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.
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.
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.
The Securities and Exchange Commission is being inundated by thousands of comments solicited by Grayscale to support the conversion of their Grayscale Bitcoin Trust (GBTC) into a spot bitcoin ETF. [Comments on NYSE Arca Rulemaking]
As part of the filing, the SEC provides a comment period of 240 days. NYSE Arca filed the application on October 19, 2021, so the last day for comments is June 16.
Bitcoin skeptics refer to GBTC as the Bitcoin Roach Motel or Hotel California, a place you can check in but never leave because once bitcoin goes into the trust, it has no obvious way of getting out. I covered the details of how the trust works in an earlier blog post. [Amy Castor]
GBTC is currently trading at 25% below the price of bitcoin. Grayscale argues that converting it to a spot bitcoin ETF will allow GBTC to trade in line with its underlying asset.
In truth, Grayscale can redeem shares and return investors their money, but it stands to make hundreds of millions of dollars more with an ETF, so you should definitely spam the SEC instead!
Grayscale has encouraged spamming the commission through a massive ad campaign at Amtrak stations. Grayscale CEO Michael Sonnenshein is going around giving press interviews, pointing out how mean and evil the SEC is for never having approved a spot bitcoin ETF in the past.
On its website, Grayscale offers a link that opens up directly to a ready-made email, making it mindlessly easy to spam the SEC in a few simple clicks.
Jorge Stolfi, a computer scientist in Brazil, has been reading through the SEC comments one by one and posting his thoughts on Twitter.
Nearly 4,000 comments have been submitted so far, and 98% of them are positive in that they support converting GBTC to a bitcoin ETF. Some of the names look suspiciously made up.
Thousands of the comments are copies of the same Grayscale spam message, and many don’t even bother to edit the “[YOUR NAME HERE]” placeholders.
Thanks to the torrent of spam letters to the SEC re making GBTC into an ETF, I learned two more financial terms: "contango" and "backwardation".
I feel embarrassed for having to learn them from guys who cannot even edit "***[YOUR NAME HERE]***" placeholders in spam messages.
Many of the comments parrot Sonnenshein’s remarks to the press about how the SEC has approved a bitcoin futures ETF; therefore, it should also approve a spot. (This is nonsense. The former is an actual bet on dollars. Nobody touches BTC at any point in the process.)
Hopefully, the SEC will read the spam comments and understand them for what they are: clear evidence that thousands of GBTC investors do not understand the nature of bitcoin, and that GBTC should not be converted to an ETF for the sake of those same investors.
In reading through the comments something else becomes alarmingly clear — many retail investors are stuck with GBTC in their retirement accounts. Thanks to a television ad campaign that Grayscale ran in 2020, many falsely believed that bitcoin was a hedge against inflation, rather than an incredible risky and volatile asset.
Amongst the positive comments, Coinbase submitted a ridiculously long (27 pages) letter trying to demonstrate that the bitcoin market cannot be manipulated. They somehow forgot to mention the 83 billion tethers currently sloshing around in the crypto markets. [SEC Comment]
Last year, Coinbase settled charges with the CFTC that one of its own employees was wash trading the vast majority of a certain coin’s volume on their own exchange, and they apparently weren’t aware of it until much later. I’m sure they have a lot of credibility on this subject!
Voices against the GBTC conversion
There are a few powerful letters to the SEC against the conversion. These are definitely worth a read for anyone who wants to get a better understanding of how GBTC works.
Writing on behalf of a client, Ropes & Gray Attorney David Hennes does a fantastic job underscoring how Grayscale is royally screwing over GBTC holders. [SEC Comment]
As Hennes points out, Grayscale bought $700 million worth of its own GBTC shares at a discount and is authorized to buy back $1.2 billion.
If GBTC converts to an ETF, Grayscale would then be authorized to sell the corresponding bitcoins at the market price, thus making some $200 million to $350 million in profit at the expense of those who sold them the shares at discount.
Since Grayscale is no longer issuing shares of GBTC, it can redeem GBTC at net asset value without running afoul of Regulation M, as it had in the past. However, it chooses not to because it is collecting a 2% management fee on $25 billion in BTC assets held in the trust.
“The SEC should thus deny the conversion of GBTC into an ETF unless and until Grayscale first (a) initiates a redemption program for GBTC that complies with Regulation M; and (b) agrees to distribute to GBTC’s other shareholders on a pro-rata basis any and all gains resulting from any Grayscale purchases of GBTC shares at a discount and corresponding sales of GBTC shares on an undiscounted basis,” wrote Hennes.
Computer scientist David Rosenthal, who gave a popular lecture at Stanford warning about the hazards of crypto, says all of the reasons the SEC had for rejecting previous bitcoin spot ETFs — and there have been close to a dozen of them — are still valid.
“The constant pressure to approve a spot Bitcoin ETF exists because Bitcoin is a negative-sum game. Bitcoin whales need to increase the flow of dollars in so as to have dollars to withdraw. The SEC should not pander to them.” [SEC Comment]
Rosenthal also comments on my Grayscale story in his blog. [DSHR blog]
Along that same vein, David Golumbia, author of “The Politics of Bitcoin,” warns “manipulators in the crypto space need a constant inflow of real dollars to prop up their manipulation so that they can continue to dump their tokens into the hands of ever more unsuspecting consumers. That they are obviously engaged in selling their own tokens for a profit while bullying others into buying at the same time is only one of many tactics they use that are illegal in well-ordered markets.” [SEC Comment]
In his own submission, Stolfi states that bitcoin is a tool of crime. It allows dark markets to exist and flourish. It has taken the place of the now-defunct criminal bank Liberty Reserve. And it functions as a natural Ponzi. [SEC comment]
“Bitcoin does not provide any benefits for society; on the contrary, it has caused enormous damage; and this balance cannot ever improve, because the technology is inherently wasteful, impractical, illegal, and insecure.”
