Declaration of John Jay Ray — FTX is worse than Enron

John Jay Ray III took over FTX in the wee hours of November 11. Hours later, he filed for Chapter 11 in a Delaware court.

The new CEO filed his first-day declaration this morning. It’s incredible. David Gerard and I summarize it — this one is on David’s blog. [David Gerard]

  • In his 40-year career, Ray, who oversaw the Enron liquidation, has never seen “such a complete failure of corporate controls.”  
  • Ray has divided SBF’s empire into four silos, but the accounting is all unreliable because he’s gotten the numbers from SBF. 
  • Ray and his team will have to create a balance sheet and financial statements from scratch using what records they have of cash transactions.
  • FTX Digital Markets, the company’s Bahamas subsidiary, filed a for Chapter 15 in SDNY. Ray’s team is asking the court to move the Chapter 15 case to Delaware. 
  • Ray thinks the filing in SDNY was shenanigans by SBF and unnamed agents of the Bahamas government!
  • SBF’s late night DMs with a Vox reporter, published the next day, make it looks like he was in on the plot.

Crypto.com’s bad weekend — crypto exchanges are shaky

  • By Amy Castor and David Gerard

“i have a lot more respect for the binance guy, having seen a competitor stumble and taken the opportunity to very publicly shank them five or six times while they’re on the ground, under the guise of trying to help”

— infernal machines, SomethingAwful

We’re exhausted keeping up with all the good news for bitcoin.

Crypto.com didn’t have the greatest weekend. As we write this, withdrawals are clogged, but some are reported to be coming through okay.

The test an exchange faces is: can it stand a run on the bank?

The test bitcoin as a whole faces is: how will the price hold when lots of people are dumping for cash?

Number go down

After the bitcoin price had been floating at around $20,000 for several months, FTX crashed. On the day Binance reneged on its offer to buy FTX’s remains, BTC dropped below $16,000. It’s a bit above that now.

The actual dollars have gone home, and the wider crypto casino is having to pretend harder and harder that the alleged mark-to-market value of illiquid trash means anything.

Real dollars continue to disappear from crypto. Retail trading at Coinbase was down 43% in the third quarter of 2022, compared to Q2.

Reddit /r/buttcoin has a new header image

A slight case of the runs

Crypto.com is not having a great time.

The crypto markets are jittery. After the dramatic collapse of FTX, crypto holders are left shell-shocked and traumatized. They don’t trust any centralized exchange now at all.

It doesn’t take much to set the markets off. 

Despite claiming to have near-zero exposure to the fallout of FTX, over the last year, Crypto.com sent multiple very large stablecoin transfers to FTX, totaling approximately $1 billion. [Reddit, Australian Financial Review]

On November 12, crypto Twitter caught wind of the fact that Singapore-based Crypto.com and China-based Gate.io were passing funds back and forth to post stronger-looking proof of reserve statements, suggesting they didn’t have the funds they purported to have.   

Crypto.com CEO Kris Marszalek waved it off as just a whoopsie, saying they accidentally sent $400 million of their ETH to Gate.io on October 21, instead of their cold wallets, but that Gate.io had sent the money back. Everything was fine. [Twitter, archive; WSJ]

The crypto market wasn’t buying it. Instead, the news set off an FTX-style bank run, as panicked users raced to get their funds off Crypto.com. Within hours, more than 89,000 transactions pulled customer funds out of Crypto.com wallets. You could watch it in real time on Etherscan. [Chainsaw, Twitter]

Picture old-timey cartoons of guys in a stock exchange, hats popping off their heads and cigars falling out of their mouths in shock, shouting, “SELL! SELL! SELL!” Crypto.com was like that but in basements around the world.

By Monday, the run had made mainstream international news —  Sky, AFP, and Reuters, as well as financial outlets such as Bloomberg. [SkyNews]

Crypto.com should have collapsed right then, but it didn’t. Binance bailed Crypto.com out with infusions of ETH and USDC from their “recovery fund.” Cryptocurrency just reinvented the idea of a central bank as a lender of last resort. [Twitter; Twitter; Twitter]

Of course, given what he had just done to FTX, is it really a smart idea to let CZ know you have liquidity problems?

The following day, Marszalek did an Ask-Me-Anything to reassure everyone that the funds were safe. “At no point were the funds at risk of being sent somewhere they could not be retrieved,” he said. “It had nothing to do with any of the craziness from FTX.” [YouTube

Binance also held an AMA to tell everyone that everything is fine. [Twitter; Verge]

The life and times of Kris Marszalek 

Kris Marszalek co-founded Crypto.com in 2016. It was initially called Monaco but bought the “crypto.com” domain from cryptographer Matt Blaze in 2018.

Based in Singapore, the firm has spent huge money on ad campaigns, including a $700 million deal to put its name on LA’s sports arena (formerly Staples Center) and a “Fortune Favors the Brave” Super Bowl commercial featuring Matt Damon. [GQ]

The company makes money by charging fees for trades on its smartphone app. It promises Ponzi-like yields — up to 14.5% annually, paid out in stablecoins. 

To access the higher stake yield, you have to buy Cronos (CRO), the platform’s native trader token, whose price floats freely. CRO tanked over the weekend over concerns about Crypto.com’s reserves. [BeinCrypto]  

Marszalek, 42, is a Polish-born serial entrepreneur who lives in Hong Kong. He dropped out of college and started his career selling computer equipment. He doesn’t appear to have any trading experience at all prior to Crypto.com.

You’ll be delighted to hear that Marszalek has the sort of background you want in a crypto CEO. Specifically, running a voucher sales company that collapsed in 2016 and stiffed everyone.

Founded in 2010 in Singapore, Ensogo offered Groupon-style “daily deals” and so forth. After going through multiple name changes and acquisitions, Ensogo was listed as a standalone company on the Australian Securities Exchange. It pivoted to an “open marketplace platform” in late 2015. [ASX, PDF]

By April 2016, Ensogo had closed its Malaysian office and had stopped paying merchants. The company’s first-quarter report to the ASX showed an AUD$5 million deficit, despite firing half its staff in the first quarter of 2016. It had already lost AUD$67 million in 2015. Ensogo finally stopped operations in June — leaving merchants and consumers in the lurch. One Hong Kong merchant lost HK$20,000. [Tech in Asia; Tech in Asia; Tech in Asia]

Other exchanges 

In the third quarter of 2022, US exchange Coinbase suffered “another tough quarter.” Institutional trading was down 22% and retail volume was down 43%, compared to the previous quarter. Net revenue in Q3 was $576 million, down from $803 million in Q2, and $1.2 billion the year before. The company lost $545 million in Q3, compared to a net profit of $406 million in the same period last year. [FT, archive; Shareholder letter, PDF]

In Hong Kong, AAX has suspended withdrawals. The crypto exchange had just blogged that it had no exposure to FTX and that user funds were never exposed to counterparty risk. [AAX; AAX; Coindesk]

What’s a user to do?

The FTX collapse has taken out a variety of firms across crypto, including other exchanges and crypto hedge funds. Many projects used FTX like it was a bank. So many projects are now wrecked because they treated FTX like it was a safe place to store their cryptos.

Expect more trouble and possible bankruptcies to come. People keep treating crypto exchanges as banks. They are not banks.

The hard part is: what do you do instead?  

Loud and weird crypto nerds, particularly bitcoin maxis, are saying “not your keys not your coins” again a lot.

Back in the real world, approximately 100% of crypto users are in it for the money. And that’s only achievable with the coins on an exchange, where they can actively buy and trade them.

More importantly, almost all crypto users have flat zero technical knowledge. They have no idea how any of it works. They trusted the newspaper headlines. They just about get “number go up.” They won’t be self-custodying en masse.

DeFi traders will tell you that self-custodying is the only way to do anything, but they also get rekt a whole lot.

We concur that users should treat centralized exchanges as risky places to store cryptos. The trouble is, what else to do with them? If you don’t want to do the sensible thing — i.e., dump your coins and get the heck out of crypto — you’re going to have to learn way more about how the technology works than you ever wanted to.

It’s going to suck because — despite the user-friendly Super Bowl ads — crypto is not a product. It’s a pile of wires on a lab bench. Get out your soldering iron, you’re gonna be your own bank.

Crypto collapse: J. Pierpont Moneygone — FTX rekt, bought by Binance

  • By Amy Castor and David Gerard
  • Send us money! Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!

The 2021–2022 crypto bubble made a lot of traders look like geniuses. Then the bubble popped, the tide went out, and the traders turned out to be hugely overleveraged formerly-lucky idiots.

Sociologists know that when a cult prophecy fails, most cultists exit the cult, and the remaining factions turn on each other.

Crypto watchers know that this can also be exceedingly funny.

Imaginary assets, real liabilities

Sam Bankman-Fried’s boosters compare him to the legendary banker J. P. Morgan. He’s spent the crypto collapse bailing out ailing companies to keep the entire market afloat.

Bankman-Fried runs three large crypto enterprises:

  1. Alameda Research, his crypto hedge fund;
  2. FTX, his unregulated offshore crypto casino that doesn’t allow US customers;
  3. FTX US, his exchange for US customers that purports to operate under US law and accepts actual dollars.

On November 2, Coindesk’s Ian Allison posted an explosive story on a partially leaked balance sheet for Alameda. [CoinDesk]

Of Alameda’s $14.6 billion in claimed assets, $5.8 billion is FTT — FTX’s internal exchange token. You can use FTT for cheaper trading fees and increased commissions. FTT is also traded outside FTX.

Allison also noted that $5.8 billion is actually 180% of the circulating supply of FTT!

Alameda’s liabilities are listed at $8 billion, most of which is $7.4 billion of loans — quite a bit of that from FTX.

Alameda is super cashed-up … if you account for FTX’s own FTT token at mark-to-market, and not what you could actually get for that much of their private illiquid altcoin.

To make matters worse, Dirty Bubble notes that a lot of Alameda’s other assets are crypto tokens from other Sam Bankman-Fried enterprises. [Dirty Bubble Media]

Alameda and FTX seem to have printed FTT, pumped its price using customer assets — FTX was quite open that it was the FTT market maker, and there’s no other real demand — and used the mark-to-market value of their illiquid made-up token as collateral for loans, or as evidence that pension funds should invest in crypto companies.

This works great while number is going up!

Regular readers will know that this sort of flywheel scheme is precisely what Celsius Network tried to run with their CEL token and Nexo with their NEXO token. Celsius is bankrupt, and regulators have noticed that Nexo is only solvent if you allow them this particular tricky bit of accounting.

Alameda CEO Caroline Ellison said the leaked balance sheet Coindesk got a hold of was “incomplete,” and there were $10 billion in assets not listed there. [Twitter, archive

The crypto world spent a few days wondering if Alameda was the next Three Arrows Capital.

CZ pulls the plug

Large flows of FTT were noticed on the blockchain on November 6. Binance CEO Changpeng Zhao confirmed that this was Binance selling off its FTT: [Twitter, archive]

“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”

The remaining FTT that Binance sold was worth $530 million. [Bloomberg]

CZ was also annoyed at Bankman-Fried’s lobbying efforts for crypto regulation in Washington: “We won’t support people who lobby against other industry players behind their backs.” [Twitter, archive]

The crypto market is incredibly shaky. Alameda and FTX operate as separate corporations, but the market seems to think they’re closely entwined. Trouble at Alameda leads to worry about FTX.

So panicked holders, thinking Alameda might be insolvent, started withdrawing funds from FTX as fast as possible — and hardly deposited anything at all.

FTX paused all withdrawals on the Ethereum, Solana, and Tron blockchains around 11:37 a.m. UTC on November 8, according to Steven Zheng at The Block. [The Block]

Finally, just after 4 p.m. UTC, Bankman-Fried and CZ announced that Binance was buying FTX. Specifically, they have a non-binding letter of intent, pending due diligence. [Twitter, archive; Twitter, archive]

Essentially, CZ started a bank run on FTX, then swooped in to buy his competitor after breaking it. CZ did to Bankman-Fried what Bankman-Fried has been accused of doing to a string of others.

At present, this is only a letter of intent, not a done deal — CZ is making Bankman-Fried suffer. He could just let FTX go hang.

How screwed are FTX and Alameda?

CZ said FTX was in a “significant liquidity crunch.” This is the sort of “liquidity crunch” that everyone else calls “insolvency.” If it were just liquidity, FTX could have borrowed against its assets and found another way out of this. [Twitter, archive]

We don’t know for sure that Alameda was trading with FTX customer funds — but this sort of fractional reserve operation is the only not-entirely-fraudulent reason that FTX could have run out of customer funds in this way.

Bankman-Fried claimed on November 7 that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” This appears not to have been true, and he later deleted the tweet. [Twitter, archive]

If FTX couldn’t get its funds back from Alameda quickly, that would have then led to the liquidity crunch.

What about FTX US?

Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully backed 1:1, and operating normally.” So at least FTX US explicitly claims it isn’t playing the markets with your deposits. [Twitter, archive]  

FTX US is also attempting to buy the remains of the bankrupt Voyager Digital, a deal that we think is likely to go through.

The separation of customer funds and platforms is the whole point of FTX US versus FTX. It’s there to make Sam look good to regulators.

But it’s all Sam Bankman-Fried. It’s Sam’s left pocket versus his right pocket.

