Adverse selection & crypto founders

There's very much an adverse selection problem in the crypto industry. The people that you'd actually want to start a wallet company, a security company or a crypto exchange are very often the least interested in doing it.

Take, for example, bitcoin exchanges. There were two major challenges on top of the normal business challenge of figuring out how to get customers. The first challenge was how to run the exchange without getting everyone's bitcoin stolen and the second was how to run what looks and acts like a regulated financial institution without a license and without getting arrested. Most people who were competent and had a strong sense of self-preservation immediately recognized both of these problems and thought to themselves, "This is way too risky, not just for customer's funds, but also for my own personal life and freedom."

So what happened, especially in the early days, was that the people who started bitcoin exchanges were often people that either: 1) didn't understand the risks or 2) didn't care, because YOLO.

We had a front row seat to this in Hong Kong. At one point, some bankers were trying to build an exchange, but they didn't understand the first thing about even basic website security or how to hire someone that did. They ended up with their proprietary source code posted on the internet and thankfully never even got off the ground. Another group (also people with a finance background), refused to spend any money on the exchange website development and instead found a friend of the founder to make it for free. I remember the day they launched and they sent the site to visit. There were visibly broken things everywhere, so naturally I never signed up. No way I was going to trust them with any money. Others were not so lucky and it unsurprisingly got hacked and many people lost a lot of money. Over a decade later, creditors are still trying to get something back through the courts.

I write about this now because of a conversation in the Hong Kong bitcoin community lamenting the challenges of self-custody in the wake of recent hardware wallet hacks and compromises. The problem is not so much that self-custody is really hard, it's that there are a lot of people out there giving bad self-custody advice and selling bad self-custody products. Unless you do the work to understand the problem space, it's very difficult to figure out whose advice is good. And those that have a decent understanding of the problem space and are best positioned to give advice about it are also the least incentivized or interested in giving advice.

I keep hearing people say "I just got a hardware wallet like everyone told me to do and I still got hacked." I'm not sure where people got the idea that just getting a hardware wallet will solve your self-custody problems, but I highly suspect that it came directly or indirectly from unscrupulous hardware wallet vendors. A competent or honest hardware wallet founder would say "Actually, a hardware wallet just helps you reduce or minimize these certain categories of problems but not these other categories of problems, and it is not magic. You need to do a bunch of other (annoying/hard) stuff as well which includes purchasing some products from my competitor in case our company messes up so that we aren't a single point of failure for you."

Luckily for us, there are some founders out there that will do this. Unfortunately, for you, dearest reader, I'm not going to tell you who or where to look. I'm one of those people that's not very interested in giving advice to people when the downside, if I'm wrong, is that you lose all of your money. I don't want that responsibility and you're certainly not paying me to take it.