peak. It’s shocking that Wall Street professionals bought her story – but it demonstrates how easily frauds can develop and even seasoned investors can have the wool pulled over their eyes. Ms Holmes was found guilty of wire fraud and conspiring to commit wire fraud in January of 2022. In November, she was sentenced to 11 years and three months in prison at a minimum security prison camp in Texas.

A new cadre of ‘finfluencers’ are very internet savvy, using YouTube, Instagram and TikTok to try and reach a wide audience. Unregulated personalities offering shallow quick takes without fully setting out the dangers of the investments they are promoting.

The Financial Conduct Authority has warned social media sites that it may act if they continue to promote risky, and sometimes fraudulent, investments to often inexperienced consumers. It believes that a cohort of mainly younger DIY investors are taking big financial risks by investing in high-risk products promoted by a group of finfluencers that have no skills and experience other than being technologically savvy enough to use these platforms. Beware of the guru – they are often merely purveyors of snake oil. Buyers should beware of any ‘get-rich’ schemes.

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Beware of gurus and 'finfluencers'

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