Someone going by “Concerned Citizen of the Word” noted that “It’s just a matter of time before the Bitcoin bubble pops due to any of many reasons, and a lot of people, especially Americans, are going to lose massively.” [SEC comment]
If you are similarly disturbed by Grayscale’s campaign of misinformation, I encourage you to write to the SEC and make your own voice heard — with original commentary, which I’m sure they would appreciate. You can submit your comments here.
If you like my work, consider supporting my writing by subscribing to my Patreon account for $5 or $20 a month. Every little bit helps.
If you happen to be taking Amtrak and pass through Penn Station or Union Station, you will notice something unusual: every available ad space has been taken up by Grayscale.
“We care about crypto investors,” the crypto asset manager says in its ads. Grayscale is urging the public to write to the Securities and Exchange Commission and convince them to approve the first spot bitcoin ETF in the U.S.
Grayscale wants to convert its Grayscale Bitcoin Trust (GBTC) into a bitcoin ETF after flooding the market with shares. GBTC is trading 25% below its net asset value, and investors are rightfully pissed off. Grayscale wants them to be upset with the SEC, but the regulator isn’t really to blame. If anything, the SEC should have warned the public about GBTC years ago.
Over the last eight years, Grayscale has been telling investors to buy shares of GBTC, advertising the fund as a way to get exposure to bitcoin without having to buy bitcoin.
Accredited investors plowed dollars (or maybe bitcoins) into the fund all through 2020, looking to take advantage of an arbitrage opportunity. They could buy in at NAV, and after a 6 to 12-month lockup, sell on the open market for a premium. All through 2020, that premium was around 18%, on average.
Everybody was happy until February 2021, when the Purpose bitcoin ETF launched in Canada. Unlike GBTC, which trades over-the-counter, Purpose trades on the Toronto Stock Exchange, close to NAV. At 1%, its management fees are half that of GBTC. Within a month of trading, Purpose quickly absorbed more than $1 billion worth of assets.
Demand for GBTC dropped off and its premium evaporated. Currently, 653,919 bitcoins (worth a face value of $26 billion) are stuck in an illiquid vehicle. Welcome to Grayscale’s Hotel California.
The plan all along, Grayscale claims, has been to convert GBTC into a bitcoin ETF. On October 19, 2021, NYSE Arca filed Form 19b-4 with the SEC. The regulator has until early July to respond.
In all probability, the SEC will reject the application, just as it has every single spot bitcoin ETF application put before it to date.
Bitcoin’s price is largely determined by wash-trades, whales controlling the market, and manipulation with tethers. SEC Chair Gary Gensler knows this. He taught a course in blockchain and money at MIT Sloan before his appointment by the Biden administration.
This is Grayscale’s second time around. It applied for a bitcoin ETF in 2016, but withdrew the application during the 2017 bitcoin bubble because “the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market.” Meanwhile, the trust’s assets under management grew as did Grayscale’s profits.
Closed-end fund
“Inflation is rising, we need to diversify!” a panicked woman tells her son over the phone in the middle of the night. “I’m buying crypto!” She hangs up. Her son rolls over in bed. The scene is from a series of TV commercials Grayscale ran in 2020 to convince the public that GBTC was a sound investment.
Digital Currency Group is the parent company of Grayscale. Both firms were founded by Barry Silbert. DCG is invested in hundreds of crypto firms. It owns crypto outlet CoinDesk, which essentially functions as a PR machine for the entire crypto industry.
Initially called the “Bitcoin Investment Trust,” GBTC launched in September 2013. It was promoted as an investment vehicle that would allow hedge funds and institutional investors to gain exposure to bitcoin, without having to deal with custody. Coinbase has been the custodian of the fund since 2019 when it bought Xapo, the previous custodian.
Legally, GBTC is a grantor trust, meaning it functions like a closed-end fund. Unlike a typical ETF, there is no mechanism to redeem the underlying asset. The SEC specifically stopped Grayscale from doing this in 2016. Grayscale can create new shares, but it can’t destroy shares to adjust for demand. Grayscale only takes bitcoin out to pay its whopping 2% annual fees, which currently amount to $200 million per year.
In contrast, an ETF trades like a stock on a national securities exchange, like NYSE Arca or Nasdaq. An ETF has a built-in creation and redemption mechanism that allows the shares to trade at NAV via arbitrage. Authorized participants (essentially, broker-dealers, like banks and trading firms) issue new shares when the ETF trades at a premium and redeem shares when they trade at a discount, making a profit on the spread.
How it all works
Grayscale periodically invites rich investors to pledge money into the fund in private placements at its discretion. The minimum investment is $50,000. Grayscale uses the cash to buy bitcoin and issues shares of GBTC in kind.
Investors can also pledge bitcoin directly — a great advantage if you happen to be a large holder who wants to unload your BTC without crashing the market. (More on this later.)
After a lockup period, investors can sell their GBTC on the open markets. Anyone can buy and sell GBTC on OTC Markets Group, the main over-the-counter marketplace, or via a brokerage account, like Schwab or Fidelity.
Up until early last year, GBTC has typically always traded at a premium on the open market. That premium occasionally soared to over 100%. During the 2017 bitcoin bubble, GBTC traded as high as 130% above NAV.
Why would anyone pay the premium? Many institutional investors can’t buy bitcoin directly for compliance reasons. And there are a lot of individuals who don’t want the headache of figuring out how to set up a bitcoin wallet. GBTC was initially the only option for getting exposure to BTC, without having to buy BTC, at least until bitcoin futures came along. However, bitcoin futures contracts came with their own risks, costs, and headaches. GBTC was easier.
In early 2020, GBTC became an SEC reporting company. This allowed investors who purchased shares in the trust’s private placement to sell their shares in 6 months instead of the previous 12 months. You could now make more money faster!
