Zero Degrees Celsius

Ed Zitron 14 min read

Bitcoin is over $22,000 for the first time since June of last year, a signal that every rational person will take as “confusing” considering the gluttony of terrible news dogging the industry.

Celsius, a crypto “lender” that collapsed as a result of the 3 Arrows Capital contagion (who you may remember from my piece from July of last year) has been revealed to be a literal Ponzi scheme that used new customer funds to pay other customers’ withdrawals. The independent report for Celsius’ bankruptcy hearing by examiner Shoba Pillay is damning, detailing a company that deliberately used customer funds to fund its operations – operations that it also misled customers about.

Celsius took customer funds and used them to cover yields for other customers, including selling customers’ cryptocurrency as a means of increasing the value of their CEL token, which was something they did as a means of both paying other bills and making themselves temporarily richer.

The reason I’m writing this up is I think it is very, very important to know that Celsius may have committed some of the biggest, dumbest financial crimes in history, run by the Mr. Bean of investing, and losing hundreds of millions of dollars in the process. So much of this happened in broad daylight, but somehow avoided scrutiny because there was so much other stupid crap happening. Celsius lost over $4.7 billion of customer funds, which the bankruptcy judge ruled Celsius owned anyway, meaning their victims are even less likely to recover their funds than those of FTX.

As an aside: I hate every one of these people. I hate them with my entire being. Their recklessness is only matched by their greed, and their greed is only matched by their stupidity. These are sophisticated idiots that not only acted with disregard for their customers’ funds - not that one can call anyone of Celsius a “customer” in the traditional sense, as no service was being offered - but with possibly the least financial acumen I’ve seen outside of the Minions from the Despicable Me movies.

The Biggest Loser

Every Ponzi scheme requires a way to make more money, and Celsius’ attempts to do so were both craven and painfully, annoyingly stupid.

The only way they could make money was to take on stupid loans and make shady investments. While this sounds par for the course, particularly when talking about the crypto world, Celsius’ behavior makes FTX look comparatively sober-minded and conservative.

What I am about to detail is a series of financial losses to the tune of hundreds of millions of dollars that are a result of the desperation and craven recklessness of some of the dumbest people to walk this Earth.

Equities First

Loss: $288 million

  • Celsius, a company that took money from one person and gave it to another, decided it would take out loans with institutional investor Equities First (as a means of covering the yields and loans they were offering their customers - in part because “no bank would lend to them,” which is not good). This was because they did “not have enough stablecoins to fill the demand” (translation: they did not have enough money). 

    • They got these loans by offering large amounts of Bitcoin and Ethereum. They also granted Equities First “all rights, title, ownership and interest” on said collateral, and Equities First promised they would return the collateral.

    • What isn’t obvious - in part because the Examiner appears to have written this report in the form of a riddle - is how much money was loaned to and from whom. The report cites both collateral of 1000 BTC and 38,000 Ethereum, but later mentions an outstanding collateral amount of 3765 BTC.

    • I hate every single one of these goddamn people. Just be normal. Just be normal for one fucking second.

  • This deal, negotiated by then-CFO and Chief Investment Officer Harumi Urata-Thompson, was not run by then-Financial Risk Officer Patrick Holert, who was “concerned he had not been consulted.” It took until December 2020 for him to review the agreement, which he gave an “A” risk rating, meaning it was likely to be repaid.

  • When Rodney Sunada-Wong started as Chief Risk Officer at Celsius in March 2021, he read the agreement and realized there was no way for Celsius to get its collateral back as it appreciated, and that Equities First did not agree to provide any financial statements.

  • To be clear, this is very, very stupid, as when the Celsius Risk Committee met on April 2 2021, the collateral was worth several times more than what they had been loaned.

  • Problematically they realized they couldn’t track Equities First’s use of the collateral at all, which was bad because – and I quote ad verbatim – Celsius “got more concerned when no bank would lend to us, our retail business grew rapidly, we had over $1 billion in dollar loans out to our customers.”

  • They called the debt “a credit risk” with “major exposure” for Celsius, and feared that Equities First would not be able to return their collateral in a timely manner.

  • On July 22 2021, Celsius tried to repay Equities First to retrieve the collateral that they had - cryptocurrency worth $638 million. Sadly, they found Equities First would not be able to return their collateral in a timely manner.

