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“Crypto sceptics are a bit like the boy who cried wolf, except a villager gets eaten every damn time and the rest of them are still going ‘why did you cry wolf, FUDster?'”
— GunterWatanabe
Toot toot, I’m a boat
Everyone trusted Zhu Su and Kyle Davies at Three Arrows Capital (3AC). They knew what they were doing, right?
Only now, the pair have disappeared — and their fabulous yacht is back on the market. “The unclaimed yacht looms as a slightly ridiculous avatar of the hubris, greed, and recklessness of the firm’s 35-year-old co-founders.” [Intelligencer]
Here’s the 3AC yacht in all its glory: the Much Wow. Yes, Zhu was into Dogecoin too. [Much Wow; Boat International, archive]
3AC talked like competent hedge fund guys — which straight away made them look a zillion times smarter than the rest of the crypto bros. But they weren’t good at this at all. They had no clue on how to hedge their bets. The 2021 crypto bubble saved 3AC’s backside — they could keep looking like geniuses a little longer.
3AC used a “spray and pay” strategy: invest in a whole pile of trashy minor altcoins, and hope for a return.
On May 26, 2022 — by which time 3AC had likely already abandoned their Singapore office and skipped the country — Davies tweeted that “it doesn’t matter specifically what a VC invests in, more fiat in the system is good for the industry.” This is correct, if you view crypto as a single unified scam casino. [Twitter]
Articles about the wider crypto collapse talk about 3AC a lot. This gives the impression that 3AC is fundamentally to blame.
3AC deserves a lot of the blame because they were greedy and stupid. But everyone else was also greedy and stupid.
Terraform’s Anchor protocol paid 20% interest rates — the highest available. 3AC offered the next-highest interest rates available, by putting the money into UST/luna and skimming some off the top.
So everyone else put their money into Anchor and 3AC. Many of these were feeder funds, who skimmed a bit off the top themselves.
You can picture the crypto investment market as an inverted pyramid, where the point is UST/luna — a Ponzi box full of hot air. 3AC was the box above that. Everyone else is in a funnel down to those two. The bottom two Ponzi boxes collapsed, and the whole inverted pyramid came tumbling down with them.
Terraform was running the load-bearing Ponzi box; we put most of the blame on Do Kwon. But we also blame Terraform’s enablers — the rest of the crypto investment firms.
There’s a lot to blame 3AC for — the way that Zhu and Davies just kept going “this is fine” even as they knew it was going to hell. They were greedy fools.
But anyone who put their money into 3AC was also a greedy fool.
Voyage to the bottom of the sea
Voyager Digital’s official unsecured creditors’ committee (UCC) held a town hall on August 11. The meeting was led by UCC counsel Darren Azman and Chuck Gibbs at McDermott Will & Emery. Amy wrote up some notes. [YouTube; presentation]
Azman says: if you want to buy Voyager, hurry! The deadline to submit bids is August 26. Sam Bankman-Fried’s FTX has already submitted a bid. It may have been a low-ball bid, but SBF’s Alameda Research is a borrower from, lender to, and shareholder of Voyager. We expect FTX will want Voyager the most — if anyone really wants it at all.
Azman and Gibbs say that Voyager is aiming to file a restructuring plan in October — and that creditors might get their money back as soon as November! What money there is, anyway.
This time frame would be welcome, but isn’t plausible — Mt. Gox (2014) and QuadrigaCX (2019) creditors are still waiting for their money years later.
Meanwhile, the boys gotta get paid. Voyager wants $1.9 million to pay bonuses to 38 employees as part of a “Key Employee Retention Plan.” (KERP). In a bankruptcy, KERP is a way to incentivize upper management to keep working throughout the bankruptcy — and not flee the sinking ship.
Voyager is also seeking to file under seal all pertinent information about KERP participants — their names, job titles, supervisors, salary, and proposed bonus. These folks are definitely not insiders, and Voyager can’t give you their names — but trust them.
When your ship is sinking, the last thing you want is people leaving with all your deep, dark secrets. Keep them happy — and quiet.