Unsurprisingly, the trust went into overdrive in 2020. Starting in January 2020 up to Feb. 23, 2021, Grayscale filed 35 reports with the SEC indicating that it sold additional shares to accredited investors, according to Morning Star’s Bobby Blue.
The trust’s holdings doubled from roughly 261,000 BTC in January 2020 to 544,000 BTC by mid-December 2020, per Arcane Research.
The @Grayscale Bitcoin Trust has attracted new investors throughout the year, leading to a doubling of Grayscale's BTC holdings from approx. 261k BTC in January to 544k BTC by Dec 12th.
Harris Kupperman, who operates a hedge fund, explained in a November 2020 blog post how GBTC’s arbitrage opportunity created a “reflexive Ponzi,” responsible for sending the price of bitcoin hyperbolic.
There were several versions of the arb. You could borrow money through a prime broker. You could use futures to hedge your bet. You could recycle your capital twice a year.
Every version involved Grayscale purchasing more bitcoin, thus increasing demand, widening the spread in the premium, and pushing the price of bitcoin ever higher. Between January 2020 and February 19, 2021, the price of BTC climbed from $7,000 to $56,000.
“When the spread is 26% wide and liquid to the tune of hundreds of millions per week, you can bet the biggest guys in finance are all over it,” Kupperman said. “As you can imagine, everyone big is putting on some version of this trade.”
Kupperman wasn’t the only person to raise alerts about the fund, which mainly benefited wealthy investors. As soon as GBTC launched, skeptics voiced their concerns.
“You can put a nice wrapper around a turd, and present it in a very well-manicured product to investors that you say is safe,” Barry Ritholtz, a wealth manager and founder of The Big Picture blog, told Verge. “But at the end of the day, it’s still crap.”
In September 2017, Citron Research called GBTC “the widow maker” and “the most dangerous way to own bitcoin.” Citron’s Andrew Left accurately predicted GBTC’s collapse:
“Citron believes that as new methods become available for investors to gain exposure to bitcoin — including traditional ETFs — that money will move to these regulated instruments and out of the uncertain waters of GBTC, which we believe can fall by 50% easily.”
Who holds GBTC?
The press has repeatedly credited Grayscale as a massive buyer of bitcoins, and evidence of institutional money entering the cryptoverse. This may not be the case.
Even though Grayscale states its holdings in dollars, it accepts deposits of bitcoins. A whale, or a good friend of Grayscale, can trade in their BTC for shares of GBTC, which they can flip six months later at well above the actual price of bitcoin.
The last time Grayscale broke out the numbers in Q3 2019, they said that the majority of deposited value into their family of trusts was in crypto, not dollars:
“Nearly 80% of inflows in 3Q19 were associated with contributions of digital assets into the Grayscale family of products ‘in-kind’ in exchange for shares, an acceleration of the recent trend, up from 71% in 2Q19.”
Grayscale stopped breaking out the percentage of crypto deposits into its trusts after 2019, and just stated everything in dollars. They may want to break out the numbers again, as this is something the SEC might be interested in.
Crypto lender BlockFi’s reliance on the GBTC arbitrage is well known as the source of their high bitcoin interest offering. Customers loan BlockFi their bitcoin, and BlockFi invests it into Grayscale’s trust. By the end of October 2020, a filing with the SEC revealed BlockFi had a 5% stake in all GBTC shares.
Here’s the problem: Now that GBTC prices are below the price of bitcoin, BlockFi won’t have enough cash to buy back the bitcoins that customers lent to them. BlockFi already had to pay a $100 million fine for allegedly selling unregistered securities in 2021.
As of September 2021, 47 mutual funds and SMAs held GBTC, according to Morning Star. Cathie Wood’s ArkInvest is one of the largest holders of GBTC. Along with Morgan Stanley, which held more than 13 million shares at the end of 2021.
Such a lovely place
Grayscale was happy to take investor money during the bitcoin bull runs of 2017 and 2020-21 and saturate the market with shares of GBTC. Anyone sitting on GBTC now is forced to take their losses, or hold out in the hopes Grayscale will do something to fix this.
Investors, many of whom are regular folks with GBTC in their IRAs, have every reason to be upset. Meanwhile, Grayscale is pointing the finger at the SEC as the reason we can’t have nice things.
Michael Sonnenshein, Grayscale’s chief executive, told Bloomberg he would even consider suing the regulator if Grayscale’s application to convert GBTC into a bitcoin ETF is denied.
Sonnenshein argues that because the SEC has approved bitcoin futures ETFs, it should also approve a bitcoin spot ETF.
This makes absolutely no sense. The two investment vehicles are totally different animals.
A bitcoin futures ETF indexes a bitcoin futures contract on the CME. It is a bet in dollars, paid in dollars. Nobody touches an actual bitcoin at any point. In contrast, Grayscale’s spot bitcoin ETF application represents an investment that is backed by bitcoins — not derivatives tied to it.
A spot bitcoin ETF is good for bitcoin, because it means more actual cash flowing into the cryptoverse. Crypto promoters are pushing hard for this. Bitcoin is a negative-sum game that relies on new supplies of fresh cash to keep it going.
But what happens if the SEC doesn’t approve Grayscale’s application?
Grayscale can issue more buybacks. In the fall of 2021, DCG began buying back over $1 billion worth of GBTC. In March 2022, it announced another $250 million in buybacks for Grayscale trusts. The effort had little impact. GBTC continued to trade well below the price of bitcoin.
As Morning Star points out, Grayscale has the power to make this right. It can redeem shares at NAV and simply return investors their cash or bitcoin. That is, if Grayscale really does care about crypto investors.
Grayscale offered a redemption program before 2016. However, the SEC issued a cease and desist order because the repurchases took place at the same time the trust was issuing new shares, in violation of Regulation M.
