Crypto Investing, NFT Trading, and Online Sports Betting

Behavioral Underpinnings of Greed

In this article, the authors discuss the unprecedented growth of cryptocurrency and the accompanying risks and fraud. They ask, Why does a person choose the characteristics of cryptocurrency to be not only a secure medium of exchange, but also one with upward price potential? The recent price drop in the spring of 2022 shows the magnitude of loss of value Bitcoin has suffered in a very short period. Is there an element of gambling that seeps into the mindset of the crypto investor? Or could it be that the primary allure is the relative anonymity of owing it? The authors offer the reader to consider the construct of greed as it pertains to crypto trading, NFT trading, and online sports betting, and connect these aspects of human behavior to answer the social questions posed here: Is this a good thing for society?

Throughout the history of human beings, there has been a recurring theme of doing whatever it takes to gain an advantage: to have more; to amass wealth. Even in the days of the primitive hunter-gatherer, marauding a nearby and perceived weaker village was done to forcefully acquire food, weapons, and even people to add to the dominant and stronger village.

Perhaps back then the main objective was survival, but was greed involved? The Oxford Dictionary defines greed as “intense and selfish desire for something, especially, wealth, power, or food.” If human beings in ancient history were in pursuit of food, weapons, and wealth through intense force, one can argue that their behaviors were considered greedy. In today’s world, greed surely is not prevalent through primitive hunter-gatherer activities. However, is greedy hunter-gatherer behavior still widespread?

In modern society, we now see a proliferation of areas where a greed mentality can take hold and drive behavior and action. The ever-growing crypto and non-fungible token (or NFT) craze and the expanding platforms for online sports betting is compared in this article as a way of pointing out several common behavioral and economic themes. Like drug and alcohol abuse, excessive gambling can lead to addiction followed by severe consequences.

Why does a person choose the characteristics of cryptocurrency to be not only a secure medium of exchange, but also one with upward price potential? The recent price drop in the spring of 2022 shows the magnitude of loss of value Bitcoin has suffered in a very short period. Is there an element of gambling that seeps into the mindset of the crypto investor? Or could it be that the primary allure is the relative anonymity of owing it?

We offer the reader to consider the construct of greed as it pertains to crypto trading, NFT trading, and online sports betting and connect these aspects of human behavior to answer the social questions we pose: Is this a good thing for society?

Watching a sporting event whether in person or on a broadcast is, perhaps, very likely a different experience when money is on the line. It is like a friendly game of poker with friends with or without wagers and risk involved. Winners who walk away feel good and losers feel bad. Does winning or losing impact on the pure enjoyment of the game? We think it likely does. Similarly, if dollars are converted to crypto or NFTs, given the historic fluctuation of values, can a person buying these types of assets today end up adopting at least some form of gambling mentality? If this is so, is it a potentially bad thing? We think it might be.  

Patience, Self-Control, and Downside Risks

It is in our human nature to desire personal fulfillment. It is also in our human nature to desire personal fulfillment as soon as possible. This can be explained by the concepts of both financial theory and behavioral economics. One major financial concept is the time value of money, which states that cash flows are valued higher now than at a future date. This is like the behavioral economic concept by Paul Samuelson called discounted utility model, which states that consumption is worth more to you now than later.

Essentially, a common theme in human behavior is impatience. People yearn for instant gratification, which is exemplified by their rampant use of smart phones and social media in an environment where the need to know something right now is highly valued and sought after. Not only do humans struggle with impatience, but they also struggle with self-control. People make questionable decisions in their everyday lives (including personal financial decisions) because they have internal conflicts of interests within themselves.

Things that might seem beneficial to a person in the present, like eating a delicious donut, conflicts with his or her long-term goal of being healthy in the future. People with self-control might say no to eating a donut. However, if they allowed their natural tendency of impatience to prevail, they may choose eating the donut instead. This also occurs when a person internally debates with himself or herself about whether they would like to gamble $1,000 in the hope of winning $100,000 or to save that $1,000 for a rainy day.

Many people who participate in cryptocurrency investing, NFT trading, and online sports betting are heavily immersed in modern-day online culture. Many online activities feed into the constant need for instant gratification, making online users impatient and have a lack of self-control. As stated previously, humans desire personal fulfillment. Some do it with patience and self-control, but others do it with impatience and lack of self-control through these modern-day online platforms, which make their behaviors appear very greedy.

Due to our human nature, wealth earned quickly appears superior to wealth earned over a long period of time. If a higher level of risk is at play when pursuing wealth, a greater sense of greed is apparent if the potential downside of the pursuit is quite destructive. One can argue that the pursuit for riches is greedy if it can result in short-term severe losses. As mentioned above, greed is linked to recklessness and selfishness. Putting one’s wealth on the line for the possibility of even more wealth is certainly considered greedy.