We think that if your paycheck goes into FTX US, you probably want to stop doing that immediately.

What happens next? It’s contagion time!

Alameda has likely been borrowing against the FTT it held — the FTT that is now crashing. (Earlier today, FTT was worth $19; as we post this, it’s trading at $4.60.)

Binance might rescue FTX, but it’s sure not going to rescue Alameda.

This means a series of margin calls by everyone who’s lent to Alameda. If Alameda defaults, those lenders will likely end up with worthless FTT.

BlockFi and Genesis have a pile of money in Alameda. BlockFi is or will be owned in some unspecified manner by FTX US, but that doesn’t make the books balance — there’s already a rumor of a 24-hour margin call by BlockFi against Alameda. [Twitter]

Remember that Three Arrows Capital collapsed when their UST turned out to be worthless. This then took out a pile of other crypto trading firms — most notably Celsius Network and Voyager Digital.

We’re left with two questions:

  1. Who is lending to Alameda?
  2. Who’s lending to those lenders — and risks going down in turn?

The crypto market is not happy. Bitcoin has been up and down like a yo-yo today, from $19,500 just before 4 p.m. UTC to a peak of $20,500 and a trough of $17,500.

We predict more market excitement to come — specifically, a possible Alameda collapse, a chain reaction of lender failures, and attempts to cover sudden balance-sheet holes, much as we saw after the Terra-Luna and Three Arrows collapses.

But Caroline Ellison from Alameda insists there’s another $10 billion behind the sofa or something. Maybe it’s all fine!

Image: FT Alphaville

Celsius bankruptcy hearing November 1, 2022: stablecoins, KERPs and Ponzis

A hearing was held in the Celsius bankruptcy proceedings on November 1 at 11 am ET.

It went on for three hours. I sat threw all of it and drafted a story. David Gerard polished the draft and added more comments and analysis. You can read the full post on David’s blog. [David Gerard]

Here’s what we covered:

  • Secret Celsius employees will not get bonuses.
  • The examiner expands her work plan to include the CEL token and how Celsius marketed its services — send us your coins! We’re your friend, banks are you enemies! HODL!
  • The P-word came up multiple times in the hearing.
  • Celsius can’t sell its $23 million in stablecoins until it’s clear who owns them.
  • The examiner report is a ticking time bomb set to blow up the best made plans.

Please take a moment to subscribe to our Patreon accounts. We need your support, even if it’s just a few dollars a month. Links are in the blog post!

Crypto collapse: States bust Nexo, Terra’s Do Kwon on the run, Celsius CEO resigns, FTX buying Voyager and eyeing Celsius, ETH miners screwed

David Gerard and I just published our latest news roundup and analysis on the ongoing crypto crash.

In this update, we cover:

  • A slew of state regulators drop the hammer on crypto lender Nexo.
  • Terra-Luna: Where in the world is Do Kwon?
  • After a two-week auction, FTX US emerges as the highest bidder for Voyager Digital’s assets. What is SBF buying other than a giant hole in Voyager’s balance sheet?
  • Under pressure from the UCC, Alex Mashinsky steps aside as CEO of Celsius.
  • The US Trustee appoints an examiner to investigate Celsius.
  • Celsius wants to sell off some stablecoins to fund its operations. Texas agencies object! They want the debtor to hold off until the examiner comes out with her report.
  • Crypto miners are unhappy. Good!

Head over to David’s blog to read the full post! [David Gerard]

Image: GPU crypto miners in Vietnam appear to be jet washing their old mining gear before putting the components up for sale.

Crypto collapse: Celsius sues KeyFi, BlockFi’s FTX deal, Scaramucci’s SkyBridge, Voyager suit, 3AC going to jail?

David Gerard and I posted our latest episode of “Everything is going to hell in a handbasket.” This one is on David’s blog! [David Gerard]

In this update:

  • Celsius strikes back — Mashinsky is countersuing Jason Stone and KeyFi. This is what happens when two crypto firms do business on a handshake. (They don’t need a lawyer until they need lots of lawyers!)
  • How FTX saved BlockFi from being as utterly screwed as everyone else.
  • SkyBridge Capital — you can’t withdraw your money, but that’s okay because Anthony Scaramucci is coming out with a new fund!
  • Voyager pays the boys a little less than planned. Its KERP goes through but with smaller bonuses.
  • 3AC accuses Teneo of misleading the High Court of Singapore as to its corporate structure.
  • A bunch of crypto exchanges are treading water and/or closing their doors.
  • The crypto crash is a slow-motion train wreck. We keep writing about it, but what happens next? 

Crypto collapse: Coinbase’s billion-dollar bloodbath, Hodlnaut goes down, Celsius, Voyager, 3AC

It’s time for another episode of “all the money’s gone.” David and I are taking turns posting. This one is on his blog. [David Gerard]

In this episode, we cover:

  • Coinbase’s disastrous Q2 financials.  
  • Hodlnaut’s brave attempt to stay afloat before going under. 
  • More legal wrangling in the Celsius and Voyager bankruptcies.
  • Tether — a secured or unsecured Celsius creditor?
  • Other innocent victims of the CeFi fallout.

If you like our work, please do sign up for our Patreons — here’s Amy’s and here’s David’s.

Bitcoin mining in the crypto crash — the mining companies’ creative accounting

  • By Amy Castor and David Gerard
  • If you like our work, please do sign up for our Patreons — here’s Amy’s, and here’s David’s.

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. 

Cost of mining versus cost of bitcoin [Bloomberg]

Tick … tock. Next block?

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.

Crypto collapse: 3AC’s Grayscale two-step — and where in the world are Zhu and Davies?

We’ve just come out with another crypto crash update — this one is on David’s blog, so head on over there and read it!

Before you read, please take a moment to subscribe to our Patreons — mine is here and David’s is here. Your support is important. The news is free, but we depend on donations.

In this latest update, we talk about:

  • How bankruptcy works and how administrative costs suck up hundreds of millions of dollars before creditors see a penny.
  • How the collapse of UST has hit the crypto market worldwide.
  • Legal ramifications for 3AC founders if they don’t play ball.
  • How 3AC benefited from the GBTC arbitrage opportunity — and how Grayscale and Genesis may have helped!
  • Why Tether may be required to return $840 million in assets to Celsius.
  • The FDIC and the Feds cease and desist statement to Voyager.
  • FTX’s partial bailout offer to Voyager.

Crypto collapse: Terra Luna, 3AC’s Singapore liquidation, Celsius, Voyager 

“Lotta stadiums getting renamed in the next few years”

Ben McKenzie
Daniel Shin and Do Kwon while number was going up. Source: Terraform Labs

TerraUSD

Centralized finance (CeFi) is centralized DeFi — investment firms that played the DeFi markets. CeFi was where a lot of the money in DeFi came from.

CeFi looked like an industry of separate institutions — but it turned out to be a few companies all investing in each other. The chart of who invested in who would look like an inverted pyramid resting on a single point — Terraform Labs’ Anchor protocol.

Anchor offered 20% interest rates on holdings of dollar-equivalent stablecoin Terraform USD (UST), the interest being paid in UST. You could get UST by buying Terraform’s luna token from exchanges like Crypto.com or KuCoin. (Crypto.com Arena used to be Staples Center in Los Angeles.)

All the other CeFi firms just put their money into Anchor at 20%, then offered slightly lower interest to their own investors and skimmed the difference. Terraform made its money by dumping luna on these UST buyers.

UST and luna were both tokens that Terraform made up one day — neither had any reason to be worth anything. Everyone in DeFi knew how rickety UST/luna was for months — they just went along with it while it made them money. A truly fiat currency.

The party ended on May 9, when UST and luna imploded, setting off a cascade of insolvencies across cryptoland. We’re still seeing the fallout.

Crypto hedge fund Three Arrows Capital (3AC) went into liquidation as it was heavily invested in UST and luna. Firms that had big loans to 3AC, such as Voyager, Celsius, and BlockFi, had to file bankruptcy or seek bailouts from other crypto firms. Even crypto exchanges had been playing the CeFi markets with customer funds, and many had to close their doors.

Thousands of South Koreans also lost money when UST and luna collapsed. Terraform Labs founders Daniel Shin and Do Kwon are stuck in South Korea for now, while investigators look into the incident.

On Wednesday, July 20, investigators from the Seoul Southern District Prosecutors Office raided seven crypto exchanges, including Upbit, Bithumb, and Coinone. They’re looking for clues as to whether Terraform intentionally caused the collapse. They also raided some exchange executives’ homes and the home of Daniel Shin. [Yonhap News; Donga News, in Korean]

Elsewhere, South Korean prosecutors have discovered a shell company called “Flexi Corporation” that Kwon allegedly used to launder large sums of money out of Terra and into his own private accounts via over-the-counter trades. How can this be? Kwon said he only took a small salary from Terraform. [KBS, in Korean; Twitter

Three Arrows Capital 

UST and luna went under, and pulled crypto hedge fund Three Arrows Capital down with them.

The Terra collapse completely nuked 3AC. Their exposure was about $600 million. (This is triple what co-founders Su Zhu and Kyle Davies had claimed in mid-June.) [Fortune]

Zhu and Davies are in now hiding. Nobody knows where they are. They told Bloomberg they were headed to Dubai. [Bloomberg, archive]

The pair knew immediately that they were screwed. But on May 11, when investors asked if 3AC had survived the Terra collapse, 3AC told them everything was fine — and kept taking in money! 

3AC had abandoned its Singapore office by late May — they just locked the door and skipped the country — and they finally admitted there were problems only in mid-June.

But Zhu and Davies have been telling the public — especially their creditors — how they lost money too, how they fear for their lives, and how they are so overwhelmed that they can’t turn over banking information just yet, but they’ll get to that soon, for sure.

The two old school buddies say they were shocked by how quickly things unraveled. “What we failed to realize was that luna was capable of falling to effective zero in a matter of days.”

Never mind that the instability of UST/luna was obvious to outside observers, that UST/luna worked exactly the same way as the Titan/Iron pair that collapsed in 2021, and that these guys were supposed to be a crypto hedge fund with alleged competence, and not the drooling crypto degen brainlet rubes they appear to have been trading like.

Zhu and Davies never planned for number go down, and had just been piling leverage on leverage. “We positioned ourselves for a kind of market that didn’t end up happening,” Zhu told Bloomberg. Never mind that a “hedge fund” is named for the act of hedging your speculations, and not just assuming you’re a genius because there’s a bubble going on.

Teneo is the firm handling 3AC’s liquidation, and they are moving quickly. They filed Chapter 15 in the US on July 1. Shortly after, they also filed for recognition of 3AC’s British Virgin Islands liquidation with the Singapore high court. 

Someone leaked Teneo’s 1,157-page Singapore filing earlier this week. The comprehensive document is a gem — it gives us a full update on the bankruptcy proceedings up to July 9. Teneo’s Christopher Farmer and Russell Crumpler left no rock unturned. [Filing, archive]

We recommend reading at least the first 35 pages — it tells the story of Ponzi borrowing, multiple defaults, ghosting creditors and liquidators, and doing deals with some lenders while cutting out others. The rest of the filing is exhibits, other court filings, and affidavits of furious creditors.

3AC’s biggest creditor is Barry Silbert’s Digital Currency Group, the parent company of Genesis Trading, which had a $2.4 billion partially collateralized loan to 3AC. DCG is now stuck with up to $1.1 billion in losses. [The Block]

Other large creditors include Voyager Digital ($687 million), Blockchain.com ($302.6 million, up from the originally claimed $270 million), and Deribit ($80.6 million).  

Kyle Davies’ wife, Chen Kaili Kelly, filed a claim for $65.7 million, and Zhu Su himself submitted a $5 million claim. We have no idea how 3AC was structured to allow an owner and a cofounder to be a listed creditor in a bankruptcy.

Zhu and Davies reportedly made a $50 million down payment on a yacht — with borrowed money, while they defaulted on their lenders. (We’re definitely feeling the Quadriga vibes with this one.) They wanted it to be bigger than any of the yachts owned by Singapore’s billionaires, and ready for pick-up in Italy. Zhu told Bloomberg that the yacht story was a “smear.”

Tai Ping Shan Capital, an over-the-counter desk in the BVI, claimed it operated independently of 3AC, but it turns out to have tight connections. On June 14, 3AC transferred $30.7 million in USDC and $900,000 in USDT to TPS. It’s unclear where those funds subsequently went. [Coindesk]

Good news! In a supplemental Chapter 15 filing, Teneo says it’s recovered $40 million of assets! The bad news is that this is a drop in the bucket. Creditors have so far submitted $2.8 billion in claims, and there’s plenty more coming. [Court filing]

3AC creditors have picked a creditor committee consisting of the largest creditors: Voyager, DCG, CoinList, Blockchain.com, and Matrixport. The committee will work closely with Teneo to “maximize the value of the assets available for distribution.” [The Block

Blockchain.com is struggling to survive in the aftermath. It just laid off 25 percent of staff. [CNBC

In addition to owning CryptoDickButt #1462, 3AC had also started a $100 million NFT fund with pseudonymous NFT trader Vincent Van Dough. They supplied the funding, while Van Dough curated the art. (We mentioned CryptoDickButt last time, and we’re shocked that some of you thought we were just making that up. You should know by now that crypto is always stupider.)