The US Trustee objects to the sealing: “The payment of bonuses, let alone bonuses in such a significant sum to such a limited number of individuals under the circumstances that brought Voyager to this Court, should not be countenanced.”
The UCC also objects — of Voyager’s 350 employees filed, only 12 have resigned so far. Nobody’s leaving. In fact, nobody’s been asked to leave.
Creditors are pissed that Voyager hasn’t bothered to reduce employee headcount at all, given the platform has been frozen since July 1. What are the employees doing, other than collecting paychecks? [motion, PDF; objection, PDF; objection, PDF; Coindesk]
Just days before Bernie Madoff was formally charged by the SEC, he wanted to distribute hundreds of millions of dollars in early bonuses to employees. We’re sure he was just being nice to them too. [National Post, 2008]
Celsius: When you’re in a hole, keep mining
Celsius submitted their Budget and Coin Report, reflecting the funds they were holding as of July 29. (They filed for bankruptcy on July 13.) The company plans to file similar reporting on a monthly basis throughout their bankruptcy. [Notice of filing and coin report, PDF]
The report shows just how much money Celsius wants to set on fire. Over a three-month period from August through October, Celsius is allocating $14 million to payroll, $57.3 million to mining, and $33 million to restructuring costs. By the end of October, they’ll be operating hugely in the red.
Those negative numbers were the elephant in the room during Celsius’ second-day hearing on August 16. Amy summarized this hearing previously. Here’s the slide deck that Celsius lawyers from Kirkland & Ellis presented. [presentation, PDF]
Celsius has this mad idea that they can crypto-mine their way out of bankruptcy. First, they plowed customers’ money into stunningly risky investments. [Twitter thread] Now they want to feed the remaining customer funds into their money-gobbling bitcoin mining operation.
Celsius sought approval from the court to sell their mined bitcoin — so they could use the proceeds to fund Capex for their Texas mining operation.
The US Trustee’s attorney, Shara Cornell, objected on the grounds that Celsius wasn’t being transparent about what bitcoin it planned to sell, or how much the mining business was expected to generate.
Despite those objections, Judge Martin Glenn approved the motion — though he had reservations: “At bottom, this is a business judgment decision that may turn out to be very wrong, but we will see.”
We think he should have had stronger reservations. Celsius says its mining will be profitable in January, but the numbers don’t add up.
Celsius expects to generate 10,118 BTC this year and 15,000 BTC next year. Last year, they only mined 3,114 BTC, according to filings. The company has paid for 120,000 rigs, of which 49,000 are in operation.
Even if Celsius mines and sells 1,000 BTC per month, that’s only $2 million when their hosting costs are $19 million per month, with only half the rigs operational. This business simply isn’t viable. It’s just an attempt by Celsius CEO Alex Mashinsky to postpone his company’s liquidation.
Well, that was a huge arithmetic error. Sorry about that. We blame the intern. (i.e.,ourselves.)
A question of trust
Celsius also wanted to sell some de minimis assets. These turned out to be notes/bonds and equity in other crypto companies — but Celsius hadn’t bothered to mention that bit.
Cornell from the US Trustee said, “The motion makes it sound like the debtor is selling office furniture.” Judge Glenn said he had “no inkling the debtor was proposing to sell millions of dollars of equity or notes/investments in other crypto businesses.” He did not approve the motion.
US Trustee William Harrington has had enough of Mashinsky messing around. Days after the hearing, Harrington filed a motion requesting the court appoint an examiner to investigate what’s really going on inside Celsius and present their findings to the court. [motion, PDF]
As grounds for hiring an examiner, the Trustee lists allegations of incompetence or gross mismanagement — including the offering of unregistered securities — significant transparency issues, and widespread mistrust in the debtors.
Under US bankruptcy laws, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company’s debts exceed $5 million. We have no doubt Judge Glenn will approve the request.
The language in the motion suggests that Mashinsky can’t be trusted. (We concur.) Among other things, it points out that Celsius owes $20 million in back taxes. Unpaid taxes are senior debt. The IRS gets first dibs on the remaining assets before the unsecured creditors.
