It didn’t take me long in the crypto world to realize that it’s an ecosystem being fueled by the “House Money Effect”.

Having spent countless hours in the world of high stakes poker I recognized it instantly and now can’t stop seeing it everywhere I look. A short 🧵👇

For those of you unfamiliar with the House Money Effect, it’s a theory used to explain the tendency of investors to take on a much greater risk profile when reinvesting profit earned through investing than they would from money earned in other ways (i.e. - wages).

In the early days of online poker (2003-2006), anyone with a semblance of talent was able to turn hundreds of dollars into hundreds of thousands of dollars playing online. The player pool was deep and 95%+ of the players were really bad. Picking up their money was easy.

There were a few hundred players who started with small deposits and quickly amassed high six figure/low seven figure bankrolls. Did they set up nest eggs and save for a rainy day? Did they plan for retirement? Hell no!

Guess what two things happened?

First, they had to find ways to chase the dragon. Playing at nosebleed stakes was common because the lower stakes couldn’t quickly move the needle on their bankrolls. And playing at stratospheric levels differentiated them from the general poker community which was an ego rush.

Many high stakes players found ways to gamble on everything in life because it became part of their identity. This effect was magnified in an echo chamber because they spent every waking moment together playing poker, studying poker, or partying with their poker fortunes.

Second, they became numb to the value of money. A $10,000 watch was “1 buy-in at a $50/$100 table”. A $1000 steak or a $2000 pair of shoes was mere rounding error. They were living lives disassociated from reality unless you started with the belief that money was infinite.

After spending a few weeks in cryptoland I feel like I’m back in 2005 trying to talk an 18-year old millionaire into opening an IRA.

The House Money Effect is at play but magnified to a never-before-seen level in the history of humanity due to the magnitude of the winnings.

The estimates I’ve seen imply that there are over 100,000 crypto millionaires. Of this, almost 10,000 are worth at least $10MM. The impact of the House Money Effect on the ecosystem with this much House Money at work is mind boggling but it explains a lot.

What I worry about is seeing a repeat of the psychological damage that “riches to rags” can cause. When I was part of the poker scene, I had heartbreaking conversations with poker players who lost everything in their quest to stay on top. It’s damage that some never recover from.

So while there are a lot of interesting innovations taking place in crypto, I can’t help but hope that we never experience a crypto winter or NFT wipeout that creates tens of thousands of “broken” people. I’ve seen it happen to a few people in my life and it isn’t fun to watch.