Crypto Insider

From Celsius to Coinbase, crypto high-fliers face their day in court...

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Bill Bonner, reckoning today from Baltimore, Maryland...

My advice is to dabble in cryptos for now. But don’t take it too seriously. Most of the coins out there now are going to go to zero. Cryptos are intellectually fascinating. But they’re not anything you want to put a lot of your money into in my view. At least not yet.

~ Bill Bonner, December 31 2018

The crypto world was wild, untamed… and almost lawless.

It was all great fun, as long as prices were rising. But when they came down, suddenly, everyone was looking for the sheriff. MarketWatch reports: 

‘Fraud is fraud’: Former Coinbase manager charged in first-ever cryptocurrency insider-trading case

Ishan Wahi is accused of tipping his brother and pal of upcoming crypto asset listings, from which they illegally netted $1.5 million in trades.

A former Coinbase product manager has been charged in the first-ever cryptocurrency insider-trading case, for allegedly tipping his brother and a friend to upcoming asset listings that weren’t yet publicly known.

Ishan Wahi, 32, of Seattle, worked as a product manager for Coinbase Global , the largest crypto exchange in the U.S., and was one of a small group of employees who received advance knowledge of assets that were soon to be listed on the exchange.

Federal prosecutors said that between August 2021 and May 2022, Wahi told his brother, Nikhil Wahi, 26, of Seattle, and their friend, Sameer Ramani, 33, of Houston, Texas, of the upcoming listings and that they used that information to place favorable trades ahead of time.

Prosecutors said that over the course of 14 separate trades Nikhil Wahi and Ramani illegally netted $1.5 million in illicit profits. All three men are charged with wire fraud and wire fraud conspiracy, and face up to 20 years in prison if convicted. The Securities and Exchange “”

“When the wind blows strong enough,” say the old timers, “even turkeys will fly.”

Flying Turkeys

And in the gales of crypto madness, the skies filled with as many as 10,000 different crypto coins. These coins had no apparent ‘raison d’etre.’ They were neither fish nor fowl – neither making products nor providing services. They claimed to be a new form of ‘money.’ But what kind of money is it that you can create at will?  

Nobody wanted to ask that question. It didn’t seem to matter. And nobody cared whether they were ‘ponzi schemes’ either – not as long as they still got their money. But the trouble with Mr. Ponzi’s scheme was that it was always doomed.  And when the new depositors stop coming in, the old depositors feel they have been deceived. They thought cryptos were ‘money’… and their coins were ‘investments.’ Bloomberg:

A former employee at bankrupt crypto-lender Celsius has sued the company, calling it a 'Ponzi scheme'

Jason Stone, the CEO and co-founder of the Defi firm KeyFi, later Celsius acquired in 2020, filed the complaint in New York on Thursday. His team was tasked with receiving "hundreds of millions of dollars of customer deposits" from Celsius to invest…Stone accuses Celsius of lacking basic security and risk management systems in place, and says the firm now owes money to his company and hundreds of thousands of customers.

When something seems too good to be true, it is usually neither good nor true.  And when we first heard of crypto accounts that would pay as much as 18% interest, we guessed that the important part of the story was yet to be told.   

‘Whatever they are paying,’ we told colleagues, ‘it ain’t interest.’  

Now, the story is coming out. Celsius Network advertised 18% interest. You got the money by putting your cryptos on deposit, where the company supposedly used them to ‘lend’ to other crypto projects. The whole story has yet to be told, but it appeared to us that the company was a ponzi scheme. It took in money… and used the money to gamble on other cryptos. As long as more money was coming in than going out, it could pay customers 18% “interest.”  

The Widening Gyre

Like a flying turkey, Celsius stayed aloft… until the wind turned. But when customers wanted their money back, the company went into a tailspin. That is, the market went down. Its bets went bad. And it suffered “severe exchange rate losses.”

That is what we thought. But it was more complicated than that and much more interesting. And it shows what a clever bunch of desperadoes could do in the crypto business. For if we understand it correctly, the Celsius crew were betting on cryptos to go down, not up. They thought they had found a new angle… to make Mr. Ponzi’s scheme work even better.

It was fairly obvious that (as we guessed back in 2018) most cryptos would go to zero. And Celsius seems to have come up with a way to profit (for its managers… not its investors) by anticipating the final chapter. It was very simple. The company kept its liabilities in crypto form (it needed to be able to give depositors back their coins). But it converted the cryptos to dollars, and used them to make more dollars.  

What an elegant scam. In effect, you borrow a million dollars in cryptos (by promising an 18% return). You count on the cryptos to go to zero… so you never have to pay back the borrowed money. Then, you take the money and invest it to earn real money.

It might have worked. But the timing had to be just right. Instead, the crypto assets went in the wrong direction – up (during the relevant period). And the more the value of the cryptos increased, the worse Celsius’s balance sheet looked. When the problem became obvious to investors, they wanted their coins back (then worth more money)… and pronto.

Alas, Mr. Ponzi didn’t have the money.

Regards,

Bill Bonner