  • Somehow this shook out to Equities First owing Celsius $500 million, which they chose to settle by turning it into five 30-month loans that collectively amounted to $340 million. Mathematicians in the audience may realize this is a great deal less than $500 million, and Celsius internally marked this situation as a $288 million loss.

Grayscale Bitcoin Trust

Loss: $130 million “in connection with its holdings of GBTC,” approximately $160 million across all crypto assets held in the Grayscale trust.

Hey, remember the Grayscale Bitcoin Trust from early January? Well, Alex Masinsky (Chief Mr. Bean and Executive Officer at Celsius) was investing too.

Short reminder: GBTC is a stock that you (either as an accredited investor or if you have direct access to them through an exceedingly stupid series of corporate entities) buy to get exposure to Bitcoin through Grayscale’s Bitcoin Trust. In practice, it allows investors to speculate on the price of Bitcoin without actually having to own any themselves. One unit of GBTC stock is meant to reflect 0.001 BTC. People could send Bitcoin to Genesis Digital Trading - part of Digital Currency Group, who owns both Grayscale and Genesis - and get an amount of GBTC stock back, the idea being that after the 6-month lockup, the stock would be worth more than the Bitcoin you put in.

You can also buy GBTC with cash.

For example: Steve sends 5 BTC worth $10,000 at the time to Grayscale. In 6 months, GBTC is trading at a premium of 10% - meaning that it is worth 10% more than the current price of Bitcoin - and now Steve can make a profit of $5000.

Similar Grayscale funds exist for other crypto assets.

This works very well, unless Bitcoin’s price decreases in 6 months. Can you guess what happened?
  • As of February 5 2021 (when the GBTC premium was 6.20%) Alex Mashinsky, through Celsius, invested $752 million in Grayscale assets, which was fine until approximately February 23rd, when GBTC shares became worth less than Bitcoin.
  • Celsius invested 30% of their assets - so their customer assets - in GBTC.
  • Hey Ed, why do you keep calling him Mr. Bean? I’m so excited to answer! The reason that such a big loss happened was because, and I quote: “[his] team forgot to sell the shares” and “Celsius was not tracking the Grayscale shares at the time the should have been sold.”
  • The bankruptcy examiner does not believe this is entirely the reason, because some of the shares were still subject to a 6-month lockup that would have expired far after the discount emerged.
  • When Chief Risk Officer Sunada-Wong brought up selling the shares, Celsius showed resistance, and alleges that Alex Mashinsky, on seeing the discount, “wanted to buy more GBTC.”
  • As a reminder, GBTC and other Grayscale trusts cannot be redeemed for cryptocurrency, and are only available to accredited investors.


Loss: “Tens of millions of dollars.”

At the very end of 2020, Celsius acquired KeyFi, a company that lets you “manage your assets seamlessly on one intelligent DeFi platform” for an undisclosed sum.

Several months before actually finalizing the acquisitio, Celsius had already allowed KeyFi - a company that does not appear to be in the business of loaning or investing money - to “engage in coin staking and other coin deployment services for Celsius,” which lost Celsius “tens of millions of dollars.”

The deal itself was “forced” on Celsius’ risk team by Alex Mashinsky and Chief Revenue Officer Roni Cohen-Pavon with “no process,” overruling then-CFO Harumi Urata-Thompson’s objections. As a reminder, Harumi Urata-Thompson is the same person who said the aforementioned Equities First loans were fine, which should speak to how bad the KeyFi deal was.

Mashinsky had previously invested in KeyFi CEO Jason Stone’s prior company Battlestar Capital, where he also lost money. As a result, he chose to both give Mr. Stone an office at Celsius and hand him more money to invest, because "many entrepreneurs fail before they succeed.” It appears that Mr. Stone, despite his job being “run a wallet company,” was given some sort of hedge fund style investor role, investing in yield farming (put token into contract and get free money, another kind of Ponzi scheme).

By November 2020 - again, before the acquisition had actually been finalized - Mr. Stone and KeyFi had “suffered significant liquidation based on their mismanagement of [Celsius’s] loan collateral,” which appears to be yet another thing that shocked the Celsius Risk Committee. Mr. Stone was meant to get permission before investing, but also appears to have just done it anyway. They had also asked Mr. Stone to build software to help them track his investments, which he did not do.