The fund, called “Starry Night Capital” planned to launch a physical gallery in a “major city” by the end of 2021. [The Block, 2021]

The Defiant noted on June 17 that the Starry Night portfolio had been aggregated into a single Ethereum address, probably controlled by Zhu, Davies, and Van Dough. Teneo has noticed and is concerned. [The Defiant]

Celsius

Celsius promised 18% returns on your crypto. When too many people tried to pull their money out at once, Celsius paused withdrawals on June 21 and filed for bankruptcy on July 13. We covered the bankruptcy filing and CEO Alex Mashinsky’s declaration in our last post. 

Celsius admits to a $1.2 billion hole in its balance sheet. Others think the assets are fake and the liabilities are very real, which would put the hole at $4 billion to $5 billion.

Mashinsky says that Celsius’ losses include $15.8 million from investments in UST and luna, along with $40.6 million in loans to 3AC. He also said that Celsius lost 35,000 ether tokens in 2021 due to an incident involving a staking provider that “misplaced” the keys to its tokens. Oops!

Celsius held its first bankruptcy hearing on July 18. SDNY Judge Martin Glenn is presiding over the case. Kadhim Shubber from the Financial Times live-tweeted the hearing, which took place over Zoom. Here’s a copy of the presentation Celsius gave to the judge on Monday. [Stretto; Twitter thread]

Celsius’ lawyer Patrick Nash told the judge there won’t be a liquidation. Celsius has a recovery plan: to HODL — and mine bitcoins! That’s right, Celsius wants to mine their way out of bankruptcy. Nash says the plan is to mine 10,000 bitcoins in 2022.

How did Celsius end up in bankruptcy? You might think it had something to do with Celsius making horrible investments and losing everyone’s money, but no! As Nash explained, Celsius was driven to insolvency by unfounded Terra/luna fears, worries about Coinbase’s bankruptcy risk factor disclosure in May, and a bank run that knocked over an otherwise well-run business.

Former Celsius employees tell a different story. Celsius compliance and financial crimes director Timothy Cradle spoke of the company’s “sloppiness and mismanagement.” [Coindesk

Cradle also told CNBC that Celsius execs “were absolutely trading the token [CEL] to manipulate the price.” A former HR employee said she was told not to do a background check on Yarom Shelem, the former Celsius CFO who was arrested in Israel for fraud. [CNBC]

Celsius creditors have been filing claims since July 18. [Twitter] The letters make for some disturbing reading. Molly White has been posting excerpts on Twitter. It’s a reminder that Celsius investors were ordinary people lured in by Mashinsky’s false promises. [Twitter thread]

Québec pension fund CDPQ also has some questions to answer. CDPQ invested $150 million in Celsius in October 2021 as part of a $400 million funding round co-led by WestCap Investment Partners LLC. “We understand that our investment in Celsius raises a number of questions.” [Bloomberg

Celsius’ next bankruptcy hearing is August 10.

Voyager

Crypto broker Voyager said its secret sauce was “low-risk investments.” Yet it loaned out three-quarters of its assets under management to 3AC.

In June, the firm signed an agreement with Sam Bankman-Fried’s Alameda Ventures for a revolving line of credit so it could keep the music playing a bit longer. But on July 1, Voyager Digital filed Chapter 11 bankruptcy.

Coffeezilla points out that Voyager is trying to sell people on this “Chapter 11 bankruptcy reorg,” and hides the fact that under bankruptcy law, a company that describes itself as a broker cannot file Chapter 11. They should be required to liquidate under SIPA. (Securities Investor Protection Act) [Youtube; Twitter]

The CEO of of crypto media outlet Benzinga will be on the unsecured creditor committee in the Voyager bankruptcy. Jason Raznick is among the largest unsecured creditors for Voyager. [Inside Bitcoins]

Voyager’s next bankruptcy hearing is on August 4. It has $350 million of customer money in an omnibus account at Metropolitan, and it keeps reassuring everyone that they’ll get their money soon! It just has to work things out with the judge first. [Voyager blog; archive]

In the meantime, Bankman-Fried proposed a partial bailout. Under his proposal, Voyager customers would have the opportunity to open new accounts at FTX with a cash balance funded by their bankruptcy claim. They would be able to withdraw the cash, or use it to purchase crypto on FTX. [FTX press release; FT, archive]

Other CeFi firms that are definitely robust and doing fine 

Vauld is a Singapore-domiciled crypto lender that serves mainly customers in India. It stopped withdrawals on July 4 and owes $402 million in crypto to its customers. 

After suspending withdrawals and laying off 30% of its staff, Vauld filed for protection against creditors in Singapore on July 8. [WSJ]

A Singaporean moratorium order is similar to Chapter 11 in the US. It allows Vauld to avoid a complete cessation of operations and liquidation of assets, while it tries to get its act together. 

Vauld later disclosed they were short $70 million, partly from exposure to UST/luna. Vauld issued a statement on July 11. Vauld and Nexo are still discussing an acquisition of Vauld. [Vauld blog, archive]

BlockFi released its Q2 2022 transparency report. The report showed it had $1.8 billion in open loans from retail and institutional investors by the end of June and $600 million in “net exposure.” [BlockFi blog, archive; Decrypt]

Crypto collapse: Celsius’ real liabilities and fake assets, Voyager still bankrupt, 3AC owns CryptoDickButt #1462

David Gerard and I just posted another update on the crypto crash. This one is on his blog, so head on over there and check it out!

If you like our work, please do sign up for our Patreons — here’s mine, and here’s David’s.

In our latest episode of the CeFi/DeFi apocalypse, Celsius filed for Chapter 11 bankruptcy. In the filings presented, the firm has a $1.2 billion hole in its balance sheet. Celsius’ liabilities are real — but its assets are fake. 

Meanwhile, Celsius founders have already made a fortune selling their CEL tokens.

We’re sure it’s all fine though. They probably just need to issue a new token to fix the problem. 

Crypto collapse: 3AC, Voyager, Celsius, and other DeFi casualties

Crypto contagion

The price of Bitcoin has bobbled along above $20,000 since mid-June. There seems to be serious interest in keeping it above that number!

Sam Bankman-Fried has been playing the J. Pierpont Morgan of crypto, rescuing sinking companies with hundreds of millions of dollars in crypto assets. His companies FTX and Alameda have so far bailed out Voyager Digital and BlockFi. He says he’s got a few billion left to keep other crypto companies from slipping into the dark abyss of liquidation. [Financial Post]  

All Bankman-Fried can do is buy time. The entire cryptosystem is imploding. People are finally realizing that most of the money they thought they had in crypto was imaginary. You didn’t lose money in the crash — you lost your money when you bought crypto.  

We’ve been busy keeping up with the fallout, and mining comedy gold. Who thought staying poor would be this much fun? It was nice of the coiners to suggest it.

The liquidation of Three Arrows Capital

Three Arrows Capital (3AC) went into liquidation as of June 27. Two applications were filed in the British Virgin Islands (BVI) where 3AC is incorporated — one by 3AC themselves, and the other, a provisional liquidation, by 3AC creditor Deribit. [LinkedIn]

In a liquidation, a liquidator is appointed to tally up all the assets of a company and distribute them to creditors. It’s the end of the company. Provisional liquidation is not quite the end yet — it’s like bankruptcy protection, even though you know the company is probably insolvent. Wassielawyer has a great thread explaining all this. [Twitter thread]

Why would 3AC petition to liquidate themselves? CEO Zhu Su has shamelessly listed himself as a creditor in the liquidation!

Teneo is the court-appointed liquidator. They’ll be assessing the assets and the claims against the company and its directors. 

The liquidators are able to convert any crypto assets into US dollars. This could mean a few billion dollars worth of bitcoin getting dumped any day now — or maybe not, if 3AC’s own bitcoin wallets turn out to be empty. 

Less than a week later, 3AC filed for Chapter 15 bankruptcy in the US on July 1. 3AC’s assets are (likely) not in BVI, but in the US and Singapore. Chapter 15 allows the BVI court to be recognized in the US — and protects US assets during the liquidation process. [Bloomberg, archive; bankruptcy filing, PDF

According to its bankruptcy filing, 3AC had $3 billion under management in April 2022. Analytics firm Nansen reported the company held $10 billion in assets in March. Money disappears fast in crypto land! [Bloomberg]

Also according to the filing — and we’re sure this is fine! — 3AC’s two founders have gone missing: “Mr. Davies and Mr. Zhu’s current location remains unknown. They are rumored to have left Singapore.” 

The last we heard from Zhu Su on Twitter was a vague tweet on June 14 — “We are in the process of communicating with relevant parties and fully committed to working this out” — a month after the Terra Luna collapse, which set this entire cascade of dominoes falling. [Twitter]

Zhu is currently trying to offload a bungalow in Singapore that he bought in December for SGD$48.8 million (USD$35 million). The house is held in his son’s trust. [Bloomberg]

Fatmanterra (who is pretty on the ball) says he heard Zhu is planning to transfer the funds from the sale of the bungalow to a bank account in Dubai and has no intention of paying creditors with the proceeds. [Twitter]

3AC has other troubles, such as a probe by Singapore’s central bank. The Monetary Authority of Singapore said that 3AC provided them with false information, failed to meet regulatory requirements when moving fund management to the BVI, and ignored limits on assets under management. They weren’t supposed to manage more than SGD$250 million (about $178 million). [MAS press release, PDF; Blockworks]

Oh, look! 3AC’s money has an over-the-counter trading desk: Tai Ping Shan (TPS) Capital. 3AC seems to have a bunch of money sheltered in this entity, and TPS is still trading despite the liquidation order! Sources told Coindesk that TPS was “where the action was” for 3AC,  and where most of 3AC’s treasury is held and traded.

TPS insists it’s completely independent of 3AC, even though Zhu and Davies of 3AC are still part-owners, and the companies have long had multiple links. [CoinDesk; Twitter; CoinDesk]

Peckshield noticed that on 4 July, 3AC transferred $30 million in stablecoins to Kucoin — 10 million USDT and 20 million USDC. This is after the firm was ordered to liquidate. [Twitter]

Rumor has it that 3AC also looked to crypto whales for loans. [Twitter]

3AC also owns a bunch of NFTs — because we all know that NFTs are a great investment and very liquid. [Twitter]

Big plans for Voyager Digital (in bankruptcy)

Less than a week after crypto lender Voyager halted withdrawals, the company filed for Chapter 11 bankruptcy protection in New York on July 5. [Filing; press release; Ehrlich Twitter thread; FT

Voyager says it has $110 million of cash and “owned crypto assets” on hand, plus $1.3 billion in crypto assets on its platform. It owes nearly $1 million to Google and $75 million to Alameda Research — which recently threw Voyager a lifeline of $485 million. The rest of its large unsecured creditors are customers.

Alameda says it’s “happy to return the Voyager loan and get our collateral back whenever works for Voyage” — we’re not even sure what that means. [Tweet]

Voyager holds $350 million of customer money in an omnibus account at Metropolitan Commercial Bank — just an undifferentiated pile of cash, with only Voyager knowing which customers’ money it is. The judge says “That money belongs to those customers and will go to those customers” — but the company will have to sort through who owns what and conduct a “fraud prevention process” (KYC, we presume) first. [Bloomberg, archive]

Voyager sent its customers an email stressing that it’s not going out of business — it has a plan! [Reddit]

“Under this Plan, which is subject to change given ongoing discussions with other parties, and requires Court approval, customers with crypto in their account(s) will receive in exchange a combination of the crypto in their account(s), proceeds from the 3AC recovery, common shares in the newly reorganized Company, and Voyager tokens. The plan contemplates an opportunity for customers to elect the proportion of common equity and crypto they will receive, subject to certain maximum thresholds.”

Instead of getting your crypto back, you’ll get a corn beef hash of magic beans, and we’ll call that money, okay?

The only issues here are that future Voyager tokens, future proceeds from the 3AC recovery, and future equity in the reorganized company will all be close to worthless.

Putting this nonsense through the bankruptcy court will take months, and Voyager customers get to stand back and watch in horror as the value of their crypto plummets to nothing. Look what’s happened to Mt. Gox customers — they are still waiting.

Jim Chanos weighs in on Voyager’s apparently false claims that its money is FDIC insured: “Making false claims to attract depositors/investors is financial fraud, plain and simple. No regulatory jurisdiction tug-of-war need come into play here, if true.” [Twitter]

The FDIC is also looking into Voyager’s FDIC claims. [WSJ]

Patrick McKenzie writes one of his informative blog posts on money transfer systems, this time explaining what a deposit is — and what a deposit isn’t. Unsurprisingly, he rapidly gets to our friends at Voyager Not-A-Bank. [Kalzumeus]

Voyager is just trying to buy time. But given their apparently false claims of FDIC insurance, the odds they can get a judge to let them avoid liquidation this way are zero.

When the accountants get hold of the books and start going through everything, the real story will be shocking. We saw all this happen with QuadrigaCX.