One example of this behavior was when one unlucky man lost $74 million worth of crypto during the crypto crash in May 2022. The man had posted on Reddit.com that he had owned 906,419 Luna coins which ultimately became worthless during the crash. He stated that he “believed in [Luna] so much and [he] lost everything.”  Interestingly, another Reddit user commented that “greed is a powerful emotion” as he accused the man of being greedy for not cashing out his Luna coins sooner.[1]

Cryptocurrency, NFTs, and Online Sports Betting Became Popular Through “Nudges for Bad”

Richard Thaler is a behavioral economist that helped enhance public policies in several countries (particularly the UK) to help citizens make better decisions for the good of the country and for their own economic benefits.

One example of his contributions involved the UK income tax system. Richard helped the government construct reminder letters to individuals who had not paid their taxes on time. In these letters, Richard made sure to let the individuals know that “the great majority of people in the UK pay their taxes on time” or that the individuals “are currently in the very small minority of people who have not paid their taxes on time.” By adding these sentences in the reminder letters, the number of taxpayers who made payments within 23 days increased by over five percentage points.[2]

These simple sentences that helped convince individuals to pay their taxes were coined as nudges. Richard defines a nudge as any form of choice architecture that alters people’s behavior in a predictable way without restricting options or significantly changing their economic incentives. In other words, a nudge is a reminder or influence to help people make an economic decision, but not forcefully. As a behavioral economist, Richard insists that nudges should be implemented for good. People should be nudged to save for retirement, get more exercise, and pay taxes on time. However, there are certainly nudges for bad!

Nudges for bad are prevalent in the crypto, NFT, and online sports betting spaces. Avid internet-users are heavily exposed to crypto, NFTs, and online sports betting through social media advertisements and endorsements made by celebrities. This exposure nudges people in a very negative way, convincing them that they can potentially become rich quickly by putting their money into these platforms.

There are so many examples of these bad nudges in the crypto, NFT, and online sports betting world. Virtually all these nudges are in the form of marketing and promotion. We have seen crypto and NFTs being promoted by internet celebrities. Many of these so-called “influencers” give their target audience instant gratification in the form of short-form content on YouTube or TikTok. Since crypto investing and NFT trading are also known for a similar instant gratification through the idea of “getting rich quick”, having internet celebrities promote these platforms draw in a significant mass of people. These types of people are then susceptible to greedy behavior through crypto investing and NFT trading.

One major internet celebrity that has endorsed crypto and NFTs is Khaby Lame, who is the most famous TikTok user in the world. He recently signed an endorsement deal with Binance, the world’s largest crypto exchange.[3] Other internet celebrities would endorse crypto and NFTs by providing promotional codes to use certain crypto and NFT platforms within their content. For example, meet Kevin and Graham Stephan, who are internet personalities that talk about the stock market, personal finance, and real estate, both recently shared promotional referral codes to open an account for a cryptocurrency exchange called FTX in their YouTube videos. By using their referral codes, new users of this platform can earn free crypto or even up to $100.[4]

Even world-famous celebrities have nudged people to participate in crypto and NFTs. Floyd Mayweather, an undefeated world-champion boxer, endorsed an obscure NFT project called Bored Bunny. Unfortunately, the project left investors “financially crippled” after the value of its NFTs collapsed.[5] Floyd Mayweather is known to be a very rich public figure who attracts people who are enamored by his wealth. These people were certainly in the hopes of achieving the same wealth as Floyd, but ultimately fell victim to what seems to have been, perhaps, a fraudulent NFT project.

Other ways in which crypto and NFT companies have nudged people into using their platforms are by lucrative advertising deals. For example, FTX has struck an advertising deal with NBA team Miami Heat, NFL’s Super Bowl, and MLB.[6] Furthermore, the home of the Los Angeles Lakers has recently changed from Staples Center to Crypto.com Arena.[7]

The online sports betting space has also implemented similar marketing strategies. DraftKings, one of the largest online sports betting websites, has a $12 billion partnership with the NFL Players’ Association.[8] DraftKings also has a lucrative deal with ESPN for an exclusive marketing commitment on ESPN’s platforms.[9]

The authors had also talked to a former customer relationship manager at one of the largest online sports betting companies. In our discussion, the individual mentioned that his former company would ensure that advertisements were “placed in areas with a high population of 35-year-old men [with high income].” He also stated that these types of companies would create promotions for people that were most susceptible to gambling. He told us that “the industry milks that specific audience for more [profit].” Clearly, online sports betting companies have strategies to attract people who may be impatient and/or lack self-control. Once these companies get these people to use their platform, greedy behavior is imminent.

Greed, Losses, and Fraud

All these nudges promoting crypto, NFT, and online sports betting have created a vast economy in those spaces. As of July 2022, the total value of all cryptocurrencies was approximately $1 trillion.[10] Sales of nonfungible tokens were about $17 billion in 2021.[11] Through July 2022, over $8 billion in online sportsbook wages have been placed in New York state this year.[12]

With this much wealth overflowing through these platforms, greedy behavior and the negative consequences of such behavior certainly were bound to occur. Although the market capitalization of crypto still stands at an astounding $1 trillion, this is almost $2 trillion lower than crypto’s peak in early November 2021. [13] Crypto suffered an immense crash in May 2022 primarily due to the failure of the TerraUSD stable coin. TerraUSD was supposed to be pegged to the U.S. Dollar through an algorithmic mechanism. However, the algorithm failed to keep TerraUSD pegged to the U.S. Dollar and many crypto traders sold TerraUSD at an extremely high rate. This led to the crashes of virtually all cryptocurrencies as more people saw the technical flaws of TerraUSD as a huge red flag.

