As money becomes tight, it seems like many Americans are starting side businesses. Few side-businesses have seen as much rise and fall like Michael Malekzadeh’s sneaker-flipping company. Michael earned $300 million in the last few years. But his side-gig was halted when he was arrested for fraud.
Michael's sneakers business was a success during Covid. Because he sold shoes at a fraction of retail price, many called him the “Sneaker King”. People who bought shoes from Michael were able to sell them later, while others claimed that flipping shoes was better than their S&P 500 returns.
The sneaker resale marketplace is much like other parts of the economy. Prices are determined by supply and demand. Many ‘limited edition' items can be very expensive. Cowen, an investment bank, predicts that the resale market for resale will grow to $30 billion within 10 years. Michael was able capitalize on consumer interest during pandemic. However, his customers noticed that something wasn't right.
Michael filmed himself riding his $29,000 Louis Vuitton bicycle around his home, while simultaneously ripping off consumers with sneakers worth $70 million. He knew that he wouldn't be able fulfill more than 1-10% of his orders because he didn't stock the sneakers.
Federal investigators have charged Michael with operating a Ponzi-like scheme. Some are calling him Bernie Madoff of sneakers.
Takeaway: Trading sneakers can be a good alternative to the stock market in times of economic turmoil. Some buyers took advantage supply and demand to invest in limited-edition sneakers. Ironically, however, brokers such as Michael have their own way of committing security fraud. Alternative investments come in all shapes and sizes by 2022. Do your research and make sure you get what you have signed up for.