Voyager stock trading was halted on the Toronto Stock Exchange, after the bankruptcy filing. [Newswire

Cornell Law professor Dan Awry writes: “If you thought securities regulation was a jolt to the crypto community, just wait until they learn about bankruptcy law.” [Twitter]

Here’s a Voyager ad preying on artists. Why be a poor artist when you can get rich for free by handing them your crypto? [YouTube]

And here’s a Twitter thread detailing Voyager’s shenanigans in getting a public listing in the first place. They bought a shell company and did a reverse-merger — and then pumped the stock, only to dump it during crypto’s bull run. [Twitter thread]  

It’s worth a closer look at just how much ickiness from Voyager the Metropolitan Commercial Bank risks getting on itself. Dig page 30 of this March 2022 investor presentation, talking up Metropolitan’s foray into crypto customers. The presentation mentions elsewhere how Metropolitan wants to get into crypto. [Investor presentation

Celsius: ‘Ere, he says he’s not dead!

Celsius Network Ltd. has a new board of directors. They’re all bankruptcy attorneys. [Companies House]

But Celsius is not bankrupt yet! As such! In fact, Celsius is still paying debts! If selectively. Though paying down debts is likely a sign that Celsius is getting its books in order before filing for bankruptcy.

Celsius has repaid $150 million worth of DAI to MakerDAO. Celsius still owes MakerDAO about $82 million in DAI. [FXEmpire]

On July 4, Celsius took out 67,000 ETH ($72 million) from Aave (30,000 ETH) and Compound (37,000 ETH). [Etherscan; Peckshield; Tweet]

Celsius has laid off 150 employees. [Ctech]

Let’s keep in mind that Celsius isn’t just about crypto bros wrecking each other. Celsius investors were lied to and stolen from: “Celsius customers losing hope for locked up crypto.” [WSJ]

Celsius’ CEO has a book on Amazon — you know, in case anyone felt they needed the financial wisdom of Alex Mashinsky in their life. What editor at Wiley thought this was a good decision? “This book belongs on the bookshelf of anyone interested in financial independence, cryptocurrencies, bitcoin, blockchain, or the battle between decentralization and centralization.” Also, how to take everyone’s money and lose it playing the DeFi markets. [Amazon]

KeyFi sues Celsius: I’m shocked, shocked to find that Ponziing is going on in here!

0x_b1 was a crypto whale, active on Twitter, who traded vast sums of crypto in the DeFi markets. He was the third-largest DeFi user at one point, with only Alameda Research and Justin Sun doing larger volumes. 0x_b1 was highly respected, yet nobody knew who he was or where he got his wealth from — until now.

0x_b1 turns out to be Jason Stone, the CEO of trading firm KeyFi, a.k.a. Battlestar Capital, who says that KeyFi managed Celsius’ DeFi portfolio from 2020 to 2021. The cryptos that 0x_b1 traded were hundreds of millions of dollars (in crypto) of Celsius customer funds.

As Battlestar Capital, Stone first hooked up with Celsius in March 2019. Battlestar said that customers could earn an astonishing “up to 30 percent” annually from staking their cryptos. [CoinDesk, 2019]

Jason Stone and KeyFi are now suing Celsius, saying they never got paid. A case was filed 7 July by Stone’s attorney, Kyle Roche of Roche Freedman. The complaint is incendiary. [complaint, PDF]

Celsius saw DeFi take off in 2020. Celsius figured they could use customer funds to play the markets and make some yield, so they hired KeyFi to trade for them, with a handshake agreement to share the “hundreds of millions of dollars in profits” —  rather than anything so trad-fi as, e.g., a written contract. (They did finally write up contracts after KeyFi had been working for Celsius for six months.)

Celsius invested cryptos, and its liabilities to customers were denominated in cryptos — but Celsius accounted for everything in US dollars. So if an asset appreciated, Celsius and KeyFi might show a dollar profit — but Celsius might not be able to repurchase the ETH or whatever, to return it to the customer who lent it to them, without losing money to do so.

KeyFi says it would have been trivial to hedge against such an event by purchasing call options at the spot price it originally paid. KeyFi says that Celsius didn’t do this — but told KeyFi it had. It’s not clear why KeyFi didn’t just do something similar themselves.

Celsius gave customers a higher yield for accepting payment in their own CEL tokens. The yield was calculated in dollars. Stone alleges that Celsius used customer bitcoins to pump the price of CEL through 2020, meaning they paid out less CEL for a given dollar yield.

Alex Mashinksy also sold $45 million of his personal CEL holding during this time.

“The Celsius Ponzi Scheme” starts on page 23 of the complaint. Celsius had liabilities to customers denominated in ETH — but bitcoin and ether prices started going up dizzyingly in January 2021:

“87. As customers sought to withdraw their ether deposits, Celsius was forced to buy ether in the open market at historically high prices, suffering heavy losses. Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors. Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality, it had become a Ponzi scheme.”

Jason Stone and KeyFi quit in March 2021. 

In September 2021, Roche wrote demanding a full accounting from Celsius, and all the money that Celsius hadn’t paid KeyFi. This was the start of the present action, and this is what KeyFi is suing over.

This suit is important because it sets out a clear claim that Celsius operated as a Ponzi scheme. If the courts find that Celsius was in fact a Ponzi, then any money or cryptos that Celsius paid out to customers or some creditors could be clawed back in bankruptcy.

Stone is seeking damages for an amount “to be determined at trial.”

It’s not clear that Stone was as great a trader as he paints himself. A report from Arkham details how Stone racked up $350 million in losses. [Arkham, PDF]

CoinFLEX

We’ve been watching online interviews with Mark Lamb of CoinFLEX, which stopped withdrawals after $47 million of bitcoin cash (BCH) went missing.

Lamb, who appears alone in the interviews, keeps saying “we” and referring to his “team.” His wife is the chief marketing officer of CoinFLEX and Sudhu Arumugam is listed as a cofounder, but where’s the rest of the team?

How Lamb’s business really works: [Twitter]

  1. Create fictitious dollars (FlexUSD).
  2. Lock them up in a lending scheme.
  3. Offer unsustainably high yields to attract retail deposits. 

CoinFLEX had a special deal with CoinFLEX investor Roger Ver, where it would not liquidate Ver’s account in the event of a margin call — a highly risky proposition for Coinflex.

Ver had taken a large long position in BCH, which was losing value. [Twitter] Lamb claims Ver needed to deposit $47 million to meet a margin call.

But it looks like Lamb liquidated Ver’s BCH anyway by selling it on Binance, even though he’s claimed to know nothing of this. CoinFLEX claims that Ver owes them $47 million, while Ver considers that Lamb broke their agreement.

Lamb lent one-third of all CoinFLEX’s customer money to one guy. Now, with the “significant loss in liquidating his significant FLEX coin positions,” the deficit for Ver’s account is $84 million. CoinFLEX says that they’ve brought an arbitration against Ver in Hong Kong. It will take 12 months to get a judgment. [blog post]

Meanwhile, CoinFLEX are … issuing a new coin (rvUSD), out of thin air, to pay back their existing customers.

Lamb explained his incredible plan to rescue CoinFLEX in an interview with Ash Bennington on Real Vision. Lamb refused to reveal how big the hole in his books actually is. “I can’t comment on those specific figures at this time.” [Twitter]

But creditors will be made whole and transparency will come — in the fabulous future, along with an audit! 

Lamb’s plan includes issuing rvUSD, a debt token. You get 20% returns — also to be paid in rvUSD. Lamb says the returns will be funded by Ver paying the money, which Ver still maintains he doesn’t owe.

Lamb has clearly thought all of this through carefully with his “team.” Their hard work is apparent — the rvUSD whitepaper is three pages long. [Whitepaper, PDF]

Who would want to buy rvUSD? Lamb told Bennington he has lots of “big” investors lined up. CoinFLEX says it will resume 10% of withdrawals in a week and everyone will get their money as soon as these big investors come through. 

There are 197 million FlexUSD tokens in the wild, according to Coingecko. Even if Ver owes $47 million, there should still be a difference of $150 million in collateral there — if FlexUSD is indeed fully backed by USDC, as Lamb claims it is. Additionally, CoinFLEX still has $10 million of BCH held for its bridge to its SmartBCH chain. And there are user deposits on the exchange.

So what percentage of assets does CoinFLEX still have? Why won’t they release assets and liabilities?

Other legitimate trading firms that are definitely stable going concerns

BlockFi: BlockFi and FTX reached a deal on 1 July, where FTX will buy BlockFi for a “variable price of up to $240 million based on performance triggers” that will provide Blockfi with a $400 million credit facility.  [BlockFi; Twitter thread]

Babel: Orthogonal Trading issued a default to defunct DeFi lender Babel regarding a $10 million loan. [Twitter]

Genesis: Genesis is one of the largest cryptocurrency brokerages for institutional investors. The company confirmed speculation that it had exposure to 3AC. Genesis is part of Digital Currency Group, who put in some cash to prop them up. [Bloomberg; Twitter]  

Blockchain.com: another crypto exchange that thought playing the DeFi markets with customer funds was a good and cool idea. They lost $270 million in loans to 3AC. They told shareholders: “Three Arrows is rapidly becoming insolvent and the default impact is approximately $270 million worth of cryptocurrency and U.S. dollar loans from Blockchain.com.” [CoinDesk]

Uprise: Korean crypto startup Uprise lost $20 million shorting luna in May. They were right about luna — but their short was wiped out anyway, by a sudden spike in the price. [The Block]

CoinLoan: Crypto lender CoinLoan restricted withdrawal limits on 4 July — from $500,000 per day down to only $5,000 per day. They are calling this a “temporary change” to withdrawal limits. Presumably, it’s “temporary” because it will soon be $0. [Tweet; Bitfinex Tweet

They directly say this is because of “a spike in withdrawals of assets from CoinLoan.” How dare you try to get your funds out! [blog, archive]

Nexo: has signed a term sheet to acquire 100% of defunct Indian crypto exchange Vauld. It’s not clear what’s left in Vauld, or if Nexo thinks they can pillage the corpse but pretend Vauld’s considerable liabilities to customers don’t exist. [Coindesk]

Our friend Michel does the numbers. He estimates $300 million was lost by Vauld in the UST/luna collapse. [Twitter]

Bitcoin Core ETP: this is an exchange-traded product, a bit like a bitcoin ETF, but based in Switzerland. How does the ETP plan to make money? By lending out the bitcoins on the DeFi markets! That will definitely work out fine, probably. [FT, paywalled]

Crypto collapse: Exchange troubles, Binance’s friends with machine guns

David and I just finished an update on crypto exchanges. David posted it on his blog, so go check it out over there.

We’ve both covered QuadrigaCX, the Canadian exchange that collapsed in early 2019, in-depth. Over and over again, reporters asked us: “How could something like Quadriga happen?”

It happened because Quadriga had absolutely no oversight. Regulators barely knew Quadriga existed. Nobody in crypto cared while the charming Gerald Cotten was talking good news for bitcoin.

You should assume that exchanges will act against their customers in absolutely any way they can get away with. This is, after all, the historical behavior of crypto companies of any sort.

Crypto skeptics step up lobbying efforts with their first conference

For years, crypto skeptics have been a few talking heads on Twitter shouting out to the abyss to anyone who would listen. In the last year and a half, we’ve been networking and sharing information. Our voices are getting louder — and policymakers are listening!

Last month, a group of us joined forces to urge US lawmakers to crack down on the crypto industry. Twenty-six computer scientists and academics sent a signed letter to US lawmakers criticizing crypto investments and blockchain technology. The move got wide media coverage

Soon after, David Gerard, author of “Attack of the 50-Foot Blockchain” and my co-writer in documenting the current crypto collapse,” journalist Izabella Kaminska, and noted academic John Naughton appeared in front of the UK’s House of Commons Science and Technology Committee to tell them that blockchain technology is devoid of any meaningful use case.  

Now, for the first time, crypto skeptics will have our own conference: the Crypto Policy Symposium. It’s a way for us to network amongst ourselves, and to connect with lawmakers to make sure they have the information they need to shape future policy. 

Scheduled to take place September 5 to 6 in London and virtually, the event is being organized by Stephen Diehl, a software engineer and co-author of “Popping the Crypto Bubble,” and Martin Walker. A long-term follower of attempts to apply “blockchain” to banking, Walker is a director of the Center for Evidence-Based Management, a leading management think-tank.

The main goal of the symposium, as Diehl explained it to me, is to give policymakers access to the information and material they need to make informed decisions around crypto regulation. 

Right now, politicians are mainly hearing from lobby groups, funded by deep-pocket crypto companies with lots of venture capitalist backing. Diehl hopes the effort will bring together domain experts and policymakers from the European Union, and the US to address public interest problems.

“Europe and the US are the big fronts, and in the US, there is a bill going through and a lot of debate in the executive branch right now,” he said, in reference to recent legislation introduced by pro-bitcoin Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.). If passed into law, the bill will create new loopholes for token-based startups to skirt securities laws.

Over a span of two days, symposium attendees will get to watch a dozen panels lasting 45 minutes each. “Ideally, panels will include three to four people — someone from tech, someone from law, and someone from journalism,” Diehl said. “The aim is to offer a balanced perspective.” 

Topics will include bitcoin’s environmental impact, the politics of bitcoin — yes, David Golumbia, author of “The Politics of Bitcoin” will be talking — ICOs, NFTs, Web3, and the current DeFi domino collapse. Diehl and Walker have enlisted three dozen notable crypto skeptic luminaries — including myself and David Gerard! — in journalism, tech, and academia, as panelists at the event. 

Diehl hinted at the possibility of a high-profile keynote but we will have to wait for that to be confirmed to learn more. He and Walker have invited members of regulatory and financial agencies across the US and Europe, including the FCA, ECB, IMF, SEC, Finma, and Bafin.