Not only have people lost their wealth in crypto due to the turbulent market, but also some have lost their wealth in crypto due to fraud. As forensic accountants, the authors are quite aware of the high risks of fraud in the crypto space. In fact, the authors previously published an article in QuickRead about the risk and fraud in the cryptocurrency economy. According to a Federal Trade Commission (FTC) report, since the start of 2021, more than 46,000 people lost over $1 billion in crypto scams. The report also claimed that crypto has become “an alarmingly common method for scammers to get peoples’ money.[14] Reported losses due to crypto fraudsters increased nearly 60 times what they were in 2018. These scammers certainly acted with greed as they selfishly took money away from vulnerable victims.

Conclusions: What’s Next?

It seems that we have nudged our way to an economy with a lot of negative financial behavior through crypto investing, NFT trading, and online sports betting, which have been overwhelmed with volatility, scams, and greedy behavior. Since many large corporations and celebrities are endorsing these platforms, perhaps we also need them to endorse different companies and organizations that promote positive financial behavior. Maybe internet celebrities should endorse apps that help people save money and budget their personal finances. Or perhaps major sports networks should focus more on endorsing financial institutions that help people save for retirement and meet their financial goals. Better yet, major sports networks could also promote the National Council on Problem Gambling or some nonprofit mental health and wellness organizations like HelpGuide, as often (if not more often) as they promote online sports betting sites. These kinds of nudges would certainly be for the better!

[1] https://www.thesun.co.uk/money/18564453/luna-investor-lost-74-million-dollars-cryptocurrency-crash/

[2] Thaler, Richard. “Misbehaving: The Marking of Behavioral Economics”. 2015.

[3] https://fortune.com/2022/06/30/binance-khaby-lame-crypto-exchange-famous-tiktoker-partnership/

[4] https://www.youtube.com/watch?v=Qdwy6IyZVTc & https://www.youtube.com/watch?v=8vV1snzBwAg

[5] https://www.nbcnews.com/business/business-news/celebrity-endorsed-nfts-leave-investors-financially-crippled-rcna27705

[6] How FTX became crypto’s MVP of sports sponsorship (fastcompany.com)

[7] https://www.npr.org/2021/11/17/1056431658/staples-center-lakers-crypto-arena-name

[8] https://www.forbes.com/sites/marieschulte-bockum/2021/12/08/draftkings-signs-deal-with-nfl-players-association-as-old-guard-gaming-companies-jump-aboard-nft-hype-train/?sh=68bfeb452711

[9] https://www.sportspromedia.com/news/espn-sports-betting-deal-caesars-draftkings-gambling-sportsbooks/

[10] Total Market Cap of Crypto as of July 21, 2022: https://coinmarketcap.com/all/views/all/

[11] https://www.cnbc.com/2022/03/10/trading-in-nfts-spiked-21000percent-to-top-17-billion-in-2021-report.html

[12] https://www.nysportsday.com/revenue/#:~:text=By%20the%20start%20of%20summer,the%20%24200%20million%20figure%20weekly.

[13] https://www.cnbc.com/2022/07/14/why-the-2022-crypto-winter-is-unlike-previous-bear-markets.html

[14] https://www.thestreet.com/investing/cryptocurrency/crypto-46000-people-lost-1-billion-to-cons-in-15-months

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Eric Kreuter, PhD, CPA, CGMA, CFE, CBA, MAFF, is a Managing Director at CBIZ Marks Paneth and was an Adjunct Professor in the Graduate Finance Program at Manhattanville College in Purchase, NY where he taught Forensic Accounting. He previously served as an Associate Professor at Mercy College in Dobbs Ferry, NY, where he taught graduate classes in Human Resource Management. He also served as a volunteer at the Bedford Hills Correctional Facility and the Taconic Correctional Facility in Bedford Hills, NY. He is a Counselor at St, Christopher’s Inn located in Garrison, NY.

Dr. Kreuter can be contacted at (212) 201-3117 or by e-mail to ekreuter@markspaneth.com.

Andre Castillo, CPA, ABV, CFE, MBA, is a Supervisor in the Financial Advisory Services group at CBIZ Marks Paneth. He provides services related to forensic accounting, litigation consulting, economic damages, internal control reviews, and fraud investigations for his clients. Prior to joining CBIZ Marks Paneth, Andre started his career at KPMG LLP providing audit services to public companies in the sports and entertainment industry and the consumer products industry. He holds a BA in Economics from Boston College and an MBA/MS in Accounting from Northeastern University.

Mr. Castillo can be contacted at (914) 909-4932 or by e-mail to acastillo@markspaneth.com.