The situation is different now. Grayscale stopped issuing new shares in March 2021. That leaves the door open for it to pursue a redemption program and bring GBTC closer inline with the price of bitcoin.
I doubt this will ever happen. Grayscale is sitting on a cash cow. As long as it can redirect investor anger at the SEC, why change?
“There is no obligation to convert to an ETF,” David Fauchier, a fund manager at London’s Nickel Digital Asset, told me in a tweet. “If things stay as they are, they will print money into perpetuity basically, it’s a FANTASTIC business if BTC doesn’t zero.”
Ha. No, the status quo is to keep the trust as is. There is no obligation to convert to ETF. If things stay as they are, they will print money into perpetuity basically, it’s a FANTASTIC business if BTC doesn’t zero
Fed by stimulus money, tethers, and a new grift in the form of NFTs, the price of bitcoin reached a record of nearly $69,000 in November 2021. Bitcoiners rah-rahed the moment.
However, the same network effects that brought BTC to its heights are working in reverse and can just as easily bring it back down again. At its current price of $40,000, amidst 8.5% inflation, bitcoin is not proving itself to be the inflation hedge Grayscale hyped it up to be.
I encourage anyone reading this to submit your comments to the SEC regarding Grayscale’s application for a spot bitcoin ETF. Jorge Stolfi, a computer scientist in Brazil, has provided an excellent example, and so has David Rosenthal, also a computer scientist. You can submit your own comments here.
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About that Axie-Ronin hack
On March 23, a hacker stole an eye-watering $625 million in crypto from the Ronin network, the blockchain powering the popular play-two-earn game Axie Infinity.
Six days later, the hack was discovered. Where was Axie cofounder Jeff Jiho Zirlin on that day? He was at a party in Los Angeles caught off guard by the press. (CNN Business)
“Shortly after his first interview, which was on the record and recorded, Zirlin asked if CNN could run his answers by his PR team before publishing. CNN declined the request.”
Axie originally ran on Ethereum. But since Ethereum is too sluggish and costly to use, it now runs on Ronin. How do you get your ETH onto Ronin? The Ronin Bridge.
In the world of DeFi, a bridge lets you use crypto from a different blockchain.
The Ronin bridge locks up ETH, the native crypto of Ethereum, and issues a token on the Ronin sidechain that represents ETH called wrapped ETH, or WETH.
Molly White wrote a post describing how everything works. A bridge is like a casino where you trade in your actual money for casino chips. Someone robbed the money and now you’re stuck with worthless chips. (Blog post)
Bridges are a honeypot for hackers. Qubit Bridge, Wormhole Bridge, Meter.io Bridge, and Poly Network Bridge have all suffered similar fates.
Why does this keep happening? David Gerard says DeFi is akin to a piñata. “You whack it in the right spot, and a pile of crypto falls out.” (Blog post)
Ed Zitron points out that the real ones suffering from the Ronin hack are not the investors, the developers, or those in power, but regular folks who needed the money. (Substack)
The hackers are now in the process of cleaning their ill-gotten ETH. After a six-day head start, they sent $70 million in ETH through privacy mixer Tornado Cash. (Decrypt)
Venture capitalists need P2E
Venture capitalists are betting big on play-to-earn games, like Axie. A hack this size should put Axie and its developer Sky Mavis out of business, however, this is crypto.
Axie is backed by a16z. The Silicon Valley VC firm also has a big stake in Yuga Labs, which is transforming itself into a P2E gaming company as I type. Even though its founders have zero experience in gaming. I predict someone will bail Axie out with magic beans shortly. (My blog post)
In fact, Sky Mavis just raised $150 million in a funding round led by Binance, a leading Tether exchange, with help from the usual suspects, including a16z. (Substack)
Axie Bailed out by fraudulent Tether exchange. If you’re holding crypto on binance, you’re bailing out Axie.
It costs them nothing to bail out bad projects, and they can just make money by pumping and dumping the tokens. pic.twitter.com/0cqVSdEz4Q
— Bitfinex’ed 🔥 Κασσάνδρα 🏺🇺🇦 (@Bitfinexed) April 6, 2022
Gensler wants Coinbase to register with the SEC
The SEC is weighing a path forward for Coinbase, and other crypto exchanges, so they can register with the agency. (FT)
Coinbase is not registered as a securities broker-dealer, even though the majority of tokens that it lists resemble securities. SEC Chair Gary Gensler has been urging Coinbase to submit to SEC oversight for months.
In speaking at Penn Law, Gensler said that he’s asked his staff to work with the CFTC to find ways to “register and regulate platforms where the trading of securities and non-securities is intertwined.” (Prepared remarks)
Crypto exchanges trade both crypto commodities and crypto securities, so Gensler wants to get the CFTC involved as well.
Since crypto exchanges also custody crypto assets and act as market makers, he also wants to see if it makes sense to separate custody and market-making.
Gensler’s comments come just weeks after Yuga Labs launched Apecoin, which resembles an unregistered securities offering. The same day Apecoin launched, it was listed on Coinbase.
The regulator rejected the application for all of the same reasons it has rejected every spot bitcoin ETF application put before it in the past: fraud, manipulation, wash trading, manipulative activity involving Tether, and so on.
At this point, the SEC is simply copying and pasting text.
Grayscale is clinging on to hope. The asset manager is so desperate to get its application for a spot bitcoin ETF approved that it is threatening to sue the SEC. (Bloomberg)
It’s also running a targeted ad campaign — taking over the entire advertising space between two mass transit hubs and their Amtrak trains for three months, so bitcoiners will drown the SEC in comment letters. (Business Insider)
The SEC’s deadline to rule on Grayscale’s application to convert its $30 billion GBTC into a physically-backed ETF is July 6.