“White papers are being written across every branch of the US government, from the Securities and Exchange Commission to the Treasury Department to the FBI,” Diehl added. “Biden has commissioned all of this work and the bureaucrats are woefully uninformed. This is a problem, and that is why work like this is really important.” 

He and Walker also want the symposium to be a meeting place for crypto skeptics. “I feel like a lot of us are islands. I want everyone to know everyone, make friends, and create a community. That is how things actually get done in advancing this kind of policy work,” he said.

It’s been a lot of work organizing the event, but Diehl is optimistic: “There have been hundreds of other crypto industry conferences but this is the first one where critical voices are welcome to speak freely about these important issues.”

I’m not sure I’ll make it to London, but I’m looking forward to taking part in this event virtually.

Who had Voyager Digital next in the DeFi dead pool?

  • By Amy Castor and David Gerard
  • Become a patron and support our work — Amy’s Patreon is here; David’s is here.

In our last episode, Voyager Digital was looking shaky. Voyager had a massive hole in its balance sheet, courtesy of Three Arrows Capital (3AC), which had imploded. Voyager had maxed out its line of credit from Alameda for the month — it could only withdraw $75 million in credit for each 30-day rolling period. 

On Friday, July 1, Voyager announced it was “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” [Voyager, archive; WSJ]

How screwed is Voyager? Three-quarters of their assets — about $600 to $700 million in BTC and USDC owed by 3AC — are missing. [Press release; Yahoo Finance]

How screwed are Voyager’s customers? “Your debit card will stop working … exploring strategic alternatives,” the crypto broker said. “We are in discussions with various parties regarding additional liquidity and the go-forward strategy for the company.” [Voyager blog, archive]

Whoever had Voyager Digital next in the DeFi dead pool: you may now claim your 100 trillion luna.

Voyager’s business

Voyager is — or was — a crypto investment firm. You deposited dollars or crypto into Voyager, and you earned up to 12% interest on your deposits via their Earn program. The company claimed 3.5 million customers. 

It also had a mobile app that allowed you to trade 100 different cryptocurrencies commission-free. [Voyager, archive]

Voyager was a “CeFi” company, or centralized DeFi — an investment firm that played the DeFi markets.

It also offered a debit card. Customers deposited dollars, which were immediately converted to the USDC stablecoin, which Voyager paid a yield of up to 9% on. “Earn like crypto, spend like cash.” [Voyager, archive]

Voyager very much wanted its customers to treat the company like their bank — and deposit their money. It encouraged customers to directly deposit their paychecks into their Voyager debit card account.

It’s not a bank, though. We’ll see in a moment why that turned out to be important.

The company offered “even greater rewards” if you owned their VGX token! This was aimed squarely at the cryptocurrency audience: “When it comes to your crypto, every satoshi counts.” With VGX you could get up to a 12% yield! [Voyager; archive]

Voyager is listed on the Toronto Stock Exchange. However, its services were only available to Americans — not Canadians. [Voyager terms of use; archive]

At the end of March 2022, Voyager got cease-and-desist letters and orders to show cause from the states of New Jersey, Alabama, Oklahoma, Texas, Kentucky, Vermont, and Washington — who considered Voyager’s yield platform to be an unregistered offering of securities. [CoinDesk; press release]

Voyager’s liabilities

Here is Voyager’s press release for their Q3 2022 numbers, released on May 16. (Voyager’s financial year is July to June, so January to March is Q3.) The headline announced that revenue was up — $102 million! [Voyager, archive]

But the numbers show that year-over-year losses were also way up — Voyager had operating losses of $43 million. The company was burning money to pump up revenue and user numbers. Voyager promoted both these numbers to investors in June 2022 without mentioning the losses that were getting it there. [Voyager, archive]

The Q3 2022 numbers were announced when UST and luna had gone to zero, and Terraform’s Anchor protocol had collapsed. Voyager CFO Evan Psaropoulos said on the quarter’s earnings call: [Seeking Alpha]

“It is important to note with recent news related to UST and LUNA, that Voyager does not have UST listed on the platform and has not placed any access in any DeFi lending protocols such as the Anchor platform.”

But it turned out that Voyager was heavily exposed to UST, luna, and Anchor — via their largest debtor, Three Arrows Capital. The guys at 3AC knew they were in terminal trouble, but hadn’t told anyone yet — including their creditor, Voyager.

In the Q3 2022 earnings call, voyager CEO Steve Ehrlich said:

“We also spoke to all of our counterparties on lending and verified that there were no issues. In the past, we’ve had questions from investors about one counterparty. And as of today, we have no exposure to that counterparty.

… the people we lend to are some of the biggest names in the industry. As we stated, too, we had conversations and verified there was no contagion with them, had conversations with every single one of them. And since we limit who we lend to, to these parties, we’re really comfortable we did not have to call anything in and we had zero issues with any of our borrowers.”

Which counterparty could that have been?

Voyager released new financials yesterday afternoon, July 1, as part of its announcement that it was suspending withdrawals, detailing the 3AC-shaped hole in their numbers.

Is Voyager FDIC insured? No, but they’d like you to think so

If you had dollars on deposit with Voyager, you should assume they’re gone and not coming back.

Voyager tried very hard to imply in the large print that customer deposits were insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) if something happened to Voyager — and only admitted in the small print that they weren’t. Voyager tweeted on November 12, 2020: [Twitter; archive]

“Have you heard? USD held with Voyager is FDIC insured up to $250K. Our customers’ security is our top priority. Start growing your crypto portfolio today.”

But your dollars had already been converted into USDC. Voyager then used the USDC, a liability to you, as collateral for loans it took out elsewhere. The user agreement explicitly allows this: [Voyager, archive]

“Consent to Rehypothecate. Customer grants Voyager the right, subject to applicable law, without further notice to Customer, to hold Cryptocurrency held in Customer’s Account in Voyager’s name or in another name, and to pledge, repledge, hypothecate, rehypothecate, sell, lend, stake, arrange for staking, or otherwise transfer or use any amount of such Cryptocurrency, separately or together with other property, with all attendant rights of ownership, and for any period of time and without retaining a like amount of Cryptocurrency, and to use or invest such Cryptocurrency at Customer’s sole risk.”

Your dollars were transformed into Voyager’s USDC the moment you deposited.

Voyager has an omnibus account with Metropolitan Commercial Bank, where it deposited its customers’ dollars. An omnibus account is a single holding account for money from multiple investors. Voyager acts as the money manager of the omnibus account — and maintains full control of the money.

Pass-through FDIC insurance, which would cover the customers and not just Voyager, is a bit tricky. You have to meet several requirements. Fundamentally, the funds need to be a liability of the bank, e.g., Metropolitan, not the account holder, e.g., Voyager. [FDIC; Seward & Kissel LL]  

If Metropolitan failed, the FDIC insurance would cover Voyager up to $250,000. But Voyager’s customers were not FDIC insured. And Metropolitan is doing just fine. 

Voyager repeatedly and consistently led customers to believe their US dollar deposits were safe if Voyager failed.

Usually, Voyager just tried to imply that customer deposits were directly FDIC-insured — and then detailed in the fine print how this wasn’t the case. Occasionally, Voyager slipped up and claimed this directly, such as in this blog post of December 18, 2019: [Medium, archive]

“Through our strategic relationships with our banking partners, all customers’ USD held with Voyager is now FDIC insured. That means that in the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000). We’re excited to offer our customers an extra level of security, so they can feel more comfortable holding their USD with Voyager.” [emphasis ours]

Let’s say that again: “you are guaranteed a full reimbursement”

This claim was simply not true.

Metropolitan Bank has issued a statement on Voyager and FDIC insurance — we expect they’ve been getting a lot of calls from Voyager customers: [Metropolitan, archive]

“FDIC insurance coverage is available only to protect against the failure of Metropolitan Commercial Bank. FDIC insurance does not protect against the failure of Voyager, any act or omission of Voyager or its employees, or the loss in value of cryptocurrency or other assets.”

Several Voyager customers on Reddit were very confused about all of this. Many were trying to figure out how to file an insurance claim to get their cash back. Others were learning for the first time that their dollar deposits were not, in fact, safe. [Reddit; Reddit

Reddit user DannyDaemonic called up the FDIC: [Reddit]

“I called the FDIC earlier and they said Voyager Digital LLC was not a bank and was not FDIC insured. They said for future reference, LLCs cannot be banks, ever. So when you see “LLC,” any claim of FDIC insurance is false. They did confirm that Metropolitan Bank is FDIC Insured but just because Voyager Digital stated “each Customer is a customer of the Bank” doesn’t mean they were funding those accounts. It just means if Metropolitan Bank failed, any holdings Voyager Digital placed under your name there would be safe. But since it’s only Metropolitan Bank that’s FDIC insured, Voyager Digital failing wouldn’t trigger the FDIC insurance.

I imagine Voyager is allowed to withdrawal from those accounts to pay debt or make investments. It’s also possible, if Voyager Digital is insolvent, that they haven’t even been depositing cash into the Metropolitan Bank for quite some time.

It doesn’t look good.”

The precise law that Voyager seems to be playing fast and loose with is 18 USC 709 — “False Advertising or Misuse of Names to Indicate Federal Agency”: [Onecle]

“… or falsely advertises or otherwise represents by any device whatsoever the extent to which or the manner in which the deposit liabilities of an insured bank or banks are insured by the Federal Deposit Insurance Corporation…”

As of March 31, Voyager claimed to have $175 million in cash. At present, it’s not clear they have any cash. They said they had $355 million in cash “held for customers” as of June 30, per their press release. However, they haven’t spelled out liabilities, including “cash owed to customers.” What really matters to customers is the balance held at Metropolitan, and we don’t know what that is.

At this point, Voyager either needs to get another loan from FTX or declare bankruptcy.

If Voyager does need cash, they’ll have to sell their bitcoins and ether — driving down the prices of those. 

The purpose of CeFi is to mis-sell investments

The CeFi lenders who are collapsing right now, such as Voyager and Celsius, are in the business of packaging up extreme risk as a shiny product — so that they can mis-sell these to the public as retail-suitable investments.

DeFi is a bunch of wires on a lab bench — not a finished product. CeFi puts a shiny box around the breadboarded system held together with clips and lumps of explosive.

The CeFi companies then lie to their customers that the remarkable interest rates on offer can exist without a jaw-dropping amount of hidden risk.

The very stupid and very crypto thing is when their fellow crypto institutions think “this is fine!” and do things like putting all their money into 3AC, which put all its money into Anchor.

It’s supposed to be retail — and not institutional traders — that sees a 5%, 10%, or 20% interest rate and stops thinking of anything but the big number. Perhaps crypto companies need to be legally restricted to retail-friendly investments? Or we could send some of these guys to jail for fraud, that works too.

Crypto collapse latest: the DeFi dead and dying list

David and I just finished an update on the spreading DeFi contagion. David posted it on his blog, so head on over there and read it.

We recap the latest on Three Arrows Capital (3AC), Voyager Digital, Celsius, BlockFi, and more.

In 2012, Trendon Shavers (Pirateat40) ran a Ponzi scheme on the BitcoinTalk boards called Bitcoin Savings and Trust. At one point, BTCST held 7% of all bitcoins.

Pirate’s Ponzi had a pile of pass-through funds — which invested only in BTCST. There were even funds insuring against the collapse of BTCST … who put the insurance premiums into BTCST.

History repeats, but only the stupid stuff. 

Image: Night of the Living Dead, 1968

CoinFLEX gets Roger Verified — the mystery of the missing Bitcoin Cash

David and I just wrote up a story on CoinFlex — a small exchange that we hadn’t heard of until recently. This is a fascinating story, which I am sure will get more interesting. David posted the story on his blog.

CoinFLEX also turns out to run a huge dark-pool crypto derivatives exchange and/or repo market, serving some notable proportion of the wider crypto trading market. 

Mark Lamb, who runs the exchange, has found himself $47 million short. An ultra high net work individual owes CoinFlex money, Lamb says. Apparently, this individual turns out to be Roger Ver.

Lamb has come up with a way to solve the problem, and it all has to do with the magic of tokenization! You’ll want to listen to the entire Bloomberg interview.

How 2020 set the stage for the 2021 bitcoin bubble

  • By Amy Castor and David Gerard
  • Be sure to subscribe to our Patreon accounts — Amy’s is here; David’s is here.

We often get asked by reporters: “Why are crypto markets crashing?” The short answer is because there’s no money left, and no more coming in. The long answer is more complicated.

Bitcoin peaked at $64,000 in April 2021 and again at $69,000 in November 2021. Many of the network effects that drove the price of bitcoin to those heights were put into place in 2020.

The same network effects are now working in reverse. Markets take the stairway up and the elevator down.

The 2017 bubble was fueled by the ICO boom and actual outside dollars entering the crypto economy. Bitcoin topped out just below $20,000 in December 2017.

The crash that followed over the next 12 months was like air being slowly let out of a balloon — much like the 2014 deflation after Bitcoin’s prior 2013 peak. ICO and enterprise blockchain promoters tried to keep going through 2018 like everything was fine, but the party was clearly over.

In contrast, the 2022 crash is like a wave of explosive dominoes all crashing down in rapid succession. How did we get here?

