While it came as no surprise after three of his closest associates testified against him, Sam Bankman-Fried’s conviction on seven counts of fraud and conspiracy in a Federal courtroom should nonetheless have served as a warning to players in the cryptocurrency market. Bankman-Fried (known as SBF) is of course the founder of, and chief puppeteer behind, the FTX cryptocurrency exchange, whose customers were unknowingly funding his money-losing hedge fund, called Alameda. Even as the case against SBF was in preparation in March 2023, Forbes.com listed at least ten other cryptocurrency exchanges and traders under investigation.

And after the verdict, Politico reported that “crypto giants like Binance, Coinbase and Gemini, among others, are still heading for courtroom clashes with regulators that could prove an even greater peril to the market’s future than FTX’s collapse in late 2022 ever did.” Indeed. Binance just agreed to pay a $4.3 billion (!) fine to the U.S. government for money laundering, and its disgraced CEO may yet face jail time.

But those who expected a chilling effect on the price of bitcoin (still the flagship cryptocurrency) could not have been more mistaken. When FTX declared bankruptcy in November 2022, the price of bitcoin stood at $17,056. On November 19, 2023, it hit $36,449.

What Gives?

While the details of SBF’s misappropriation of investors’ funds to cover losses in his Alameda hedge fund are still elusive, it is conceivable that, had SBF been able to arrange a buyout to stop the run on FTX, cryptocurrencies’ ongoing appreciation would have let him repay the stolen coin — and spare SBF his catastrophe. 

There is a precedent of sorts. In the 1990s a young Austrian, Michael Berger, established a hedge fund betting that the exuberantly priced technology stocks of the late 1990s were overvalued. But because he could not cover his short positions as prices continued to rise, he falsified his statements to investors, leading to a loss of $400 million by the time he was charged in August 2000.

Arguably, if Berger had been able to fend off reality for only a few months until the dot-com bubble burst in March 2000, he would have achieved his dreams. By this reckoning, unlucky timing turned the prescient financial genius into a fugitive criminal when he successfully jumped bail while awaiting sentencing. He was arrested by Austrian authorities, but beat a U.S. extradition request.

Just as Berger quickly became a historical footnote, SBF already seems to be a relic in crypto circles. Faith in cryptocurrencies seems not only undiminished but even strengthened by the FTX scandal and the billions of dollars in losses to investors.

Part of the reason may be that his fraud was revealed not by the mainstream press but by the crypto news site CoinDesk, a scoop suggesting that the crypto community can police itself. But there is more to the crypto renaissance than tribal self-congratulation.

Skeptics like the investor Mark Mobius have long explained cryptocurrencies as a religion, and while many buyers must consider their choice entirely rational, libertarian utopianism and evangelical zeal underpin much of the scene. Indeed, the social psychology of faith may help explain the paradoxical sequel of the FTX scandal.

In 1954, a group of social psychologists from the University of Minnesota studied the followers of a Chicago woman who foretold a catastrophic flood on a specific date and promised her followers rescue by flying saucers. When the fatal day passed uneventfully, some believers defected. But others interpreted the non-apocalypse as a sign of their leader’s powers to hold back the flood and reaffirmed their faith.

Like so much of social psychology, the study has been controversial for decades. But the concept of cognitive dissonance it introduced — that people look for evidence to reinforce their beliefs rather than change them in the light of strong evidence to the contrary — is still going strong.

The most obvious explanation for the paradox of soaring bitcoin prices is that the failure of FTX will stimulate effective regulation as well as new instruments like exchange-traded funds that will permit investors to benefit from crypto’s rise without taking some of the more notorious crypto risks — especially losing digital keys and thereby, their money.

You Gotta Have Faith

But a more interesting (and perhaps convincing) explanation is the aforementioned cognitive dissonance. Consider that Michael Lewis, author of Going Infinite: The Rise and Fall of a New Tycoon which was published on the eve of the trial, has continued to support SBF as an irrationally exuberant genius who made foolish but not criminal decisions. In fact, he has accused his book’s almost uniformly hostile reviewers of being part of a “mob” of haters.

Cynics might say that Going Infinite has been so profitable, with over 100,000 copies sold plus a $5 million film deal, that remaining in the loyal minority is a just a rational commercial strategy. From a publishing standpoint, after all, Lewis has nothing to gain by joining the pitchfork people. He even has an upside in the unlikely case that an appeal results in a new trial.

In my view, though, it is more telling that Lewis is not an investigative journalist but a profiler who makes lasting friends with his data-driven subjects — whether they are baseball managers or the iconoclasts who foresaw the 2008 crash. By his own account, he bonded with his subject and more or less embedded with him during the months of home detention in SBF’s parents’ home on the Stanford campus.

It is thus hard to imagine a writer in Lewis’s position admitting he had been deceived, even if he agreed. But everything Lewis has said suggests he still believes in SBF as an inwardly tormented would-be world-saver rather than a master manipulator. Admitting he had been wrong would not only embolden envious rivals for executive mindshare — Lewis’s speaking fee is $150,000 according to The New York Times — but it might also shake his confidence, and that of his admirers, in what has been a spectacularly successful literary strategy. Far better to double down and empathize with his subject as the victim of the federal prosecution meat grinder. (Lewis likes to point out that only 0.4 percent of indicted defendants are acquitted in court.)

Changing Minds

Once people encounter the concept of cognitive dissonance, they see it everywhere. Bill Clinton’s public support reached its highest level after his impeachment despite (or because of) the prosecution’s R-rated revelations. Donald Trump’s myriad legal troubles may affect swing voters, but not the MAGA faithful. Mass gun killings seem to strengthen opposition to bans on assault weapons on the weird logic that it takes a defender with an AR-15 to stop a shooter with an AR-15.

It is easy to forget how common it once was for men and women to abandon earlier convictions when reality got in the way. Leading former communists contributed to a famous 1949 anthology, The God that Failed, after Stalin gobbled up eastern Europe and Soviet crimes became too visible to ignore. David Horowitz, one of Donald Trump’s most zealous supporters, began as co-editor of the radical magazine Ramparts in the 1960s. Daniel Ellsberg, as his obituaries recently underscored, was a Marine officer and think tank cold warrior before he was the parent of all whistleblowers.

Today there seems to be a higher cognitive dissonance barrier to switching, and it is difficult to think of contemporary examples. In fact, the rarity of people who change their views based on compelling new evidence is one of the more alarming symptoms of political deadlock.

I suspect many fans of cryptocurrencies would agree that, on the scale of centuries, their evanescent symbolic strings will not prevail in the way that precious metals, gems, works of art and even some defaulted bonds have retained industrial and/or aesthetic value. But nobody can say when crypto will definitively go out of fashion. Eels were used to pay rent in medieval England. And in The Decline and Fall of Practically Everybody, the humorist Will Cuppy notes that “the salaries of Russia’s foreign ambassadors were [once] paid in rhubarb.”

• • •

Was SBF a genius or a knowing fraudster? Both or neither? We still don’t know FTX and Alameda well enough to be sure. But bad timing may have had a lot to do with his fall. Was he skillful? Maybe. But “est-il heureux?” as the 17th-century French statesman Cardinal Mazarin wondered when choosing a general. The question is not whether he was skillful, but whether he was lucky.