This is our second post this weekend! You’ll find our latest on the crypto collapse on David’s blog. [David Gerard]
Also, please support our work via Patreon, if you haven’t already. Our stories are free to read for everyone, but if you want to help us get the word out, become subscribers. Links in post!
In this episode:
More documents have come out on Binance’s “Tai Chi” plan to subvert US regulation.
Binance appears to have been channeling bridged USDC reserves to Cumberland/DRW.
Senators write a scathing letter to Binance, asking for a slew of documents.
We told you bitcoin miners were fiddling accounts!
Nishad Singh, another member of SBF’s inner circle, turns against Sam.
Also, lawyers propose tighter bail restrictions for Sam — a flip phone and virtually no internet access.
the wonderful thing about bitcoin is that ‘sorry i was too dumb to do things properly so it all collapsed’ is not only a feasible explanation but historically likely
— Boxturret on SomethingAwful
Shut up, Sam
If you may be in legal trouble, any lawyer has one piece of advice: stop talking. If you’ve just filed a high-profile bankruptcy with maybe billions of dollars missing: stop talking. If you’ve got prosecutors sniffing around your activities: stop talking.
Sam Bankman-Fried never got the memo, or he did and threw it in the trash. In reference to his lawyers, he told Tiffany Fong: “they know what they’re talking about in an extremely narrow domain of litigation. They don’t understand the broader context of the world.” [YouTube; Twitter]
Despite producing reams of potential “evidence” that could one day be used against him, SBF will talk to any reporter, anywhere, any time of day. On Wednesday, November 29 he spoke on an NYT DealBook panel. On Thursday, November 30, he spoke to Good Morning America.
He loves the camera. But he still can’t tell you where the money went.
In the DealBook interview with Andrew Ross Sorkin, SBF said he “never tried to commit fraud,” and he didn’t knowingly commingle $10 billion in customer funds. He frames the whole matter as he seemingly lent Alameda customer funds from FTX as a risk management problem that got out of hand. Well, it sure did that. [Video; Transcript]
George Stephanopoulos from Good Morning America, who actually flew to the Bahamas to talk to SBF, was a lot tougher on him. SBF again denied “improper use of customer funds,” saying he failed at oversight. “You said one of your great talents in a podcast was managing risk.” “That’s right.” “Well, it’s obviously wrong.” [GMA; Twitter]
As Lying for Money author Dan Davies points out, prosecutors just have to show that SBF intentionally deceived clients as to what was happening to their money. When you tell people their money is segregated and it’s not, that’s fraud. “The offence was committed the minute it went in the wrong account.” [Twitter]
If you ignore your lawyer because you’re smarter than everyone, no lawyer is going to work with you. Martin Flumenbaum at Paul Weiss already dumped SBF. We’re hearing unconfirmed rumors that David Mills, his father’s colleague at Stanford, who was advising SBF, is also refusing to work with him further. [Semafor; Twitter]
A lot of FTX employees bailed after the company filed for bankruptcy. But a few have soldiered on — likely so they can nail SBF, who screwed them over about as much as he screwed over all of his customers and investors. While SBF is telling his side of the story to reporters, FTX employees are leaking emails. NYT wrote about the absolute chaos that FTX lawyers and execs endured in wresting power away from the deluded SBF in the wee hours of November 11. [NYT]
If Sam’s lawyer had jumped in front of the camera and ripped Sam’s larynx out with his bare hands, he could reasonably bill it as extremely valuable and important legal services to his client.
starting to think his strategy is to spend the next few months producing so much self incriminating material that any jury will die of old age before the trial ends pic.twitter.com/fSZGYciAsi
In January, there were three big crypto lenders — Celsius, Voyager, and BlockFi. Now all three are bankrupt, and our emails are clogged with new bankruptcy filings.
BlockFi was already a dead firm walking. They were dead after Three Arrows blew up in May. FTX kept BlockFi’s head above water with a $400 million credit facility — but then FTX imploded. [Twitter]
The New Jersey firm doesn’t just have more liabilities than assets — a lot of the assets are missing too. All of BlockFi’s cryptos were in FTX. They were using FTX as their crypto bank.