GBTC is now trading at 25% below NAV, meaning that investors, who are subject to a six-month lockup period, are losing money compared to those buying BTC directly. In addition, the fund has an investment minimum of $50,000 and an annual management fee of 2%.
Grayscale CEO Michael Sonnenshein says the SEC has created an unfair playing field and forced investors into a futures-based bitcoin.
There is a good reason why the SEC will allow a bitcoin futures contract and not a spot bitcoin ETF. Doomberg wrote a great post explaining it, which I highly recommend reading. (Doomberg Substack)
It comes down to this: Bitcoin futures are settled in cash, and the direct flow of dollars never enters the crypto ecosystem. In contrast, bitcoin spot ETFs are designed to buy and hold bitcoin directly, injecting much-needed U.S. dollars into the crypto universe.
The bitcoiners need a bitcoin spot ETF because utility companies don’t accept tethers, and miners need to pay their power bills. Galaxy and DCG are propping up the U.S. miners. They’ve been lending U.S. miners money so they don’t have to sell their “stockpile” of freshly mined BTC.
GBTC selling at a 25% discount to NAV. Miners sitting on substantial Bitcoin. Mt. Gox settlement hitting the market soon. No spot Bitcoin ETF approved.
In conjunction with the shutdown of Hydra, the DOJ announced criminal charges against Dmitry Olegovich Pavlov, the site’s alleged operator.
Since it launched in 2015, Hydra facilitated more than $5 billion in transactions for 17 million customers. The site was written in Russian and most of its drug-related business was with sellers in Russia, Ukraine, Belarus, Kazakhstan, and surrounding countries. (Elliptic)
Hydra was more than just a drug market. It offered a mixing service to launder dirty crypto and exchange it for rubles, taking in $200 million in stolen crypto in 2021 and early 2022 alone.
Vendors on Hydra even sold bundles of rubles for bitcoin, buried in dead drops for customers to dig up. (Wired)
The BBC has a story on how the police sting began with a tip-off and led to finding the “bullet-proof” hosting company in Germany. (BBC)
Elsewhere in crypto
Bitcoin miner Riot Blockchain produced 511 BTC in March and holds 6,062 BTC. Why are they holding? Coindesk didn’t bother asking. (Coindesk)
HIVE Blockchain released its March 2022 mining figures. It produced 278.6 BTC and over 2,400 ETH. As of April 3, 2022, HIVE is sitting on 2,568 BTC and 16,196 ETH. (Yahoo Finance)
I guess miners figure bitcoin will go up in price forever. Or may there is just nobody left to sell it to?
Crypto hacks in the first quarter of 2022 have amounted to $1.2 billion in crypto — that’s up nearly 700% from the same period last year. Web3 is going great. (Techcrunch)
Buzzfeed did an in-depth story on Worldcoin, a bizarre crypto project that involves scanning the retinas of people in Africa and elsewhere in the global south in return for crypto. But with Worldcoin’s token yet to launch, participants feel robbed. (Buzzfeed)
Worldcoin is backed by Y Combinator President Sam Altman, a16z, and Khosla Ventures. It’s raised $100 million in funding so far.
After purchasing 9.2% of the social media giant, Elon Musk has become the largest shareholder of Twitter. He also got a Twitter board seat. (NYT)
MicroStrategy purchased another 4,167 BTC for $190 million. It took out a loan against its bitcoin holdings to buy more bitcoin. What could possibly go wrong? Michael Saylor’s company now holds a total of 129,218 bitcoins. (SEC form 8-K, Bloomberg)
Federal prosecutors in Miami seized $34 million worth of crypto in one of the largest crypto forfeiture actions ever filed by the U.S. (DOJ press release, Miami Herald)
Crypto investor Katie Haun has raised $1.5 billion for her new firm Huan Ventures after leaving a16z last year. (Wired)
Crypto asset funds are seeing surging assets under management. A16z’s crypto-focused funds are worth around $9 billion.(Cointelegraph)
While the SEC drags its feet to enforce securities laws, which are clear and have been in existence since the 1930s to protect investors, the powers-that-be are gathering more money to invest in token projects.
The DOJ found 119,754 bitcoins stolen from crypto exchange Bitfinex in a hack in 2016. Federal officials were able to seize 94,643.29 BTC ($3.6 billion). The rest is still out there. (Washington Post)
On Jan. 31, those funds were spotted moving out of the hacker’s wallet, but nobody realized at the time it was the feds moving the funds. Most people assumed it was the hackers themselves!
Heather Morgan, 31, and Ilya Lichtenstein, 34, were charged with trying to launder the bitcoins. They were arrested in NYC, where they live. (DoJ press release, Complaint, Statement of facts)
Lichtenstein is Russian-American. Morgan is a U.S. citizen, who grew up in California. We don’t know if the pair were behind the actual theft, but they probably were given the majority of the coins were in the same wallet as when they left Bitfinex.
David Gerard describes the 2016 hack in Chapter 8 of his book “Attack of the 50-foot Blockchain,” as told to him by Phil Potter. He summarized it on Twitter.
Morgan is a rapper with loads of embarrassing videos online. (Vice)
She had an active TikTok account featuring her rap moves.
Morgan was also a prolific Forbes contributor, which should surprise nobody. (Forbes)
And she gave a talk at NYC Salon on how to social engineer your way into anything. (Youtube)
The couple sat on those coins from August 2016 to January 2017, before trying to launder some of them. Almost all of the BTC they moved went through AlphaBay, which they used as a mixer. The feds were able to spot this because they seized AlphaBay in July 2017.
One overlooked detail in the Razzlekahn arrest. Almost all the money went through AlphaBay, using it as a mixer. The feds were able to see through this because they seized AlphaBay. Its amazing how, even years after, darknet market seizures pay dividends to the feds.
