Celsius Meltdown

The great crypto rollercoaster, from Nakamoto to Mashinsky...

(Source: Getty Images)

Bill Bonner, reckoning today from Poitou, France...

What makes the investment world so entertaining is that it puts on display the vanity, stupidity and cupidity of our beloved race. Gypsies, tramps and thieves – they’re all there. Mountebanks, fantasists, and dreamers too. Whatever else can be said about them, they’re fun to watch. And every story, though recounted in financial industry mumbo-jumbo, is essentially an ‘I-told-you-so.’ 

Last week, the world of crypto finance opened up for inspection.  It was like visiting a joint session of Congress – scammy, goofy and repulsive. In this instance, Celsius executives were charged with fraud.  

The SEC:

Defendants made numerous false and misleading statements to induce investors to purchase CEL [a crypto currency] and invest in the Earn Interest Program. Among other false representations, Defendants misrepresented Celsius’s central business model and the risks to investors by claiming that Celsius did not make uncollateralized loans, the company did not engage in risky trading, and the interest paid to investors represented 80% of the company’s revenue.

None of these claims was true.

The Nakamoto Moment

Backing up… it was an exhilarating moment when bitcoin was unveiled by Satoshi Nakamoto in 2009. Here was a new form of money, created by a shadow, using ‘open source’ software; it needed no banks and no government. And it offered to make financial transactions simpler, cheaper, and faster.

It could not be fiddled. It appeared to be anonymous. Nor could the money supply be inflated. There were no banks or KYC rules to deal with. No banking fees to pay. No hacked credit cards.

At the time, the internet, with its vast reservoir of bids and offers, buyers and sellers, goods and services, seemed ready for a new form of money. The taxi business had been ‘disrupted.’ Retailing, too. Hotels. Bookstores. Movie theaters. Why not money itself?

Money is, after all, just ‘information.’ It is a way of ‘keeping score in life,’ said T. Boone Pickens. It tells us who has what and who owes what to whom. BTC seemed to offer a way to make the information purer – without the intermediaries, hustlers and grifters to muddy the waters.    

If a man has a million dollars, the ‘money’ itself is meaningless. What he really wants is a claim on a million dollars’ worth of things he doesn’t have – things that belong to other people – their goods, their services, their time…and their respect.    

Bitcoin seemed well suited to the purpose. It could make money much more efficient; it could be the most important disruption of the whole Information Revolution. We advised readers to experiment with it…to play it safe…and to see how the new money worked out. We even made a ‘training video’ to show readers how easy it was to open an account. But our attempt to find a ‘wallet’ and buy coins failed. The show ended up like one of those ‘Jackass’ videos… without the broken bones.  

“Better than Gold”

That was very early in the crypto cycle. And the theory was one thing. The practice was another. Gold has been reliable money for at least 3,000 years. A couple of seasons in the crypto sun made investors and entrepreneurs giddy with delight; bitcoin was ‘better than gold,’ they said.  

Only government can counterfeit money – legally. But it didn’t take the hustlers long to figure out that if some reclusive Japanese guy could create money, so could they. Soon, there thousands of these new ‘crypto monies’ on the market.

The classic program was to create millions of worthless ‘coins.’ You kept most of them to yourself, but a few were allowed out in public, where they were traded on crypto exchanges. A coin might have a value, for example, of 1/100^th of a penny.  So, with just $1,000, you could launch 10 million of them…each guaranteed to be worth something.  

You then began buying your own coin. At minimal cost, you bid up the coin to 1/10^th of a penny. Then, the other players began to notice. Your coin had already gone up by 1,000%; there was money to be made. And here is where it gets interesting.  

A new ‘coin’ was much like a new, publicly-traded tech company. You might not have any idea what the company did, if anything. The actual value of its stock might be zero. Still, the price could shoot up. Maybe it was called “Texla,” for example, and investors hit the wrong key. Maybe it spread a rumor – not officially! – that it had found a cure for aging.

But manipulating the value of a publicly-traded stock is against the law. A crypto coin, on the other hand, was something new. Was it a ‘security’ under SEC rules? Were buyers of BTC the investors the SEC was meant to protect?  Nobody knew.  

With so little ‘float’ on the market…and such low prices…new crypto prices were easily coaxed upward. Then, as the price went up, guess what – all those millions of coins you held back suddenly appeared to be valuable. On paper. Sort of. As long as you didn’t try to sell them.  

What fun that must have been…trading your worthless cryptos for someone else’s worthless cryptos…all of them going ‘to the moon’…and everybody getting rich!  

Mashinsky’s Millions

By 2021, cryptos were said to be worth almost $3 trillion. This was new ‘money’ that, like the dollars created by the Fed, had not existed before. And everybody wanted some of it. FOMO had set in amongst investors. They had heard – almost daily – about how much money was being made from cryptos.  

The competition became fierce. How to get the public into the casino…and how to get them to buy your crypto rather than someone else’s?

That was where Alex Mashinsky saw an opportunity. At the height of the madness came word that Mashinsky’s company, Celsius, had made a breakthrough. It was financing the crypto industry. And it would share its gains with ‘depositors’ – paying as much as 17% ‘interest,’ or about 30 times more than traditional banks. There was little risk; Celsius had millions in assets (based mainly on its own crypto currency, CEL) and its loans were backed by good collateral. Mashinsky:

“These loans are collateralized. This means the institutions give Celsius assets or dollars to hold onto before we give out the digital assets. This protects the community and keeps them whole.” 

This was a deal that was too good to pass up. But it was also too good to be true. You can’t earn 17% ‘interest’ in a world where the norm is 3% or 4% even with good collateral.  

What Mashinsky was really doing was operating a Ponzi scheme. Depositors put in money. Mashinsky gambled with it. As long as cryptos rose and the gambles paid off…new money came in the front door and he was able to pay the ‘interest’ out the back.    

But when the lights dimmed in the casino, Mashinsky’s ‘collateral’ turned out to be nothing more than the worthless cryptos he started with.

Regards,

Bill Bonner