BlockFi has over 100,000 creditors. Assets and liabilities range between $1 billion and $10 billion. There’s $1.3 billion in unsecured loans outstanding and $250 million in customer funds locked on the platform.
BlockFi has $256.5 million cash on hand — after selling their customers’ crypto:
In preparation for these chapter 11 cases, BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs. Through the process, BlockFi was able to raise $238.6 million of additional cash, for a total unencumbered cash position as of the Petition date of $256.5 million.
Ankura Trust is BlockFi’s largest unsecured creditor to which it owes $729 million. Ankura is typically brought in to represent the interest of others in bankruptcy. If so, who are those creditors? We’d love to know.
FTX US is BlockFi’s second-largest unsecured creditor, with a $275 million stablecoin loan. This is the credit facility that SBF “bailed out” BlockFi with in June.
BlockFi’s fourth-largest unsecured creditor is the SEC — BlockFi still owes $30 million of its $50 million in penalties from February. The total settlement was $100 million, with half owed to the SEC and half owed to state regulators. [SEC; Twitter]
All the other creditors’ names are redacted. Very crypto.
BlockFi is entangled in FTX in multiple ways. BlockFi had a $680 million loan to SBF’s Alameda Research. This was collateralized by SBF’s personal shareholding in popular day-trading broker Robinhood — just days before FTX filed for bankruptcy. BlockFi is suing SBF for his stake in Robinhood. It doesn’t help that SBF was shopping his Robinhood shares around as collateral after he’d pledged them to the BlockFi loan. [Filing, PDF; Complaint, PDF; Bloomberg]
Crypto miners — we told you so
We set out in detail in August this year how publicly traded bitcoin mining companies were always going to leave their lenders and investors as the bag holders.
We predicted that the miners would default on billions of dollars in loans, leaving the lenders with worthless mining rigs and unsaleable piles of bitcoins. They would then go bankrupt — with all the paperwork in order.
The miners depreciated their mining rigs over five years — and not the 15 months they should have — to make their companies look like better investments.
Iris Energy (IREN) faced a default claim from its lender NYDIG on $103 million “worth” of mining equipment. The company’s miners aren’t making enough money to service their debt. So Iris defaulted! And NYDIG now owns some obsolete mining rigs. [SEC filing, Global Newswire; Coindesk; CoinTelegraph]
Shares in Argo Blockchain (ARBK) dropped 40% after the firm announced that its plans to raise $27 million by selling shares were no longer happening. [Twitter; Decrypt]
Core Scientific hired law firm Weil, Gotshal & Manges and financial advisors PJT Partners to help figure out ways to stave off bankruptcy. The options include exchanging existing debt for equity or additional debt, asset sales, equity, or debt financing. They’re gonna go bankrupt — because that was always the exit strategy. [The Block]
Just how bad is the crypto collapse?
My landlord friend in Dallas just asked me if I know anything about bitcoin miners:
“This bitcoin mining company defaulted, moved out, and left all their equipment behind.”
In the financial crisis of 2008, when banks were dropping like flies, some big banks would buy smaller banks that had healthy books — so they could patch the holes in their own books. Bigger and bigger shells to hide the Ponzi under.
Crypto is doing the same. FTX was buying up, and planning to buy up, small bankrupt crypto firms to try to hide the hole in its own books. And Binance, the largest crypto exchange, just bought Sakuro Exchange BitCoin (SEBC), a Japanese exchange that is already licensed with the country’s Financial Services Agency. [Binance; Bloomberg]
Japan learned its lesson early. Tokyo-based Mt. Gox, one of the first big bitcoin exchanges, blew up in 2014. Japan went on to become one of the first countries to regulate crypto exchanges with a licensing system. Crypto exchanges in Japan are required to keep customer assets separate, maintain proper bookkeeping, undergo annual audits, file business reports, and comply with strict KYC/AML rules. They are treated almost like banks! [Bitcoin Magazine]
Binance tried to set up operations in Japan in 2018, after getting kicked out of China — but Japan’s FSA told Binance they needed to play by the rules and apply for a license or pack their bags. [Bitcoin Magazine]
Binance’s bogus bailout fund
Binance announced a $2 billion “industry recovery fund” to prop up all of the other flailing crypto firms that have been struggling since FTX blew up. They claim that 150 crypto firms have applied for a bailout. [Bloomberg]
Binance has its own stablecoin, BUSD, that it claims is run by Paxos and Binance, “and is one of the few stablecoins that are compliant with the strict regulatory standards of NYDFS.” The crypto bailout fund is $2 billion in BUSD.