This has now become an incredibly messy lawsuit where Celsius alleges that KeyFi CEO Jason Stone stole 1000 Ethereum from Celsius to invest in NFTs. Mr. Stone alleges all of his investments were greenlit by Celsius. I hope all of them are banned from using the computer ever again.


Loss: $105 million

StakeHound is a company that lets you stake crypto to get more crypto, generating returns from thin air using the computer. So far, so Madoff.

On January 20 2021, Celsius engaged with them to operate Celsius’ ETH2 staking - putting your Ethereum on the new Ethereum network and getting yet more money generated from thin air, which “enables one to participate in the process of validating new blocks to be added to the Ethereum blockchain and to share in rewards for creating those new blocks.”

They transferred 25,000 Ethereum to StakeHound so that they could take over the “technical process of staking.” Several months later, StakeHound let them know that they had lost all the private keys and thus the money was gone, inaccessible for the rest of time.

StakeHound blamed crypto custodian Fireblocks, who they say accidentally deleted the keys. Fireblocks claims that they generated the keys for StakeHound, who stored them outside of Fireblocks’ platform and did not share said keys with a third-party service provider as they were required to do. StakeHound claims that Fireblocks backed up the private keys with another service provider called Coincover, who never checked if they could open the wallet because of a confidentiality agreement, who also, confusingly, could not open the wallet without Fireblocks having the private keys.

One might be forgiven for saying Celsius wasn’t at fault here, but let’s be clear: they sent $105 million to a company that only existed for a couple of months run out of another country with a founder whose expertise appears to be entirely no-name blockchain products. The thing in question - staking their users’ Ethereum - feels like something they could have done but were too lazy or cheap to do themselves.

I truly hope every single one of these people is put in a faraday cage and forced to read children’s books.

But Wait, There’s More!

Despite being several hundred pages long, the Celsius examiner’s report left out the $54 million that Celsius lost on the $120 million Badger DAO exploit. It is not obvious if Celsius lost the money by interacting with a bad smart contract, or whether Badger DAO lost the money.

I do not even know why they put that money in there, but at some point when you have had two different events where all your money disappears, perhaps you are the problem. I don’t know.

Looking for your money to disappear another way? Look no further.

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Negative Degrees Celsius

One of the more annoying things about Google these days is that finding old articles about companies is very difficult. But it’s important to remember that at the end of 2021, Celsius was still raising funds, specifically expanding their Series B round from $400 million to $750 million. This may have been because, and I quote the examiner’s report, “Celsius found it more and more difficult to fully deploy its crypto assets under management [editor’s note: meaning the assets held by customers] in its usual investment markets…this compounded the problem of Celsius’ persistently high rewards rates.”

This is because Celsius was offering unrealistically-high yields on customer deposits. A Celsius employee asked “how are we profitable?” at which point Coin Deployment Specialist Dean Tappen said “we aren’t.” Damningly, 36% of Celsius’ assets were generating no revenue for the company at all, specifically, Bitcoin, which they offered a very high rate on (4.74% APR) yet could not easily deploy for a return, because the Bitcoin blockchain did not include things like “yield farming” (magical money that comes out of nowhere based on nothing).

Celsius also used customer funds to both manipulate the price of and buy more of their own CEL token, which they also used to prop up their balance sheet, likely to be able to source more capital from investors. In short, they blatantly lied about their business model and how they generated their yields.

And the media absolutely dropped the fucking ball. Seeking Alpha called Celsius “A Genius Corporate Structure With An Undervalued Token” in July 2021. Back in April 2021, CNBC reporter Kate Rooney - when a guest brought up their concern about how the yields from companies like Celsius were created - actively defended these companies, claiming that they made these returns “by lending to hedge funds.’ In a nationally-broadcast interview with CNBC from March 30 2022, Alex Mashinsky explained Celsius’ ability to generate yields through lending pooled customer funds to “institutions, exchanges…[that] need to borrow these assets, and willing to pay yield” because you, the user, are “taking directional risk” on the price of Bitcoin, which even then sounded like complete horseshit.

Bloomberg, in January 2022, said that Celsius’ 18% Yields “are tempting - and drawing scrutiny,” and described Celsius – which has never had a banking charter – as “effectively a bank for cryptocurrencies, though it’s not regulated as one.” The article happily lists all of the rates that Celsius offers, and accepts - without criticism - the explanation of “we manage to generate these insane returns that no other sector in the world offers through loans.”

