Latest from David Gerard and me on EVERYTHING.
In this episode:
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.
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:
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.
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.
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.
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.
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:
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
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.
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]
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 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]
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]
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]
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?
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]
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.
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.
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.
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?
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]
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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Amy Castor 