BUSD is a Paxos-administered dollar stablecoin. Each BUSD is backed by an alleged actual dollar in Silvergate Bank, and attested by auditors. (If not actually audited as such).
That’s true of BUSD on the Ethereum blockchain. It’s not true of BUSD on Binance.
BUSD on Binance is on their internal BNB (formerly BSC) blockchain, bridged from Ethereum. It’s a stablecoin of a stablecoin. Binance makes a point of noting that Binance-BUSD is not subject to the legal controls that Paxos BUSD is under. We’re sure it’ll all be fine if there are any issues, which there totally won’t be. [Binance]
Treating FTX’s claims about other crypto firms as confessions would have given you pretty detailed correct answers — it was all projection. FTX was accusing others of what they were doing themselves. You should look at what Binance has been saying the same way.
We’re going to go so far as to assert that Binance is a hollow shell too, and the bailout fund is most likely for a hole in its own books.
Every one of the crypto companies accounts for their value in dollars by calculating their mark-to-market value. “We have a billion dollars of $CONFETTI!” Even if they couldn’t get $10,000 in actual money for it.
All of crypto is bankrupt if you account for the crypto assets at realizable value rather than mark-to-market. Realizable value depends on the inflow of actual dollars into crypto — and that inflow has plummeted because the retail suckers went home.
All crypto companies are Quadriga. Pull back the curtain and you’ll see Celsius/FTX-style non-accounting, a Google spreadsheet if you’re lucky, and incompetence. Such utter blithering didn’t-understand-the-question incompetence. It’s been this way since 2011.
Tether is fine, you FUDster
Tether has been issuing tethers by lending out its USDT stablecoin, rather than exchanging the USDT one-to-one for dollars (LOL).
As of Tether’s attestation for September 30, 2022, 9% of USDT are loans to Tether customers. Tether claims these are collateralized — but they won’t say who the borrowers are or what the collateral is. [Tether; WSJ, paywalled]
In their long-winded response to the WSJ writeup, Tether blames …. the media. [Tether]
We know from the CFTC settlement in October 2021 that Tether was issuing USDT to its big customers with a kiss and a handshake. Now they’re admitting it publicly.
Other crypto exchanges/firms in trouble
CoinDesk’s report on the hole in Alameda’s balance sheet and Alameda’s close ties to FTX did so much damage to the crypto industry — and to Coindesk’s parent company Digital Currency Group — that the news site has attracted take-over interest. [Semafor]
CoinDesk did not blow apart the crypto industry. This was an unexploded bomb that was set up in May.
It was all going to explode eventually as soon as someone looked inside the box. As CZ told The Block’s Larry Cermak in 2019: “some things are better left unsaid.” [Twitter]
Japanese social media company Line is shutting down Bitfront, a US-based crypto exchange that it launched in 2020. They said the closure was unrelated to “certain exchanges that have been accused of misconduct.” [Announcement; Bloomberg]
AAX exit scam completed. Hong Kong-based exchange AAX froze withdrawals on November 13, and its executives quietly slipped away as opposed to filing bankruptcy — social media pages removed, LinkedIn profiles deleted. Sources tell us that employees have been laid off and the founders are nowhere to be found. [Hacker News; AAX]
John Reed Stark: Since the FTX debacle, Big Crypto’s SEC hit pieces and talking points calling for “regulatory clarity” are pure pretense and subterfuge, intended to distract and dissemble the truth — that the crypto-emperor has no clothes. [Duke FinReg Blog]
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Bitcoin mining is a highly lucrative business as long as the price of bitcoin keeps going up — and as long as investors believe it will keep going up.
When the price crashes — and the price of bitcoin has halved since the start of the year — crypto miners face margin calls, they have to dump their bitcoins, and reality comes knocking.
