The Emperor’s New Clothes
“The Emperor’s New Clothes”
Written by Hans Christian Andersen in 1837 “The Emperor’s New Clothes” is a fairytale about an Emperor who is conned into buying cloth that holds magical properties.
The weavers who use the cloth to make clothing tell the Emperor that the clothes become invisible if worn by anyone who is unfit for their job or who is simple of character.
The Emperor of course orders new clothes. He thinks that if everyone wears clothes made of this fabric, those who appear without clothing (because it becomes invisible) will be unfit for their job or foolish. Or both.
To be sure he is not conned, he sends two of his most trusted advisors to check on the progress of the weavers.
His trusted advisors go to the weavers who make a big show of the new clothes but, the trusted advisors don’t see anything. Now the trusted advisors cannot admit to the Emperor that they can’t see anything because it means they are unfit for their jobs. So, they tell the Emperor about the wonderful clothes they have seen.
The Emperor is convinced and goes to the weavers for his first fitting. The weavers pretend to fit him but, the Emperor cannot see anything. No clothes, nada, zip. If he admits that he cannot see the clothes he is wearing, then he is saying he is not fit to be Emperor. He makes a big show of saying how wonderful the clothes are (that he cannot see).
Well, it’s parade day and the Emperor is going to wear the clothes and pretend he can see them.
The whole crowd (all his subjects) ooooh and aaaah over the fabulous clothes, because they do not want to be seen as unfit for their jobs or worse yet foolish. Until a child in the crowd says, “but he isn’t wearing any clothes at all”.
The Emperor’s New Clothes | Fairy Tales and Other Traditional Stories | Hans Christian Andersen
This is my abbreviated version. I have attached a link above to the original translation from Dutch.
What made me think of this story is the hype around bitcoin, crypto and financial scams.
Hans Christian Anderson was probably not thinking about financial scams 185 years ago. Charles Ponzi didn’t arrive until the 1920’s and Bernie Madoff until 2008.
The reason financial scammers are successful is that people want to believe the easy money story. Even when the story makes no sense, and they don’t understand it. Belief is a powerful motivator.
The marketing of Crypto has been relentless. A lot of financial terms have been used to promote Bitcoin.
- “Bitcoin is an inflation hedge”
- “Bitcoin is a store of value”
- “Bitcoin prices will always go up because there is a limit as to how much bitcoin can be mined”
- “Bitcoin will replace the dollar as a reserve currency”
Other marketing phrases are now coming back to haunt investors in crypto:
- “It is an unregulated market” (no government or third-party interference)
- “Transactions are untraceable” (perfect environment for all kinds of scammers)
Who do you call when you lose money? Cryptobusters?
The traditional government regulators like the Securities and Exchange Commission cannot agree on what crypto is. That alone should be a concern for investors.
When investors start losing money in crypto, they have nowhere to turn.
Lawsuits against celebrities who touted crypto?
Unlikely to go anywhere because crypto is not a security and therefore not regulated.
What about the people who invested heavily in crypto mining? No longer worth it as crypto prices crash, and the cost of electricity continues to go up.
Well known investors have said that crypto is a Ponzi scheme.
If it is, crypto will be the most sophisticated and technologically advanced Ponzi scheme the world has ever seen.
Investors have been fooled by many financial “tall tales”, crypto is just one of them.
The financial markets suffer from “a modern affliction of boundless complexity” [1].
This is something I witnessed regularly. Traders, portfolio managers, and financial engineers would present investments that were so complex, no one could understand exactly what the investment was. Or more to the point what the risk was.
Unfortunately, very few people would every challenge the “brilliance” of financial inventions because no one wanted to look foolish. No one wanted to admit that they did not understand exactly how a new financial instrument worked.
Promoting complex financial instruments meant higher fees and higher revenue. Risky assets were made to look simple and uncomplicated.
Warren Buffet is often quoted as saying: “Don’t invest in something you don’t understand”.
If you cannot explain what cryptocurrency is or how it works or why it is an inflation hedge or a store of value then you shouldn’t invest in it.
You do not want to lose your shirt (or clothes) in the markets.
[1] “When Genius Failed: The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein
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