This arrest underscores how difficult it is to actually launder bitcoin. All of the transactions are traceable. Even when you are sitting on piles of BTC, as these two allegedly were, it is really difficult to cash out.
A judge ruled the pair could be released on bonds — $5 million for Lichtenstein; $3 million for Morgan. But the government, which originally asked for a $100 million bond, ordered a review of the detention order, saying the couple have the means to flee — $330 million in BTC have yet to be found. Also, Russia has no extradition treaty with the U.S. (Stay of release)
It’s not clear what will happen to the recovered funds at this point, but likely they will be held up by the U.S. government for a long time to come. (Decrypt)
Bitfinex is absolutely convinced it will receive the recovered funds. It wants to use 80% of them to “burn” one of its shitcoins — LEO. (Bitfinex blog)
Naturally, LEO saw a surge in value after the announcement. (Defiant)
Bitfinex is the sister company of Tether. The 2016 hack set off a string of calamities for the two firms. Rather than claim insolvency, Bitfinex gave its customers a 36% haircut, repaid them in BFX tokens, and then lost its banking. Thus began a prolific printing of tethers, telling lies and other nonsense that has continued to this day. Also, it was Bitfinex’s reliance on third-party payment processors after it lost its banking that led to all the problems with Crypto Capital, some missing $850 million in funds, and the NYAG telling Tether to take its business out of New York. I detail most of this in my timeline.
Bitfinex never really paid its customers back for the 36% haircut. Ultimately, all of those customers were paid back in tethers, so why should Bitfinex get that money?
BlockFi to pay $100M
Crypto lender BlockFi is paying $50 million to the SEC and $50 million to various state regulators to settle claims that it illegally offered high-yielding crypto lending products, say sources. (Bloomberg)
It’s clear as mud how BlockFi is able to offer the rates it does. “Executives at BlockFi have said they are able to pay such high yields to customers because institutional investors will pay them even more to borrow the deposits. But the companies don’t provide a detailed accounting of how the funds are used or in what circumstances investors could lose their cryptocurrency,” writes Bloomberg.
Crypto lending programs are obviously securities subject to SEC regulation. BlockFi was funding its crypto lending operations and proprietary trading through the sale of unregistered securities. The SEC similarly warned Coinbase against launching “Lend.” And the regulator is currently looking into Celsius, Voyager Digital, and Gemini Trust regarding crypto yield products.
I didn’t realize this earlier, but apparently BlockFi is one of the largest holders of GBTC, buying it for the premium. GBTC is now trading at -24% of NAV, according to Ycharts.
Forbes, the publication that featured alleged bitcoin money launderer Heather Morgan as a contributor, is now taking $200 million from Binance, the crypto exchange that has been thus far kicked out of every corner of the world for blatantly ignoring laws and regulations. (CNBC)
The funds will help Forbes follow through on its plan to merge with a special purpose acquisition company (SPAC) in the first quarter. Forbes is owned mainly by Chinese Firm Integrated Whale Media, which bought a controlling stake from the Forbes family in 2014.
This will make Binance one of the biggest owners of Forbes after its listing. Binance will also have two director positions on Forbes’ board of executives. Binance tried to sue Forbes in 2020 for defamation, but the suit was quietly dropped.
If you are looking for an unbiased crypto news source in the future, you probably want to look elsewhere.
“Does she have regrets? I kept waiting to hear them and she comes closest in the final few pages (after chapters of what does seem like a Kafkaesque nightmare in both legal and emotional terms). ‘I regret every moment of every day of the terrible year that followed Gerry’s death,’ is what she confesses. A weaselly mea culpa that reminded me of when people, often on reality shows, apologize by saying, ‘I am sorry you feel that way.’”
The Sun also has a review of the book. It’s mostly just… a review of the book. Nice photos of Jen and Gerry though.
On Feb. 5, a loophole in the Meter Passport smart contract allowed an attacker to siphon 1,391 ETH ($4.2 million) and 2.74 wrapped Bitcoin ($83,000) from the Meter Passport blockchain bridge.
Blockchain bridges allow you to conveniently spend crypto from one blockchain — such as ETH or, in this case, BTC — on another blockchain.
@ishwinder explains the hack in layman’s terms. (Twitter)
This is one of three recent hacks on blockchain bridges lately! On Feb. 3, we had the Wormhole exploit, with $320 million in funds stolen. And on Jan. 17, Qubit was hacked for $80 million in crypto.
What does this tell you about blockchain bridges?
Meter urged its users not to trade any meterBNB, which are currently unbacked, and said that they were “working on compensating funds to all affected users.” (Twitter)
Community, unfortunately Meter Passport was hacked a few hours ago. Please do not trade the unbacked meterBNB that is circulating on Moonriver.
We have identified the issue: Passport has a feature to automatically wrap and unwrap gas tokens like ETH and BNB for user convenience.
The U.S. Department of Treasury released a report: “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art.” The report was mandated by Congress in the AML Act of 2020. It specifically mentions NFTs. (Press release, Study, Blockchain Law Center)
According to the report, NFTs are vulnerable to money laundering because “NFT platforms range in structure, ownership, and operation, and no single platform operates the same way or has the same standards or due diligence protocols.”
The report specified that NFTs used for payment or investment may fall under the virtual asset definition, and some NFT platforms may qualify as virtual asset service providers (VASPs), depending on the characteristics of the NFTs that they offer.