In this post, we outline some of the biggest problems facing North American bitcoin miners:
Miners are nothing like as profitable as they report to the public stock markets that they are.
Miners don’t want to sell their freshly mined bitcoins, as this would risk crashing the price of bitcoin — so instead, they borrow against the bitcoins, and against their rigs, too!
This business model only works if number goes up forever.
Number doesn’t go up forever.
During the bitcoin bubble of 2021, miners wanted to lure in naïve investors from the capital markets who thought that crypto mining companies were a great way to get exposure to bitcoin — without the risk of actually touching a bitcoin. The miners would hold their bitcoins, subsidize their business with debt, and you could just buy their stock!
So the bitcoin miners promoted themselves as enthusiastic bitcoin “to the moon” boys — in the hope of luring in other prospective moon boys. Buy now and watch your profits soar! Number can’t go down!
The cunning plan
Bitcoin miners used to be ruthless economic agents, in it for the money. They knew how volatile crypto was, so they sold their coins as soon as they mined them to cover power bills and other business expenses.
As some point, miners’ business model changed from selling bitcoin to holding bitcoin — and borrowing against it.
This model doesn’t make any sense unless you first assume that the number will never go down, and that the bitcoin bubble will never burst — even though bubbles always burst.
The change started in mid-2021 when bitcoin miners were kicked out of China. Most eventually settled in the US and Canada — because these countries had the world’s next-cheapest reliable electricity.
The US is now the world’s largest bitcoin mining hub, making up about 37% of the global hash rate. [CBECI]
North American miners filed to become publicly-traded companies. Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT) were the first to be listed on Nasdaq. Other miners soon followed. [Investopedia; Compass Mining]
Going public gave the miners access to the mainstream capital markets, investors, and new lines of credit — way more financial resources than they’d ever had before.
The miners marketed themselves to capital markets as massive bitcoin enthusiasts. Get in, this is the magical future! Here’s Whit Gibbs from Compass Mining in January 2022: [CoinDesk]
“With ample access to funding and investors pouring in money, miners didn’t have to sell their bitcoin to fund operational costs, said Compass Mining’s CEO Whit Gibbs. ‘And since miners are incredibly bullish on bitcoin, this allows them to do what they want to do naturally, which is to speculate on bitcoin’s positive price appreciation,’ he added.”
Miners spent mid-2021 onward racking up debt to finance the construction of facilities, buy mining equipment, and pay their executives enormous salaries.
The companies’ operating expenses were paid for by borrowing against their freshly-mined bitcoins. Some loans even used mining rigs as the collateral.
The miners also did accounting tricks, such as depreciating mining rigs over five years — and not the 15 months they should have — to make the companies look like better investments. Meanwhile, their executives were paid well beyond the carrying capacity of the companies.
In 2021, outgoing Marathon CEO Merrick Okamoto earned a shocking $220 million — although most of that was awarded in stock. Riot Blockchain’s top five execs collectively were paid $90 million the same year with a net loss. [SEC; SEC]
Riot Blockchain failed its say-on-pay shareholder vote on executive compensation for 2021. It’s an advisory vote that the company doesn’t have to act on — but it’s an embarrassing thing to have to admit publicly to failing. Thankfully, coiners have no capacity for embarrassment. [SEC]
Bitcoins sold by publicly traded mining companies, January to May 2022. [graph]
Bitcoin loans
While the price of bitcoin was going up through 2021, mining saw profit margins as high as 90%. Bitcoin hit $64,000 in April 2021 and $69,000 in November 2021. [Bloomberg, archive]
Margins on mining were especially good in 2021 because the supply of state-of-the art mining rigs was constrained due to the worldwide chip shortage. If everyone could get rigs, the margins would go away.
But by 2022, when bitcoin lost 70% of its price from its November high, it was a different story.
Miners need actual money to pay their operating expenses. Energy can account for as much as 90-95% of a miner’s overheads. Power companies don’t take bitcoins or tethers. But the crypto trading system was running low on naïve retail suckers to supply fresh dollars. [Reuters]
So the miners needed to do their part in propping up the price of bitcoin. Their solution was to avoid selling their bitcoins, and instead to hold them and use them as collateral against low-interest loans.