A long, cold crypto winter

Let’s start in early 2020. It was the crypto winter. Bitcoin’s price had spent two years bobbling up and down from infusions of tethers, and traders on BitMEX rigging the price to burn margin traders. (And, allegedly, BitMEX itself burning its margin traders.) [Medium, 2018]

But the dizzying price rises were peculiarly bloodless. There was little evidence of fresh outside dollars from retail investors — the ordinary people. The press would write how bitcoin had just hit $13,000 — but they’d also call people like us, and we’d tell them about Tether.

Throughout 2019 and into 2020, crypto pumpers were desperately trying scheme after scheme — initial coin offerings, initial exchange offerings, bitcoin futures, selling to pension funds — to lure in precious actual dollars and get the party re-started.

Then Corona-chan knocked on the door.

Act I, Scene I: Pandemic Panic

On March 13, 2020, the US government declared a pandemic emergency. The panic drove down stocks and crypto. Investors sold everything and flew to the safest, hardest form of money they could find: the US dollar! Bitcoin dropped from $7,250 to $3,858 over the course of that day.

It was an edge-of-the-cliff moment for bitcoin. Any further drop could force liquidations and create a ripple effect across dozens more crypto projects. For bitcoin miners, the price of bitcoin was now below the cost of mining.

Worse, only two months away was the bitcoin “halvening” — an every-four-year event when the number of bitcoins granted in each freshly-mined block halves. If bitcoin dropped too low in price, the miners wouldn’t be able to pay their enormous power bills. The crypto industry desperately needed to push bitcoin’s price back before May.

Tether spins up the printing press

Tether, launched in 2014, is an offshore crypto company that issues a dubiously backed stablecoin of the same name. Tether works like an I.O.U. — Tether supposedly takes in dollars and issues a tether for each dollar held in reserve. Since Tether has never had an audit, nobody knows for sure what’s backing tethers. The company has an extensive history of shenanigans — see Amy’s Tether timeline.

The issuance of tethers in March 2020, was 4.3 billion, but that’s when the Tether printer kicked into overdrive — minting tethers at a clip nobody had ever seen before. 

Tether minted 4.4 billion tethers in April 2020 — crypto’s version of an economic stimulus package. By May, Bitcoin reached $10,000, just in time for the halvening.  

Once the price of bitcoin goes up, though, there’s no way to turn off the Tether printing press. It has to keep printing. If the price of bitcoin goes down, people will sell, creating an exodus of real dollars from the system. So Tether kept printing, pushing the price of bitcoin ever skyward. 

In May, June, and July 2020, Tether issued a combined total of 3 billion tethers. In August, when the price of bitcoin reached $12,000, Tether issued another 2.6 billion tethers. In September, when bitcoin slid below $10,000, Tether issued another 2.2 billion tethers. 

By the end of 2020, Tether had reached a market cap of 21 billion. The printer kept going. In 2021, Tether pumped out 60 billion more tethers. By May 2022, Tether’s market cap had reached 83 billion. Bitcoin’s price peaks in April 2021 ($64,000) and November 2021 ($69,000) both coincided with an influx of tethers into the market. 

You can’t just redeem tethers. Only Tether’s big customers — it has about ten of them — can redeem. You can try to sell your tethers on an exchange. But you can’t just go up to Tether to redeem them for dollars. There were no redemptions of tethers, ever, until May and June 2022 — the present crash.

Curiously, Tether’s reserve as declared to New York in April 2019 contained $2.1 billion of actual money — cash and US Treasuries. But Tether’s reserve attestation as of March 31, 2021, still contained just $2.1 billion of cash and treasuries!

This suggests that the rest of the reserve over that time was made up of whatever worthless nonsense Tether could claim was a reserve asset — loans of tethers, cryptocurrencies, and dubious commercial paper credited at face value rather than being marked to market.

Dan Davies, in his essential book Lying for Money, marks this as the key flaw in frauds of all sorts: they have to keep growing so that later fraud will keep covering for earlier fraud. This works until the fraud explodes.

Tether marketcap, CoinGecko

GBTC’s ‘reflexive Ponzi’

Grayscale’s Bitcoin Trust (GBTC) played a huge role in keeping the price of bitcoin above water through 2020. It offered a lucrative arbitrage trade, an exploitable inefficiency in markets, that a lot of big players went all-in on.

GBTC was an attempt to wrap Bitcoin in an institutionally compatible shell. All through 2020 and into 2021, GBTC was trading at a premium to bitcoin on the secondary markets. Accredited investors would acquire GBTC at net asset value — some large proportion being in exchange for direct deposits of bitcoins, not purchases for cash, although all the accounting was stated in dollars. After a six-month lock-up, the accredited investors would sell the shares to the public at a 20 percent premium, sometimes more. Rinse, repeat, and that’s a 40 percent return in a year. 

GBTC functioned like a “reflexive Ponzi.” When Grayscale bought more bitcoin for the trust, that drove up the price of bitcoin, which pushed up the GBTC premium, which resulted in investors wanting more GBTC and Grayscale issuing more shares. 

Grayscale ran a national TV advertising campaign at the time, targeted at ordinary investors. The ads warned that disaster was imminent, inflation would eat your retirement, and bitcoin was better than gold — so you should buy bitcoin. Or, this shiny GBTC, which was implied to be just as good! [YouTube, 2019]

In a bull market, retail investors didn’t mind paying a premium — because the price of bitcoin kept going up. The market treated GBTC as if it was convertible back to bitcoins, even though it absolutely wasn’t. [Adventures in Capitalism]

Grayscale ultimately flooded the market with GBTC. When an actual bitcoin ETF became available in Canada, GBTC’s premium dried up. Since February 2021, GBTC has been trading below the price of bitcoin. As of March 2022, the trust holds 641,637 bitcoins. And they’re staying there indefinitely — leaving GBTC holders locked in on an underwater trade.

The rise of decentralized finance

Decentralized finance, or DeFi, didn’t directly pump the price of bitcoin in 2020. But DeFi was one of the stars of the 2021 bubble itself, and eventually caused the bubble’s disastrous explosion. All of the structures to let that happen were set up through 2020.

DeFi is an attempt to put traditional financial system transactions — loans, deposits, margin trading — on the blockchain. Regulated institutions are replaced with unknown and unregulated intermediaries, and everything is facilitated with smart contracts — small computer programs running on the blockchain — and stablecoins.

All through 2019 and 2020, DeFi was heavily promoted as offering remarkable interest rates. At a time of low inflation, this got coverage in the mainstream financial press. Here’s the diagram the Financial Times ran, depicting DeFi as a laundromat for money: [FT, paywalled, archive

The key to DeFi is decentralized exchanges, where you can trade any crypto asset that can be represented as an ERC-20 token — such as almost any ICO token — with any other ERC-20 token.

DeFi also lets you take illiquid tokens that nobody wants, do a trade, assign them a spurious price tag in dollars, then say they’re “worth” that much. This lets dead altcoins with no prospective buyers claim a price and a market cap, and attract attention they don’t warrant. If you put a dollar sign on things, then people take that price tag seriously — even when they shouldn’t.

You can also create a price for a token that you made up out of thin air yesterday and use DeFi to claim an instant millions-of-dollars market cap for it. 

This was the entire basis for the valuation of Terraform Labs’ UST and luna tokens — and people believed those “$18 billion” in UST were trustworthily backed by anything.

You can also use those tokens you created out of thin air as collateral for loans to acquire yet more assets. An unconstrained supply of financial assets means more opportunities for bubbles to grow, and more illiquid assets that you can dump for liquid assets (BTC, ETH, USDC) when things go wonky.

By September 2020, five hundred new DeFi tokens had been created in the previous month. DeFi hadn’t hit the mainstream yet — but it was already the hottest market in crypto. [Bloomberg]

The problem was that in 2020, to use DeFi you had to know your way around using the actual blockchain. Retail investors, and even most institutional investors, haven’t got the time for that sort of dysfunctional nonsense.

Retail was more attracted to the “CeFi” (centralized DeFi) investment firms, such as Celsius and 3AC, offering impossible interest rates. These existed in 2020 but didn’t gain popularity until the following year when the bubble had started properly.

A new grift: NFTs 

By late 2020, crypto promoters were searching for a new grift to lure in retail money, one that would have broader mainstream appeal. They soon found one. 

NFTs as we know them got started in 2017, with CurioCards, CryptoPunks, and CryptoKitties. NFT marketing had continued through the crypto winter — in the desperate hope that ordinary people might put their dollars into crypto collectibles.

The foundations of the early 2021 burst of art NFTs were laid in late 2020, when Vignesh Sundaresan, a.k.a. Metakovan, first started looking into promoting digital artists, such as Beeple — whose $69 million JPEG made international headlines for NFTs in March 2021, and officially kicked off the NFT boom. 

Late 2020 also saw the launch of NBA Top Shot, the only crypto collectible that ever got any interest from buyers other than crypto speculators. Top Shot traders were disappointed at how incredibly slow Dapper Labs was at letting them withdraw the money they’d made in trading — and became some of the first investors in the Bored Apes.

Coiner CEOs 

By late 2020, several big company CEOs started promoting the concept of bitcoin on the company dime. These included Jack Dorsey at Twitter, Dan Schulman at PayPal, and Michael Saylor at business software company MicroStrategy.

In October 2020, Saylor revealed his company had bought 17,732 bitcoins for an average of $10,000 per coin. Over the next 18 months, Microstrategy would plow through its cash reserves and take on debt to funnel more money into bitcoin, spending $4 billion in the process. Buying MSTR shares become the newest way for retail investors to bet on bitcoin. Saylor also put himself forward as bitcoin’s latest prophet and crazy god.

PayPal set up bitcoin trading in 2020, though only as a walled garden, where you couldn’t move coins in or out. Still, it made gambling on crypto more accessible to retail investors. 

Bitcoin miners start ‘hodling

By late 2020, we suspect there was very little actual cash in crypto. But bitcoin needed to continue its upward ascent. 

The biggest tip-off that the fresh outside dollars had stopped flowing was when bitcoin miners stopped selling their coins. Bitcoin miners mint 900 new bitcoins per day. They typically sell these to pay their energy costs — power companies don’t accept tether — and buy new mining equipment, which becomes obsolete every 18 months. At $20,000 per bitcoin, that would equate to $18 million, in actual dollars, getting pulled out of the bitcoin ecosystem every day.

In October 2020, Marathon Digital (MARA), one of the largest publicly traded miners, stopped selling its bitcoins. They took out loans, which allowed them to buy their equipment and hold their bitcoins. Marathon even bought additional bitcoins!  

Borrowing against mined bitcoins, and not selling them, reduced selling pressure on bitcoin’s price in dollars. US-based miners used this model heavily from July 2021 onward — taking low-interest loans from their crypto buddies, Galaxy Digital, DCG, and Silvergate Bank. Although, in 2022, the loans started running out and they had to start selling bitcoins.

This also set Marathon up for potential implosion when energy prices went up and the price of bitcoin dropped in 2022. Marathon is presently losing $10,000 on every bitcoin they mine. 

Easy money?

2020 was a weird year of market panics, bored day traders, and easy money — for some.

The Federal Reserve dealt with the pandemic panic by showering the markets with stimulus money. At the retail end, $817 billion was distributed in stimulus checks (Economic Impact Payments), $678 billion in extended unemployment, and $1.7 trillion to businesses, mostly as quickly-forgiven loans. [New York Times]

Bored day traders, stuck at home working their email jobs and unable to go out in the evening, got into trading stocks on Robinhood as the hot new mobile phone game. Car rental firm Hertz, a literally bankrupt company, whose stock was notionally worth zero, started going up just because Robinhood users thought it was a good deal. Instead of crypto becoming a more regular investment like stocks, the stonks* had turned into shitcoins.**

What isn’t clear is how much of this money found its way to the crypto market. At least some of it did. A study by the Federal Reserve Bank of Cleveland noted: “a significant increase in Bitcoin buy trades for the modal EIP amount of $1,200.” This increased BTC-USD trade volume by 3.8%! [Cleveland Fed]

But the trades only seemed to raise the price of bitcoin by 0.07%. And the dollars in question were only 0.02% of the money distributed in the EIP program.

* A cheap and nasty equity stock; the term comes from a meme image. [Know Your Meme]
** We are sorry to tell you that this is literally a technical term in crypto trading.

The final push over the line

A lot of channels into crypto were put into place in 2020. But the last step was to pump the price over the previous bubble peak of $20,000.

With that bitcoin number achieved, the press would cover the number going up — because “number go up” is the most interesting possible story in finance. That would lure in the precious retail dollars that hodlers needed to cash out.

The push started in late November, with deployments of tethers to the offshore exchanges. On December 18, 2020 — exactly three years after the previous high — bitcoin went over $20,000 again. And that’s when a year and a half of fun started.

Crypto collapse latest: the contagion spreads

David Gerard and I just wrote a newsletter. We had a Zoom call for an hour today, and we’d been collecting notes and trying to decide what to write next. Finally, we just decided to throw a bunch of stuff in a pile and call it a newsletter. You can read it on his blog.

So much is happening so fast that it’s almost difficult to keep up. We have a few ideas for more stories that we’ll be working on next. Stay tuned!

Also, if you are a patron, you qualify for free Bitcoin: It Can’t Be That Stupid stickers, if you ask. Just send me a DM on Patreon!