The report makes it clear that the Treasury department is carefully monitoring digital art assets, including NFTs, and the online marketplaces where they are traded. (JDSupra)
Grayscale wants to turn its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund. The SEC is seeking advice from the public about whether ETFs tied to Bitcoin’s spot price could be a vehicle for fraud. The SEC has denied six similar applications since November, including those from VanEck, WisdomTree and SkyBridge Capital. (SEC notice, Coindesk)
Only licensed banks should be allowed to issue stablecoins, according to Jean Nellie Liang, the under secretary for domestic finance at the Department of the Treasury. She appeared before the House of Representatives Committee on Financial Services to reaffirm the PWG’s November report on stablecoins. (Liang’s written testimony, Bloomberg)
Time is running out for crypto firms to be approved for the UK’s anti-money laundering register before the end of March. Ninety-six applicants are still waiting for a decision on their application. Without approval before a March 31 deadline, the future of these crypto firms’ UK operations — including exchanges, wallets and other businesses — hangs on a limb. (The Block)
Crypto shilling at the Super Bowl, and other NFT news
It’s Super Bowl weekend. Expect to see a massive amount of marketing dollars go toward shilling crypto and NFTs. Crypto.com, FTX, and Binance are among the major advertisers. (Hollywood Reporter) (NYT)
Bored Apes are also rumored to appear at the Super Bowl, in some shape or form. (Bloomberg)
Twitter accounts that have been speaking out against NFTs are being reported by bots, their accounts suspended and/or locked. This happened to @NFTEthics and @interlunations. (Twitter)
We are back. Twitter’s suspension of our account, based on the fact that we were supposedly impersonating someone else (LOL) could not have been a bigger justification for the existence of Web3. And for that we kindly thank all the scammers and their bot armies that reported us❤️
Sotheby’s is planning to auction off a set of 104 CryptoPunks on Feb. 23. The set is expected to bring $20 million to $30 million in crypto. The original buyer was 0x650d, who scooped them all up in July 2021. Here is the Etherscan confirming his purchase. (Artnet News)
He bought them for $7 million because he “chose wealth.” (Twitter)
Why did I spend $7MM on 104 floor punks? Easy: because I choose wealth. 🧵/1
Following the news of the Sotheby’s auction, the celebrity shilling begins. German-American model Heidi Klum just announced on Twitter she owns a Punk. (Tweet)
Who paid for her Punk? That’s not exactly clear. Mike Burgersburg (not his real name, obviously) has tracked down links between Bitclout investor Reade Seiff and Klum’s Punk. (Dirty Bubble)
Burgersburg also says whoever is funding Reese Witherspoon’s NFT purchases probably has a financial interest in promoting the WOW project. (Dirty Bubble)
In addition to proper FTC disclosure requirements, fans and retail buyers deserve more transparency about how these deals are made and who’s providing the money to pump up these assets.
John Reed Stark was chief of the SEC office of internet enforcement for 11 years. He has a few things to say about NFTs: Market manipulation of NFTs appears not only rampant and tolerated, but also encouraged. Fraud not only rewarded, but also taught. (Linkedin)
The counterfeit NFT problem is getting worse. Bots are scraping artists’ online galleries, or even keyword searches on Google Images, and then creating collections with auto-generated texts. Those listings have proliferated on OpenSea. (Verge)
Sotheby’s made headlines last year when it sold Kevin McCoy’s Quantum NFT (2014) for $1.47 million. Now, that sale is in the headlines once more, this time for a lawsuit being filed against McCoy and the auction house by a holdings company whose owner claims he owns Quantum. (Artnews)
Indie game platform itch.io has come out strongly against NFTs: “NFTs are a scam. If you think they are legitimately useful for anything other than the exploitation of creators, financial scams, and the destruction of the planet the we ask that [you] please reevaluate your life choices.”(Twitter, PC Gamer)
A few have asked about our stance on NFTs:
NFTs are a scam. If you think they are legitimately useful for anything other than the exploitation of creators, financial scams, and the destruction of the planet the we ask that please reevaluate your life choices.
YouTube is launching new creator tools to expand monetization, including allowing creators to sell content as NFTs so fans can “own” videos. (NBC News)
The Alfa Romeo Tonale SUV is the “first car on the market” to come with an NFT digital certificate that the automaker says will increase the car’s residual value. How? Technical details are thin. (Verge)
A group supporting WikiLeaks founder Julian Assange raised $50 million in ETH by selling an NFT of a clock to a DAO (called AssangeDAO) set up to support his legal bills. The NFT, titled “Clock,” is a joint creation by Assange and digital artist Pak. AssangeDAO contributors receive $JUSTICE. (Wired)
someone is going to have a hundred million dollar business cleaning up the mess that DAO dipshittery is already causing
David Rosenthal’s talk at Stanford is a summary of everything that is wrong with crypto and blockchain technology. This is a great read. (DSHR blog)
Vice interviewed Dan Olsen, whose Youtube video on NFTs went viral. “I’ve been keeping my thumb on what’s going on in crypto. By and large, it’s been the story of the evolution of fraud.” (Vice)
The BBC published and then took unpublished a story about a “self-made crypto millionaire giving back” without mentioning his scam coin. (archive)(missing story)
“City Coins — free, magical money for your city! Maybe” (David Gerard)
Fais Khan’s part II of his work explaining how VCs cash out on tokens: “The Unstoppable Grift: How Coinbase and Binance Helped Turned Web3 into Venture3.” (Fais Khan)
The U.S. government’s system for spotting money laundering has received a surge of suspicious activity reports from a set of San Francisco financial companies that includes some of the world’s leading crypto exchanges. (FT, Dynamics Securities Analytics report)
Mark Zuckerberg is lying about the Metaverse. The CEO of one of the most valuable companies in the world is shoving $10 billion into a concept he cannot describe. (Ed Zitron)
The Russian government will treat bitcoin and digital assets as currency. The proposal includes subjecting crypto transactions (not just within exchanges) to AML/KYC rules, which, being technically impossible to execute, should be equivalent to a ban…(Blockworks)
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Everything looks rosy for Coinbase’s debut on Nasdaq on April 14. The company is worth $91.5 billion, securities filings show. It reached that valuation even before releasing Q1 results of $1.8 billion—9x that of a year ago. (WSJ)
All that glitters is not gold, however. If Coinbase’s regulatory status were to change (and regulatory ambiguity is clocked in the company’s S1 risk factors), the company could be forced to drop many of its hugely profitable activities or be forced to operate at a much higher capital cost. (FT)
Signal, a good thing going bad
Signal is one of the best apps we’ve got for secure communication. But that could all change, as the encrypted app moves into payments with the integration of MobileCoin.