Marathon had started the fashion of borrowing against mined bitcoins as early as October 2020 — and the other mining companies soon followed the same plan.
Mainstream financial institutions didn’t really get into lending to bitcoin miners. The main lenders to miners were their fellow crypto companies: Galaxy Digital, NYDIG, BlockFi, Foundry Networks, Silvergate Bank [SEC], Celsius Network, and Babel Finance. (Note that Celsius is bankrupt, and Babel has suspended withdrawals.)
In fact, Marathon just entered a new $100 million revolving loan with Silvergate to add to their existing $100 million line of credit from Silvergate. This is while Marathon has thousands of mining rigs lying idle, waiting on a deal for cheap electricity. [SEC; CoinDesk]
Bitcoin miners are also trying to hedge against the downturn by betting against the bitcoin price going back up. Marathon has been selling call options at, say, $50,000. If bitcoin doesn’t hit this price, those options expire worthless. [Bloomberg]
Miners did deals with politicians and the power industry to get cheap electricity in Texas, as low as 2.5c/kWh — the sort of prices that miners were paying in China. [Bloomberg; press release]
But the Texas grid is notoriously unreliable — and can’t fall back on the other two continental US national grids. With 2022’s summer heat, electricity usage went up significantly, and ERCOT has told miners to switch off from time to time. [Bloomberg; Washington Post; The Verge]
Some miners, such as Riot, made money from credits for not using power in this time. [press release]
Margin calls
Borrowed money, one day, needs to be paid back. When the collateral dropped in value, miners’ loans got margin-called. They had to dump some of their vast holdings.
Miners started dumping big time in June 2022, some selling all their mined bitcoins and some of their “stockpile.” Bitfarms dumped 3,000 coins — half its stockpile — in mid-June. A month later, miners collectively sold 14,000 bitcoins, with a face value of roughly $300 million, in a single 24-hour period — when the CeFi crash was in full swing. [Reuters; Bloomberg; Cryptoslate]
Compass Mining — which sells people mining machines that are then hosted in third-party facilities — posted a list of publicly-listed miners in North America who were selling off their stashes. [Compass Mining]
Arcane Research’s Jaran Mellerud analyzed the cash flows and balance sheets of public miners. Marathon was the weakest: “Marathon has 6.2 times higher remaining machine payments in 2022 than their accumulated current operating cash flow accumulated out the year. This will drain them of liquidity.” He thinks Marathon will be forced to sell off their bitcoin stockpile as well. [Tweet thread; Arcane report]
Some loans even used mining hardware as collateral. But mining rigs are even worse collateral than bitcoins. The price of mining rigs on the second-hand market is extremely sensitive to the price of bitcoin — and those loans are now undercollateralized.
As of June 2022, almost $4 billion in loans to bitcoin miners are coming under stress, posing a risk to crypto lenders, as many of the rigs posed as collateral have halved in value. [Bloomberg, archive]
Miners still hold huge piles of unsaleable bitcoins. CryptoQuant says that miners’ holdings have been increasing. As of July 2022, miners held 1,856,000 BTC. [CoinTelegraph]
Mining accounting
Bitcoin miners are not as profitable as they’ve been reporting.
Paul Butler points out that bitcoin mining companies are using questionable accounting methods. [blog post]
When you buy capital equipment with a lifetime longer than your financial year, you can allocate the cost of the purchase over its expected useful lifetime, rather than all in one hit. This is called depreciation.
Publicly-traded mining companies typically depreciate their assets over five years — but the equipment is good for about fourteen to fifteen months, and it’s most profitable in its first nine months. Bitcoin miners play on their “success” in the early years to raise capital to buy additional mining rigs.
The excessively long depreciation on mining rigs is a way to hide that the miners’ real costs are much higher than they’re reporting. The miners are not putting away money for future equipment. This is as well as overpaying their executives.
In a bubble, you can sell mined bitcoins for far more than the cost of the electricity to play Extreme Bingo trying to guess a winning hash.
You can even run old mining rigs that might otherwise be scrapped. Old rigs might spend $30,000 to mine a bitcoin — but that’s fine if you can then sell that bitcoin for $40,000.
So what happens when the bitcoin price drops too low for mining to be profitable?