The Celsius UCC is “concerned” about the Trustee hiring an examiner because “It will run up millions in costs.” [Twitter]
We know for sure that it’ll be costly — the examiner in Lehman Brothers’ 2008 bankruptcy cost $100 million, up from a projected cost of only $23 million. The examiner for Enron was $90 million. So our guess is the examiner will probably cost creditors $25 million, if not more.
The seven-member UCC feels it can conduct its own investigation and doesn’t need an examiner. The problem there is that the UCC is selected from a list of the largest Celsius creditors. These people represent companies that have a vested interest in the crypto space succeeding. They are not in any way neutral.
The P-word
A “341 meeting” was held on August 19 — a creditors’ meeting, named after section 341 of the Bankruptcy Code, where the debtor answers questions about their financial status under oath.[LII]
At the 341 meeting, Celsius CFO Chris Ferraro admitted that Celsius was paying old investors rather more money in rewards than they were actually getting in yield.
“In hindsight, we did not generate enough yield to support the return,” says Ferraro. He confirms Celsius was paying “over 100%” at times — 120% to 130% of the actual yield. There’s no transcript, but Kadhim Shubber from the Financial Times and Thomas Braziel from 507 Capital live-tweeted the call. [Twitter; Twitter]
If Celsius was paying this excess yield from incoming investor money … then that’s literally a Ponzi scheme. (A lawsuit filed against Celsius on July 7, also claimed Celsius was operated as a Ponzi.)
Ferraro said, “I don’t think it was that connected” — but he didn’t answer where else the money could have been coming from. It was just “hyper-growth mode,” see. [Twitter; Twitter]
A question of competence
Mashinsky is a good salesman — but he’s not so great at any other part of the job. In January, Mashinsky ordered Celsius’ in-house investment team to sell bitcoin worth hundreds of millions of dollars. A day later, Celsius had to repurchase it all at a loss. “He was ordering the traders to massively trade the book off of bad information,” said one of the traders. “He was slugging around huge chunks of bitcoin.” [FT, archive]
Mashinsky is selling his $2.5 million home in Austin, Texas. He bought it only a year ago. [Twitter]
Canadian pension fund CDPQ has written off its CA $200 million investment in Celsius. “We arrived too soon in a sector which was in transition.” Whoever authorized the investment definitely wasn’t a foolish and greedy investor in a bubble, who didn’t look into the already-insolvent company at all. [La Presse, in French]
Elsewhere amongst the wreckage
Last week, we talked about Coinbase’s horrific $1.2 billion Q2 loss. Frances Coppola took a deeper dive into the company’s 10-Q. She explains why Coinbase’s balance sheet has massively inflated. [Coppola Comment]
Genesis Trading CEO Michael Moro has quit, effective immediately — definitely a thing that happens all the time in healthy companies where things are going well. Moro “will continue to advise the company through the transition.” Genesis is also laying off 20% of its staff. The company had lent $2.36 billion to 3AC, and Genesis’ parent company DCG has made a claim against 3AC for $1.2 billion. [press release; The Block]
BlueBenx, a Brazilian crypto lending platform, has bitten the dust following a $32 million hack — or, its users think, a “hack.” Withdrawals have been halted, and employees have been laid off. [CoinTelegraph]
Hodlnaut has applied for creditor protection in Singapore. This is the equivalent of Chapter 11 in the US. They’re insolvent. [Hodlnaut announcement, archive; CoinDesk]
In court filings, Hodlnaut formally admitted that they had lost money in the Terra-Luna crash via their Hong Kong entity. Hodlnaut had previously told customers they had no Anchor exposure. We knew they had, and wrote about it in our previous update. [Twitter; CryptoBriefing]
All deposits are part of the bankruptcy estate. If Hodlnaut is liquidated, even stablecoin depositors will only get a fraction of what they had on account at the company.
Hodlnaut is now facing a probe from the Attorney-General’s Chambers and the Singapore Police Force — “pending proceedings,” though they didn’t give any other details. About 40 out of the 50 employees the company had have been laid off. [Straits Times]
Amy Castor 