Scam Economy podcast: Crypto Jenga: Celsius and the Latest Crypto Crash 

Earlier this week, David Gerard and I did a podcast together for Matt Binder’s Scam Economy. It just went up this evening. [Youtube; Apple Podcast; Google Podcast, Spotify]

The interview is based on a popular story that David and I recently co-wrote: “The Latecomer’s Guide to Crypto Crashing,” which has now been translated into German and French, and soon, possibly Italian.

It’s as if the entire crypto space has been held together by a giant lynchpin, someone pulled out the lynchpin, and now everything is tumbling to the ground.

UST crashed, Celsius followed, and more recently, Three Arrows Capital has failed to meet lender margin calls. Small crypto funds are next to fall, as David spelled in his recent story on yield farm platform Finblox.

The network effects that brought bitcoin to its heights from 2020 to 2021 are now working in reverse.

The early history of NFTs, part 4 — Game sprites on the blockchain: CryptoPunks

CryptoPunks was one of the earliest crypto collectibles on the Ethereum blockchain, following Curio Cards by six weeks. 

The launch on June 9, 2017, didn’t go as smoothly as planned. A horrible bug in the code meant buyers could take the seller’s Punk — and their money back too!

Larva Labs, the firm behind the project, was able to fix the problem, but it came back to haunt them years later in the form of V1 Punks. 

This is an early draft for our book, which David just posted over on his blog. [David Gerard]

The Latecomer’s Guide to Crypto Crashing — a quick map of where we are and what’s ahead

Since November 2021, when Bitcoin hit its all-time high of $69,000, the original cryptocurrency has lost 70 percent of its face value. And when Bitcoin falters, it takes everything else in crypto down with it. 

The entire crypto space has been a Jenga stack of interconnected time bombs for months now, getting ever more interdependent as the companies find new ways to prop each other up.

Which company blew out first was more a question of minor detail than the fact that a blow-out was obviously going to happen. The other blocks in the Jenga stack will have a hard time not following suit. 

Here’s a quick handy guide to the crypto crash — the systemic risks in play as of June 2022. When Bitcoin slips below $20,000, we’ll officially call that the end of the 2021 bubble.

Recent disasters

TerraUSD collapse — Since stablecoins — substitutes for dollars — are unregulated, we don’t know what’s backing them. In the case of TerraUSD (UST), which was supposed to represent $18 billion … nothing was backing it. UST crashed, and it brought down a cascade of other stuff. [David Gerard; Foreign Policy; Chainalysis Report]

Celsius crumbles — Celsius was the largest crypto lender in the space, promising ridiculously high yields from implausible sources. It was only a matter of time before this Ponzi collapsed. We wrote up the inevitable implosion of Celsius yesterday. [David Gerard]

Exchange layoffs — Coinbase, Gemini, Crypto.com, and BlockFi have all announced staff layoffs. Crypto exchanges make money from trades. In a bear market, fewer people are trading, so profits go downhill. Coinbase in particular had been living high on the hog, as if there would never be a tomorrow. Reality is a tough pill. [Bloomberg; Gemini; The Verge]

Stock prices down — Coinbase $COIN, now trading at $50 a share, has lost 80% of its value since the firm went public in June 2021. The company was overhyped and overvalued.

US crypto mining stocks are all down — Bitfarms ($BITF), Hut 8 Mining ($HUT), Bit Digital ($BTBT), Canaan ($CAN), and Riot Blockchain ($RIOT). Miners have been borrowing cash as fast as possible and are finding the loans hard to pay back because Bitcoin has gone down.

UnTethering

Crypto trading needs a dollar substitute — hence the rise of UST, even as its claims of algorithmic backing literally didn’t make sense. What are the other options?

Tether — We’ve been watching Tether, the most popular and widely used stablecoin, closely since 2017. Problems at Tether could bring down the entire crypto market house of cards.

Tether went into 2020 with an issuance of 4 billion USDT, and now there are 72 billion USDT sloshing around in the crypto markets. As of May 11, Tether claimed its reserve held $83 billion, but this has dropped by several billion alleged “dollars” in the past month. There’s no evidence that $10.5 billion in actual dollars was sent anywhere, or even “$10.5 billion” of cryptos.

Tether is deeply entwined with the entire crypto casino. Tether invests in many other crypto ventures — the company was a Celsius investor, for example. Tether also helped Sam Bankman-Fried’s FTX exchange launch, and FTX is a major tether customer.

Tether’s big problem is the acerbic glare of regulators and possible legal action from the Department of Justice. We keep expecting Tether will face the same fate as Liberty Reserve did. But we were saying that in 2017. Nate Anderson of Hindenburg Research said he fully expects Tether execs to end the year in handcuffs. 

Other stablecoins — Jeremy Allaire and Circle’s USDC (54 billion) claims to be backed by some actual dollars and US treasuries, and just a bit of mystery meat. Paxos’ USDP (1 billion) claims cash and treasuries. Paxos and Binance’s BUSD (18 billion) claims cash, treasuries, and money market funds.

None of these reserves have ever been audited — the companies publish snapshot attestations, but nobody looks into the provenance of the reserve. The holding companies try very hard to imply that the reserves have been audited in depth. Circle claims that Circle being audited counts as an audit of the USDC reserve. Of course, it doesn’t.

All of these stablecoins have a history of redemptions, which helps boost market confidence and gives the impression that these things are as good as dollars. They are not. 

Runs on the reserves could still cause issues — and regulators are leaning toward full bank-like regulation.

Sentiment

There’s no fundamental reason for any crypto to trade at any particular price. Investor sentiment is everything. When the market’s spooked, new problems enter the picture, such as: 

Loss of market confidence — Sentiment was visibly shaken by the Terra crash, and there’s no reason for it to return. It would take something remarkable to give the market fresh confidence that everything is going to work out just fine.

Regulation — The US Treasury and the Federal Reserve were keenly aware of the spectacular collapse of UST. Rumour has it that they’ve been calling around US banks, telling them to inspect anything touching crypto extra-closely. What keeps regulators awake at night is the fear of another 2008 financial crisis, and they’re absolutely not going to tolerate the crypto bozos causing such an event.

GBTC — Not enough has been said about Grayscale’s Bitcoin Trust, and how it has contributed to the rise and now the fall in the price of bitcoin. GBTC holds roughly 3.4 percent of the world’s bitcoin.  

All through 2020 and into 2021, shares in GBTC traded at a premium to bitcoin on secondary markets. This facilitated an arbitrage that drew billions of dollars worth of bitcoin into the trust. GBTC is now trading below NAV, and that arbitrage is gone. What pushed bitcoin up in price is now working in reverse.

Grayscale wants to convert GBTC into a bitcoin ETF. GBTC holders and all of crypto, really, are holding out hope for the SEC to approve a bitcoin ETF, which would bring desperately needed fresh cash into the crypto space. But the chances of this happening are slim to none.

The bitcoins are stuck in GBTC unless the fund is dissolved. Grayscale wouldn’t like to do this — but they might end up being pressured into it. [Amy Castor]

Whales breaking ranks — Monday’s price collapse looks very like one crypto whale decided to get out while there was any chance of getting some of the ever-dwindling actual dollars out from the cryptosystem. Expect the knives to be out. Who’s jumping next?

Crypto hedge funds and DeFi

Celsius operated as if it was a crypto hedge fund that was heavily into DeFi. The company had insinuated itself into everything — so its collapse caused major waves in crypto. What other companies are time bombs?

Three Arrows Capital — There’s some weird stuff happening at 3AC from blockchain evidence, and the company’s principals have stopped communicating on social media. 3AC is quite a large crypto holder, but it’s not clear how systemically intertwined they are with the rest of crypto. Perhaps they’ll be back tomorrow and it’ll all be fine. [Update: things aren’t looking good. 3AC fails to meet lender margin calls.] [Defiant; Coindesk; FT]

BlockFi — Another crypto lender promising hilariously high returns. 

Nexo — And another. Nexo offered to buy out Celsius’ loan book. But Nexo offers Ponzi-like interest rates with FOMO marketing as well, and no transparency as to how their interest rates are supposed to work out.

Swissborg — This crypto “wealth management company” has assets under management in the hundreds of millions of dollars (or “dollars”), according to Dirty Bubble Media. [Twitter thread]

Large holdings ready for release

Crypto holders have no chill whatsoever. When they need to dump their holding, they dump.

MicroStrategy — Michael Saylor’s software company has bet the farm on Bitcoin — and that bet is coming due. “Bitcoin needs to cut in half for around $21,000 before we’d have a margin call,” Phong Le, MicroStrategy’s president, said in early May. MicroStrategy’s Bitcoin stash is now worth $2.9 billion, translating to an unrealized loss of more than $1 billion. [Bloomberg]

Silvergate Bank — MicroStrategy has a $205 million loan with Silvergate Bank, collateralized with Bitcoin. Silvergate is the banker to the US crypto industry — nobody else will touch crypto. Silvergate is heavily invested in propping up the game of musical chairs. If Silvergate ever has to pull the plug, almost all of US crypto is screwed. [David Gerard]

Bitcoin miners — Electricity costs more, and Bitcoin is worth less. As the price of Bitcoin drops, miners find it harder to pay business expenses. Miners have been holding on to their coins because the market is too thin to sell the coins, and borrowing from their fellow crypto bros to pay the bills since July 2021. But some miners started selling in February 2022, and more are following. [Wired]

Mt. Gox — at some point, likely in 2022, the 140,000 bitcoins that remained in the Mt. Gox crypto exchange when it failed in 2014 are going to be distributed to creditors. Those bitcoins are going to hit the market immediately, bringing down the price of bitcoin even further.

Feature image by James Meickle, with apologies to XKCD and Karl Marx.

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Crypto predictions for 2022: A bitcoin crash is coming—eventually. Regulators will kill stablecoins, soon NFTs

I wrote a prediction piece last year, wherein I spoke to several nocoiner luminaries to get their predictions for 2021. I also gave my own predictions. Were we right? Did any of our predictions hold true?

Well, yes, we were spot on. All our predictions were 100% correct!

We predicted 2021 would be a year of comedy gold. It was! Where to begin? El Salvador adopted bitcoin as a national currency. You can’t get any dumber than that—or maybe you can. How about Bitcoin Volcano bonds? Or Elon Musk sending the bitcoin price falling when he tweeted a broken heart emoji?

Several of us also predicted bitcoin would collapse in value. Bitcoin has not suffered a stupendous crash yet, but the conditions are ripe for a crash—loose regulatory oversight and a lack of real dollars in the system. It’s just taking a little longer than we thought. 

Bitcoin started 2021 at $32,000. It went on to set a new record high of $69,000 in November 2021. It’s now below $50,000—already a 30% drop in price. The higher it goes, the farther it has to fall. The question is not if crypto will plunge, but when.  

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, who has been following Bitcoin since 2012, told me he expected the crypto markets to collapse six months ago. 

“I’m surprised the [bitcoin] mining hasn’t collapsed yet, but I think it’s being propped up by mining companies HODLing and going into debt on power bills.” Bitcoin miners mint 900 new bitcoins per day and they have to sell those for cash to pay their monstrous electricity bills.

Weaver added: “I think the huge hype with Crypto.com, Robinhood, and the others IS drawing in some retail suckers, just not enough.”

Robinhood, the popular stock trading app, starting shifting into crypto in 2020. In an attempt to become a household name, Singapore crypto exchange Crypto.com plastered its name on L.A.’s Staples Center. The media attention helps lure more real dollars into the crypto ecosystem.

Carol Alexander, professor of finance at Sussex University, told CNBC that she expects bitcoin to collapse to as low as $10,000 in 2022. As far as she’s concerned, bitcoin “has no fundamental value.” It’s not a real investment, just a “toy.”

To keep the game going a little bit longer, coiners will need to come up with a new way to lure dumb money into the crypto markets. How will they do this in 2022?

In 2017, initial coin offerings were the answer. In 2021, NFTs lured in the dumb money. David Gerard, author of “Attack of the 50-foot Blockchain,” predicts “there will be some attempt to invent a new form of crypto magic bean that’s more blitheringly stupid than NFTs, but I’m at a loss as to what it could be.”

Changing tides

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, is reluctant to make bitcoin price predictions but he thinks change is definitely in the air. “If 2022 doesn’t see a massive crash plus regulations, enforcement, etc then I will be really shocked,” he said in a private chat. 

Stolfi pointed out that critics are less restrained now. In the past, they would tell you to “be careful.” Now they are outright calling bitcoin a Ponzi. Headlines tell the story. A recent opinion piece in the FT carried the headline: “Why bitcoin is worse than a Madoff-style Ponzi scheme.” On CNBC: “‘Black Swan’ author calls bitcoin a ‘gimmick’ and a ‘game,’ says it resembles a Ponzi scheme.” And a June 2021 headline in Vice read: “President of the Minneapolis Federal Reserve Called DOGE a Ponzi Scheme.”

Stablecoins

Stablecoins spun completely out of control in 2021. The supply grew 388%, driven by decentralized finance (DeFi) and derivative trading, according to research by The Block

In early 2021, there were 21 billion tethers sloshing around in the crypto markets. Twelve months later, that number quadrupled to 78 billion. Tether is now shamelessly moving tethers in 1 billion and 2 billion batches. And where are Tether’s two remaining principles—CEO Jean-Louis van der Velde and CFO Giancarlo Devasini? Nowhere to be seen is where. They disappeared from the public eye long ago. I suspect we won’t see them again until the U.S. DOJ catches up to them. 