We’re seeing this now. Miners are taking inefficient hardware offline, causing visible drops in the hash rate charts since May 2022. In November 2018, the price of bitcoin dropped below $3,800 and a lot of miners threw out all their old equipment. The hash rate dipped noticeably.
The real trouble starts when bitcoin falls below $15,000. (As we write this, bitcoin is around $23,000.) Break-even for the most efficient machines is somewhere between $9,000 and $11,000, based on an electricity cost of 5c/kWh. In June 2022, JPMorgan put the cost of mining at $13,000 per bitcoin. [Bloomberg]
If the price drops too low, will the bitcoin blockchain stop ticking along? Probably not — bitcoin really doesn’t need much mining to keep running.
There was a slowdown on the bitcoin (BTC) blockchain in late 2017, when bitcoin cash (BCH) — a fork of not just the bitcoin software, but also its full transaction history — was trying to compete to become the official version of bitcoin. Large miners such as Bitmain switched a large proportion of their mining pools to the BCH chain.
The BTC chain took an hour between blocks at times in November 2017 — about 15% of the previous hash power.
Hardly anyone noticed — they were too busy having fun on the exchanges, which is where the action was in the 2017 bubble. Nobody really cares about the blockchain itself.
Bitcoin mining is green, actually
LOL, no it isn’t.
Proof-of-work mining has long been cryptocurrency’s biggest public relations battle, especially since Elon Musk — formerly the avatar of energy transition — bought bitcoins for Tesla in February 2021.
The general public thinks of crypto as nerd money for nerds to rip each other off. But when the public hear about proof-of-work crypto mining, and how it consumes an entire country’s worth of electricity, they get angry.
So it’s extremely important for the crypto industry to pretend as hard as possible that bitcoin mining isn’t as stupidly and egregiously wasteful as it obviously is — so that they’re allowed to keep mining at all.
The Bitcoin Mining Council claims that bitcoin uses 0.16% of all the electricity in the world. The BMC also claims that 58.4% of bitcoin mining energy use is from sustainable sources, based on claims by its members. [BMC, PDF]
Neither of these numbers is true — and BMC doesn’t show its working. Sources that do show their working — and don’t have a financial interest in fudging their numbers — put the sustainable energy percentage at 25.1%, and the percentage of the world’s electricity consumption over 0.5%. [Joule, paywalled; Digiconomist]
We’re also boggling that the BMC calls 0.16% of all the electricity in the world “negligible” — for the most inefficient payment network in human history. Even Christmas tree lights are more useful to humanity.
You’d almost think that coiners will say any bizarre and egregious nonsense if only it lets them keep trading their magic beans.
What happens next?
Number goes down, loans get margin-called, and the mining companies go broke because of a market downturn.
We expect the mining companies to blame everyone else they possibly can — the CeFi companies for crashing the market, bitcoin for just refusing to go up forever. They have to, really.
Bitcoin mining stocks are already down — MARA is down 58% year-to-date, RIOT is down 75%, and Core Scientific (CORZ) is down 74% since the beginning of the year. Meanwhile, crypto stock short sellers were up 126% as of June. [Reuters]
This scheme was never a sustainable business model. But none of these guys are long-term planners. So we don’t expect they had a coherent exit plan either.
The crypto companies who lent dollars to the miners should have been sufficiently capable of joined-up thinking to realize this was never a sustainable business model. Somehow, they didn’t.
But then, for an example of the forward thinking skills of crypto guys, we remind you that Michael Novogratz of Galaxy Digital — one of the big lenders to miners — got a Terra-Luna tattoo in January 2022. [Twitter]
Those loans are never getting paid off. The mining rigs are near-worthless, and the bitcoins held as collateral can’t be dumped without taking the market down even further. The lenders get to take a bath on this one.
The bitcoins will likely be dumped, putting more sell pressure on the price of bitcoin.
Along with the rest of the crypto collapse, this is thankfully isolated within crypto. The only “real” financial institution involved is Silvergate, and they have almost no non-crypto customers these days. Any hit to Silvergate is unlikely to be contagious.
Of course, the investors can always sue the bankrupt corpses of the mining companies.
Amy Castor 
