Liberty Reserve, Bitcoin, and Hindsight Bias

I spent most of my high school years as a wannabe entrepreneur. I took side jobs and involved in projects that could make additional pocket money for me. Growing up in a family with a teaching background and minimal disposable capital, I had zero experience nor guidance in entrepreneurship. Still, I managed to sell the prepaid mobile plans to my friends during high school and even gobbled up a huge chunk of its market share. It lasted for a year or two and made a 3x or 4x return on investment.

As I graduated from high school, I liquidated my project. So I spent half of my capital to fund my hiking hobby and another half as a reserve. I did lots of side projects and earned a decent income, but they were not scalable. I need more capital, time, and energy to improve my side projects, and I don’t have unlimited resources. I can write about those experience in details, but not for now. So, long story short, I dabbled into the world of investment.

My thesis was simple: Earn money from side projects, save half of it for future projects, use the other half to buy any investment. Unfortunately, the only investment I knew of was a certificate of deposit or gold. I learned both from observing my mom. I was young and impatient. I wanted much money, and quick. So then, I scoured internet forums for investment advice. In retrospect, it wasn’t a good idea.

In 2012, crowdfunding was THE hot pick. We buy a share of a project, and then we will get paid a regular dividend from that project. We need a digital currency to convert our real money to crowdfunding “money” to buy a share. When we get the dividend, we will get it in the crowdfunding “money”. For you crypto user, it was similar to staking coins. We need digital currency to convert crowdfunding “money” to real money. In short, digital currency is the bridge between crowdfunding “money” and real money. That was the first time I got to know digital currencies, notably: Liberty Reserve and Bitcoin. Liberty Reserve was one of the most liquid digital currencies among Indonesian crowd-funders at that time. Bitcoin? It wasn’t even close. It was too complex to join the server or to convert money.

After a few months, I got quite a few dividends from several crowdfunding projects. Blinded by greed, I used all my dividends to buy other projects. I even convert some of my saved money to Liberty Reserve to buy more projects. “I earn this much money so quick! I have to buy more so I can get more money quicker!!” Maybe that thought was the one that dominated my mind. I don’t know, and I don’t want my remembering self to speculate what happened in my experiencing self’s mind. All I know is that when I saw a huge profit made in the project, my mind couldn’t think clearly.

I loved Liberty Reserve because it was practical, simple, easy to use, and tangible. PayPal was elegant, but I didn’t have a credit card to join as a member. Bitcoin was complex, but global netizen said that it has great technology and breakthrough innovation. I was on the edge of learning more about Bitcoin. As a matter of fact, there were dozens of trending digital currencies, and each of them has unique perks and specialty. I chose to use the simplest one.

A year or so had passed, I earned a regular dividend from the crowdfunding portal. I hadn’t converted them to real money. Why should I? Let them compound. To reduce my exposure to the crowdfunding scheme, I “saved” my profit in Liberty Reserve. “It is a digital currency, but saving still saving, right?” Wrong. Dead wrong.

The governments, notably the US Government, shut down Liberty Reserve in 2013. The Liberty Reserve market changed overnight. Suddenly, everyone was a seller. No buyer. Was it a market crash? Nope, the market froze. Shortly after, the crowdfunding portal ceased to function. I, a twenty-year-old student with no job and no income, lost all “investment” in the blink of an eye.

A few months after the collapse, I noticed a few digital currency remnants. I asked my senior in my organisation to invest in a digital currency with the best prospect of surviving. He declined sternly. He would rather preserve the capital than gamble it for a huge return. I respected him. He was the more rational and responsible self than I. Out of dozens of those blooming digital currencies, I only know a few survivors in 2021, such as PayPal and Bitcoin. I was right, but for the wrong reason. To this day, I never own digital currencies again after the collapse.

The collapse made most of my capital vanish. It was the darkest moment, investment-wise to this day, for me. I have learned one important thing, though: “When you jump into the hot pick, the hot investment with a get-rich-quick vibe, convert your profit to real money at a specific point to reserve your capital and reduce your exposure.” Also, an investor needs to manage the downside. Ask, “how can I lose all of my money?” Because of the collapse, I am more comfortable declaring “I don’t know” when I really have no idea about investments, and I am all right to be wrong.

Buying a digital currency is the rational choice for my remembering self (now), but my past (experiencing) self faced an extremely different situation. Had my senior and I invested in digital currencies at that time, we will live a prosperous life. However, I am happy that my senior rejected my offer. How can we, in 2013, determine which digital currency will survive in the future? After all, we witnessed how they collapsed left and right. Each digital currency had great potential but no foundation other than trust. No balance sheet or anything to make a sound analysis either. All we could do was gamble our money away. And gambling is not the best way to invest money. Out of the few survivors, how can we be sure which one of them can survive? And if it survives, what time should we sell and exit the market?

It is easy for the remembering self to blame our past self. “Why didn’t I buy that investment?”, “Why didn’t I buy more of it?” or “Why did I buy this stock at that price?”. That is our hindsight bias talking. Hindsight bias is the common tendency for people to perceive past events as more predictable than they actually were (taken from Wikipedia). It is one of the most dangerous enemies to an investor. Even worse, lots of social media accounts encouraged investors to dance with it by posting: “You should have bought this investment 5 years ago!”

Cryptocurrencies are booming. People show off their crypto profits on social media. They boast the surefire way to profit in crypto. They brag about blockchain’s safety feature and technological breakthrough in cryptocurrencies. I agree that blockchain is indeed a great invention and can be the foundation of future’s money. However, we cannot be sure a coin can survive just because it has that technology. We have to distinguish one from the other. Similar to the digital currency market upheaval in 2013 with only a few survivors, only a few cryptos out of all current coins in the market will be around in the next decade. Blockchain technology will stay, but which coin will prevail is a mystery.