Growth in the second most popular stablecoin was even more staggering in 2021. Circle’s USDC went from 4 billion to 42 billion. In July 2021, Circle shocked everyone when it announced plans to go public via a SPAC, thereby sidestepping the financial scrutiny of an IPO.

We haven’t heard any news on that SPAC since, even though the merger was supposed to close in Q4 2021. My guess is the heat is excessive.

Both Tether and Circle claim that their stablecoins are fully backed by reserves, but the big question is — how carefully are these reserves audited? Some of those reserve assets, like commercial paper, are riskier to convert to cash. Regulators are worried that stablecoins could fuel digital-era “bank runs” if a large number of investors rush to redeem them.

The Biden administration said in 2021 that it wants to regulate stablecoin issuers the same way as banks. SEC Commission Chairman Gary Gensler likened stablecoins to “poker chips at the casino.”

I predict stablecoin companies will continue to feel the pressure from regulators in 2022, and eventually, it will become impossible for them to stay in business. They are becoming too big of a risk.

NFTs — another regulatory loophole to be closed

In 2021, NFTs became dinner table talk after a Beeple piece sold for $69.3 million in crypto at a Christie’s auction. It turned out, the person behind the sale was the former operator of a shady cryptocurrency exchange in Canada, who partnered with Beeple on plans to fractionalize the NFT with a B20 token. He actually gave Beeple 2% of the B20 supply and kept 60% for himself.

Out of seemingly nowhere, NFTs have now become a $40 billion market.  

The initial coin offering market was huge in 2017, until regulators gave fair warning that most ICO tokens were unregistered securities. I predict the regulatory noose will tighten on the NFT market as well. Regulators are already warning that fractionalized NFTs resemble illegal securities. 

If NFT marketplaces are deemed art dealers, they could fall under the bank secrecy act, which means platforms will have to ID their customers and submit suspicious activity reports to the government. 

In short, 2022 will be a year that regulations put a stranglehold on crypto. Until then, expect more comedy gold and corruption in El Salvador, where President Nayib Bukele is now trading bitcoin on his phone and tweeting about it.

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El Salvador’s bitcoin plan: take your USD and turn them into worthless tethers

Last week, Nayib Bukele, the President of El Salvador, announced a plan to make bitcoin legal tender. The big announcement came via video on the second day of the Bitcoin 2021 conference in Miami. 

Leading up to the big reveal, Jack Mallers, the founder of crypto payments company Strike, strode back and forth across the stage at the conference, wearing a baseball cap and hoodie. While flashing what looked like a diamond studded ring on his finger, he spoke of the woes of the unbanked and the tyranny of central banks. He then went on to play Bukele’s video to a crowd of thousands of bitcoiners.   

Days later, Bukele pushed through his legislation, and on June 8, the tiny Central American country adopted bitcoin as legal tender. Alongside the US dollar, which the country transitioned to in 2001, businesses now must accept bitcoin as payment — unless they don’t have the technology.

El Salvador has partnered with Strike, a mobile app launched in March, to make payments in bitcoin possible. Strike claims it will allow Salvadorans living abroad to send money home instantaneously, without fees. Remittances, a lifeline to the country, surpassed $5.6 billion in 2019. 

While the concept sounds ideal, a closer look reveals worrisome details: Bukele’s plan, it appears, is to confiscate US dollars from remittances and force people to accept a worthless dollar substitute through the Strike app. 

In a Medium post written in January, Mallers claims that with Strike, “El Salvador users not only get access to free and instant international transfers anywhere in the world, but they also get access to a synthetic digital dollar on their smartphone.” 

Those “synthetic dollars” Mallers is talking about? Those are tethers.

Tether, for the uninitiated, is the dubiously backed stablecoin recently ousted from New York after the New York attorney generally brought up allegations of fraud. There are currently 63 billion tethers in existence, with billions more being minted each month. Each tether is supposed to be worth $1, but nobody knows for sure what, if anything, is backing the dollar-pegged cryptocurrency. Tether, by its own admission, is only backed by 3% cash. 

Strike uses a proprietary version of the Lightning Network, a second layer bitcoin solution for payments. The Lightning Network has never lived up to promises, and is not suitable for payments on a grand scale. Brazilian computer scientist Jorge Stolfi details its shortcomings in a Reddit post.

Here’s how Strike works: Say you want to send $1,000 from Los Angeles to your mom back home in El Salvador. You deposit your hard-earned cash into your Strike account. Strike debits your account and converts your $1,000 into bitcoins. It then sends the bitcoin to El Salvador where “it arrives in less than a second” on the wings of the Lightning Network. 

Once your bitcoin crosses the border, Strike converts it into tethers and plunks those into your mom’s Strike account. Now, instead of sending your mom real dollars, which she needs to pay bills and buy food, you have just sent her a bundle of tethers. What can she do with them?

She can use them to buy bitcoin and then she can sell the bitcoin for cash. If that sounds like a lot of extra layers, well, yes. Mallers explains how it’s done. Your mom can “simply go to a Bitcoin ATM or local Bitcoin teller and receive their local fiat currency” — in other words, actual US dollars. 

Let’s ignore for now the fact that there are only two bitcoin ATMs in the entire country of El Salvador — one in El Sunzal and the other in El Zonte — according to CoinATMRadar. 

Anyhow, Mallers lays out the details:

  • An El Salvador user requests to sell $100 worth of Bitcoin from Bitcoin ATM.
  • El Salvador user scans the Bitcoin ATM QR code with their Strike app.
  • Strike debits their Tether balance and converts it to bitcoin.
  • Strike then sends the bitcoin to the desired Bitcoin ATM address.
  • The ATM receives the bitcoin and issues the user their local fiat currency.

Essentially, you are converting back and forth to bitcoin twice. Here is the problem with that: Bitcoin is extremely volatile. The price can go up one day and down the next. On April 14, bitcoin hit a record of $64,829 but has since lost nearly half its value. How’s that for remittances?

“The FX risk in this system is massive,” Frances Coppola, a UK-based writer, who spent 17 years in banking, said in a tweet. “It’s not transaction fees people should be worrying about, it is the potential for massive USD losses because of the BTC conversion.”

FX, or foreign exchange, is the cost of converting from one currency to another. With bitcoin, that cost includes transaction fees — which were as high as $58 in April, according to YCharts — and the cost of bitcoin’s potential drop in value. (Conversely, if bitcoin goes up in value, Strike users won’t benefit because their money is converted dollar for dollar into tethers.)  

Bukele has set aside a reserve fund of $150 million at the country’s development bank BANDESAL to guarantee these currency exchanges — so merchants using Strike for bitcoin payments will not have to suffer any loss in value.* The trust has been set up in partnership with Strike.

In a Twitter Spaces call with several bitcoiners, Bukele explained that the cash in the reserve fund will eventually be replaced with bitcoin. “We are going to provide those US dollars, but we are going to get bitcoin in exchange.”

As bitcoin skeptic David Gerard points out in a more elaborate story, this is an excellent way to launder filthy bitcoin.

“There is absolutely no way to run Know-Your-Customer to international standards on Bitcoin transactions, and also have Bitcoin treated like legal tender. So they’re setting up a gateway for questionable bitcoins,” he said.

What’s to come of all this? My guess is that the $150 million fund will be sucked dry in no time by bad actors. The actual acceptance of bitcoin for payments of any sort in the country will be negligible.

Tether will see some level of adoption as “synthetic dollars” in Strike accounts, but Salvadorans will soon learn it’s worthless when they can’t convert tethers to actual spendable dollars. 

I would not be surprised if the Strike app suffers some major hack within six months. Also, I suspect international banks will severe ties with the local economy, meaning El Salvador’s economy will sink even further as a result. 

Bukele, who was elected in 2019 from the center-right Grand Alliance for National Unity party, has joined Mallers and a host of other bitcoiners in adding laser eyes to his Twitter profile. He is now tweeting about his next big idea: a project to mine bitcoin using energy from one of El Salvador’s volcanoes.

*Update June 12: it appears the $150 million reserve fund is only there to protect merchants from the volatility of bitcoin, not regular users. I also added a link to the Twitter Spaces call where El Salvador’s president says the fund will ultimately be replaced by Bitcoin. (Sounds a bit like Tether’s reserves!)

Feature Image: Twitter

Related articles:
The curious case of Tether: a complete timeline of events

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‘How can $24B in tethers move a $650B Bitcoin market cap?’ and other mathematically illiterate questions

A question, or some version of it, that keeps popping up on social media lately is, “How can $24 billion worth of tethers move a $650 billion bitcoin market cap?”

This is “a blitheringly stupid question on multiple levels, starting with basic arithmetic,” bitcoin hater David Gerard said on Twitter. “It’s also a perennial dumb question.”

The question is being put forth by bitcoiners in an attempt to put people’s minds at ease about Tether. The thesis is that if tethers were to vanish—something that could happen if the U.S. Department of Justice were to give Tether the Liberty Reserve treatment—it would have little impact on bitcoin’s price, so you should stop worrying and keep buying bitcoin.

Someone posed the query recently on r/buttcoin. I am going to take a stab at sensibly answering the question in three parts starting with, What is market cap?

1. Market cap is meaningless nonsense

Market cap is a nonsensical number when it comes to bitcoin. It’s calculated by multiplying the last transaction price of bitcoin by the number of bitcoins in circulation—currently $35,000 x 18.6 million.

That doesn’t mean that people bought every bitcoin in existence for that price. The vast majority of people who own bitcoin bought it at a far lower price than what it is today. It also doesn’t mean that if everyone suddenly decided to sell all of their bitcoins, each bitcoin would bring them $35,000.

In fact, it doesn’t mean that bitcoin has any value at all other than the hope that some bigger dummy will stroll along who is willing to pay more for it than you did. Bitcoiners like to imagine that bitcoins are valuable because there will only ever be 21 million of them. That makes them scarce.

Beanie Babies were scarce in the 90s, too, with some fetching upwards thousands of dollars on eBay. But by the end of the Beanie Baby bubble, no amount of scarcity could make them desirable. They became worthless

Market cap is just another way to make something that is worthless appear valuable.

Market cap came out of the traditional finance world. And then websites like CoinMarketCap came along and began applying the term to bitcoin. In the stock market, market capitalization refers to the total value of a company’s share of stock. But while companies have an intrinsic value, bitcoin does not. There is nothing behind bitcoin. It’s not a company. It is not a thing. It is simply a number in a database.

Here is an example of how silly market cap is when applied to crypto. Say I create 1 million CastorCoins and start listing them on some little-known offshore exchange for $1. Suddenly CastorCoin has a market cap of $1 million dollars. Does that mean I have a million dollars? No, it does not. 

Or, as u/Ifinallycracked puts it on r/buttcoin: “If a bog roll contains 100 sheets and I manage to sell one sheet for a dollar, that doesn’t make it a $100 bog roll. Apply same logic to Bitscoin market cap. Success.”

Once you grasp that the bitcoin market cap does not mean that people have spent $650 billion on bitcoin, $24 billion worth of tethers—which represents 3% of the total bitcoin market cap—becomes a lot more significant.

2. Price is determined at the margins

The price of bitcoin is determined at the margins. If you want to drive up the price of bitcoin, you don’t have to buy every single bitcoin at the current price level. You simply have to scoop up the ones that are for sale. 

Money flowing into bitcoin is what keeps the price afloat. If demand increases and people are willing to pay more for bitcoin, that pushes the price up. The more dollars people throw at it, the higher BTC will go. And it doesn’t matter if you are buying bitcoin with real dollars on a banked exchange like Coinbase—or fake dollars on an offshore exchange like Binance, Huobi, or Bitfinex.

Image: CoinCompare

Right now, the latter is more prevalent—there are far more tethers flowing into bitcoin than actual dollars. In fact, 55% of all bitcoin is currently traded against tethers while only about 15% trade against real dollars, according to CoinCompare.

This is what makes the current bitcoin bubble different than the last. In 2017, when the price of bitcoin ran up to nearly $20,000, there were a lot more real dollars in the system and only 1.5 billion tethers in circulation. Now, it’s mostly tethers pushing up the price of BTC.

3. Bitcoin is illiquid

Bitcoin is relatively illiquid. According to data from Glassnodes, 78% of all bitcoin are not moving. In other words, of the 18.6 million bitcoins currently in existence, only about 4.2 million are in constant circulation.

At least 3 million bitcoin are lost because people like this guy can’t find their keys. (Just because you are the former CTO of Ripple, that doesn’t make you clever when it comes to safekeeping bitcoin.) And there are still plenty of folks holding on to their BTC in the hopes it will go stratospheric. Strong hands!

As a result, it doesn’t take a large buy or sell request to move the price of bitcoin. Printing billions of dollars out of thin air and using it to put supply-side pressure on a market as thin as bitcoin forces the prices up. Conversely, if enough people were to get panicky and rush to sell their bitcoin—weak hands!—the results could be catastrophic. Literally, the entire market cap can go to zero in a moment.

The whole point of Tether is to push up the price of bitcoin and other cryptocurrencies, and then move those assets to OTC desks and banked exchanges, where they can be turned into fiat.

Update on August 16, 2022, to remove an analogy that nobody understood at the end.

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