Techies are upset because they associate cryptocurrency with frauds and scams. They don’t want to see Signal become a sketchy money transmitter business.
A beta version of Signal Payments is now available to UK customers. It’s not available in the U.S., probably because MOB looks like an unregistered security. MobileCoin says it hasn’t worked out all the regulatory stuff yet.
Turns out, Signal’s creator Moxie Marlinspike has deep ties to MobileCoin. I wrote about the money flows, and David Gerard followed with a story explaining the tech. (My blog)(David Gerard)
In a blog post titled “Et tu, Signal?,” Stephen Diehl reminds us that we’ve seen this film a few times before.
Telegram tried the same thing in an ICO that imploded when the SEC shut them down. Facebook tried and failed to monetize WhatsApp. And when encryption app Keybase did an airdrop of Stellar lumens, crypto spammers invaded the app, ruining the user experience.
“This association weakens the entire core value proposition of the Signal app for no reason other than making a few insiders richer,” he said.
So all this time @signalapp was basically just a lead up to launch a giant crypto pyramid scheme.
GBTC once enjoyed a healthy premium but is now trading at 9.72% below NAV. Virtually nobody is buying GBTC on secondary markets.
Can shareholders redeem their GBTC for bitcoin? No, they cannot. Once bitcoin gets locked up in the trust, it is in there for good. (GBTC has ~649,130 BTC locked up to date, roughly 3% of all BTC.)
In March, Grayscale announced it was going to shore up the discount to GBTC’s NAV with a $250 million buyback. Now, it plans to convert GBTC into an ETF. The conversion would mean GBTC shareholders no longer have to pay a hefty 2% annual management fee.
For some reason, Grayscale is confident the SEC will approve an ETF, even though the regulator had rejected every single Bitcoin ETF proposal put before it to date. I’m not sure why Grayscale is any different. (Coindesk)(GBTC announcement)
Reggie Fowler has finally found himself a new lawyer after his previous defense team withdrew from the case because he failed to pay them. His new lawyer is Ed Sapone of Sapone & Petrillo in New York.
Fowler is the Arizona businessman tied to hundreds of millions of dollars in missing Tether/Bitfinex money. He was indicted in April 2019, along with Israeli woman Ravid Yosef, who is still at large.
Judge Andrew Carter has yet to set a new trial date. He is giving Sapone three months to get up to speed on the case first. And he warned Sapone: “You are going into this with your eyes wide open.” Meaning if Fowler doesn’t pay him, Sapone will not be allowed to withdraw from the case.
Other newsworthy items
Christie’s is grabbing the NFT bull by the horns. The prestigious auction house is selling NFTs of nine rare CryptoPunks by Larva Labs alongside work by Andy Warhol and Jean-Michel Basquiat in a marquee auction.
Former BitMEX CEO Arthur Hayes has surrendered to authorities. He flew to Honolulu to appear before a judge on April 6. Pursuant to an earlier agreement, he was released on a $10 million bond, secured by $1.5 million in cash, pending future proceedings in New York.
Six months ago federal prosecutors in New York accused Hayes and his BitMEX co-founders of violating anti-money laundering rules. Hayes is a US resident. Previously, he was living in Hong Kong, but he has been living in Singapore with his Singaporean wife since January 2020. (Bloomberg)(Lawyers’ proposal)(Bail conditions)
The New York Excelsior Pass is a COVID-19 vaccine passport system. It proudly proclaims its use of secure technologies, like blockchain and encryption but it’s doing the wrong thing and badly. (David Gerard)
If you are tracking central bank digital currencies, John Kiff updated his CBDC “explorers” table with new developments out of Russia, Sweden and Trinidad & Tobago. (John Kiff)
Who needs a bitcoin ETF anyway? MicroStrategy just purchased another 253 BTC for $15 million in cash at an average price of $59,339. Saylor’s firm now holds 91,579 bitcoins acquired for $2.2 billion at an average price of $24,311 per bitcoin. (Press release)
#Bitcoin is a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy. – @michael_saylor#everydayspic.twitter.com/NX2pcDqsT9
HSBC will no longer allow customers to buy Microstrategy stock due to its newly changed policy on virtual currencies. (Tweet)
The rising tide of bitcoin is good for everyone. Following in the footsteps of Coinbase, Kraken is considering going public in 2022, after record trading volumes in the first quarter (CNBC)
BitClout, the decentralized social network that tokenizes Twitter accounts, uploads your keys to their server on every API request. Any employee with access to that server can steal all the money on the platform at any time. Like I said earlier, this project appears to be one bad idea piled on top of another.(Tweet)
Phillips, another London auction house, smaller and slightly younger than Christie’s, is getting into NFTs with the sale of an artwork called REPLICATOR.
The NFT market has been a bust for Mike Winkelmann in so many ways. Now he is coming out with a book on Amazon.
Sleep with Kate. Drive with Kate. Walk with Kate. Model Kate Moss is featuring her own series of NFTs on Foundation. Proceeds go to charity. (Vogue)
Super Bowl champion Tom Brady is launching his own NFT platform called Autograph.(CNBC)
This tweet of a nothing sandwich from the Fyre Festival will be sold as an NFT. The original tweeter will use the money to help pay for a kidney transplant. The sale on OpenSeas ends on April 24. If any NFT deserves your money, this one does. (Verge)(GoFundMe)
Amy Castor 