More Naked Swimmers

As the liquidity tide goes out, more bums are revealed...

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

It was a bold move. Perhaps unhinged. But not completely crazy. Michael Saylor’s business, MicroStrategy, was getting dim… neither growing nor profitable. Bitcoin – and the whole archipelago of cryptos and blockchain stars – were shining bright.

Solution: use the public company, with its easily bought and sold shares, as a way for people to get in on the crypto boom.

Like so many other things in life, unlikely marriages… unprofitable businesses… unwinnable wars… it worked, until it didn’t work. And today, we peek at a few more of the naked swimmers. They are beginning to crowd the beach, a grotesque sight.  

‘Crypto contagion’ it is called. One failure leads to many failures. It is like the bank runs of yesteryear; we have a personal grudge against them. Our grandfather put the family fortune in a Baltimore bank. In the early 1930s, banks were failing.  Prudently, he wanted to take at least some of his money out. But he was a director of the bank. How would it look if he took out his money? There would be a run… and the bank might fail.

As it turned out, there was a run anyway. Our grandfather lost everything. And your editor grew up as child labor on a tobacco farm.

No Bid

Runs are contagious. People lose money in one bank. Other people fear their money could be in jeopardy, too. Another run begins.

Today, the runs have already begun – in the crypto, tech, blockchain sector. A lot of people thought they had a lot of money. Now, they are discovering that they have less than they thought… and maybe none at all. Their cryptos go ‘no bid.’ Their zombie companies disappear. Their tech billions are here today… but gone tomorrow.

They stop spending. They stop investing. They start looking at the right side of the menu again. And perhaps looking for a new job.

Let’s recall Chris Mayer’s presentation in Ireland last week.  

Chris does not buy stocks. He buys companies. His investors go swimming in three-piece suits.  

MicroStrategy is a company that Chris wouldn’t touch. In the 4th quarter of 2012, the company reported actual revenue of $164 million.  In the last quarter of last year, it reported revenue of $134 million, with a loss of $10 a share.  

But the share price was a whole different story. In 2012 you could buy the stock for $100. By the autumn of 2021, the price had gone above $700. That was when Saylor was buying bitcoin… and the price of bitcoin was going over $50,000.

The micro-strategy worked… for a while. Bitcoin is now beneath $21,000, considerably below what is believed to be Saylor’s average purchase price – $30,000.

[Erratum: earlier this week, we misreported the BTC price. Here in Ireland, prices are often quoted in euros… which we mistake for dollars.

As a general rule, readers are advised that they can have full confidence in the facts and figures reported in these pages…except for those we’ve misheard, misread, misunderstood, imagined, dreamed or made up.]

“Buying MicroStrategy,” Chris might say, “is not investing. It’s gambling on the price of bitcoin.”  

Whale Tails

Of course, MicroStrategy was not the only casino in town… and Saylor was not the only whale in it. There was also Alex Mashinsky at Celsius Networks.

His idea was also fairly simple. Cryptos were going up. Gamblers wanted to speculate on them… and with them. Why not make it easier for them?

Matt Levine describes the business model:

…the basic idea of Celsius is that you can deposit your cryptocurrencies with Celsius — essentially, lend them to Celsius — and it will pay you a pretty high interest rate, or an even higher interest rate if you’ll accept payment in its own CEL token. Or you can borrow cryptocurrencies from Celsius and pay it interest.

How was it possible for Celsius to pay such a high rate of interest – up to 17%?  Or, to put it another way… if the company could earn so much on borrowed (crypto) money, why bother with the hassle of depositors and creditors? Why not just borrow money on the junk bond market – at 3% interest – and pocket the difference?

Whatever Celsius was paying its depositors it wasn’t ‘interest.’ Interest presumes credit checks and collection services. It bespeaks solidity, reliability… money on deposit that can be withdrawn… borrowers with business plans, collateral, and decent loan-to-income ratios.

The courts will sort out what Mashinsky was up to… and whether calling it “interest” was a fraud on depositors… but for our purpose, we merely note these guys needed some Speedos.

The Way of the World

As the crypto currencies lost value, speculators became worried that Celsius would be unable to return depositors’ money. But Mashinsky reassured them last week.  

“Do you even know one person who has a problem withdrawing from Celsius?” he asked.  

Then, the company explained that it was “unfortunate” that a few people were spreading “misinformation”:

“We at Celsius are online 24–7. We’re working around the clock to continue to serve our community. Celsius has one of the best risk management teams in the world. Our security team and infrastructure is second to none. We have made it through crypto downturns before (this is our fourth!). Celsius is prepared.

Whenever a company says it is ‘serving the community,’ watch out. It is a scam; we want companies that make money, not those that try to make the world a better place. Celsius continued:

“We have a fortress balance sheet and exceed our regulatory requirements for capital and liquidity, as you can tell from our quarterly financial statements.”

Then, on Sunday evening came a further announcement. Bloomberg reported:

Celsius Network Ltd., one of the biggest lenders in crypto and a key player in the world of decentralized finance, said late Sunday that it was pausing withdrawals, swaps and transfers following weeks of speculation over its ability to make good on the outsize returns it offered on certain of its products, including yields as high as 17%. The move effectively halted a platform with registered entities across the globe and billions of dollars’ worth of digital coins under management, accelerating a selloff in the broader market that was already in progress on concern over prospects for tightening monetary policy ahead of a Federal Reserve meeting this week.

Well, there you have it. The way of the world. It worked… until it didn’t.

Regards,

Bill Bonner

Joel’s Note: “Gold. It simply hasn't done its job. Will it?” wondered one reader.

“Who are the ‘Elite’?” chimed another.

“What’s your view of the post-midterm lineup?” asked a third…

Thanks to all those who wrote in yesterday with questions for Bill. We’re heading down to Youghal over the weekend to catch up with the Bonner family. Bill has kindly agreed to field some reader questions for a rare, in-person Sunday Sesh.

We’ll send out a link to the interview on the day, plus post the transcript on the BPR Substack page early next week. (Usually takes about 24-48 hours.)

If you’d like to send in a question or discussion topic for us to cover, simply drop a comment in the section below…

… or write to us directly at bonnerprivateresearch@gmail.com

Until next time - Cheers!