Their source for validating this claim? Genesis. Hey, REMEMBER GENESIS?

Celsius is just one of many crypto-lending platforms attracting deposits by offering high rates, all paid in cryptocurrencies. Celsius’s rates vary depending on the currency and other factors—about 3% to 8% on Bitcoin, 4% to 7% on Ether, 9% to 11% on Tether, and its top rate of 18% on a coin called Synthetix. Investors get the highest rates if they accept yields in a token called CEL. Celsius says it’s able to pay such rates because it invests the deposits and earns even bigger returns, in part by lending cryptocurrency to traders, who are willing to pay high rates to use it for bets. Roshun Patel, vice president for institutional lending at Genesis, a New York-based firm that also makes crypto loans to traders, says going rates for Bitcoin loans are 2% to 4%, with loans of stablecoins such as Tether costing more like 10%—which could be enough to cover what Celsius promises to pay depositors.

That’s right - Bloomberg accepted the logical conclusion that Celsius could offer ridiculous returns on crypto by asking a crypto lender what they thought.

It also includes one of the more ridiculous quotes I’ve seen in an article, emphasis my own:

In an interview there last year and another at the Bitcoin 2021 conference in Miami, Mashinsky told Bloomberg Businessweek that Celsius is able to pay such high yields because it passes along most of its earnings to its users. He said it’s the traditional financial system that’s ripping people off by taking their deposits, using them to make money, and then claiming it can only pay tiny interest rates. “Somebody is lying,” Mashinsky said. “Either the bank is lying or Celsius is lying.”

I really want to spell this out: the writer in question chose to trust Alex Mashinsky, a guy who has no real finance background, rather than, I dunno, ask a bunch of banking people what they think about this and how they could possibly be able to generate these returns. The last three paragraphs hint that there may be something up - but at no point is there any suggestion that this company is crooked.

Former employees, who requested anonymity to protect their job prospects, say that while the company’s investment strategy makes sense, Celsius has taken risks with users’ money that might surprise them. In addition to lending to institutional investors, they say, Celsius has invested hundreds of millions of dollars of customer funds through DeFi protocols—apps run only by software that lets users deposit funds and earn high yields. And they say one of the company’s top DeFi money managers—who maintains an anonymous Twitter account with an avatar of a demon mutant ape—left in the summer amid a dispute. In December, Celsius said it had lost $54 million in a DeFi hack but added that user assets weren’t affected.

“Look, there’s no free lunch out there,” says Duke University finance professor Campbell Harvey, who co-authored DeFi and the Future of Finance. “If someone is offering an extremely high expected return, you have to be very cautious.”

I realize it’s crank-adjacent to say “the media failed,” but I cannot find a major media outlet that sat down and said with clarity “these returns are not sustainable,” let alone challenged the notion that the way Celsius “made money” was through loans to institutions and exchanges. While that was plausible as a way to make revenue, there is no universe in which “we take on a bunch of loans to give you returns” makes mathematical sense if you think about it for even a second. No interviews with Alex Mashinsky involve the words “sustainable” or “profitable.”

Bloomberg’s credulity is particularly breathtaking when you consider that, within recent memory, the traditional world of finance had its own Celsius. I’m, of course, talking about the Icelandic bank Icesave, which lured billions of deposits from (primarily British and Dutch) savers by offering unthinkably-high interest rates. And then, in 2008, it imploded, leaving its customers in the lurch.

Looking back, the parallels between Icesave and the recent crypto casualties — Celsius and FTX in particular — are eerie. Icesave’s parent company, Landsbanki, was heavily indebted and had made some spectacularly stupid investments. Its leadership team was just as dumb and criminal as Sam Bankman-Fried. Landbanski only remained solvent by virtue of the relatively high price of the Icelandic Krona, which lost 35 percent of its value in the first nine months of 2008. As the Krona imploded, the company’s remaining liquid assets became worth a fraction of its liabilities, which (at the time) were largely held in other currencies (primarily Euros and Pounds).

As fascinating as the Icelandic banking crisis is, there’s a larger point here. Why would Bloomberg think that a crypto firm following in the footsteps of one of the largest failed banks of the 2008 Global Financial Crisis would produce a result that was anything less than catastrophic?

It’s not as though Bloomberg — the biggest and most prestigious finance media house — is a stranger to the sordid saga of Icesave, having covered it exhaustively at the time, and during the five years of legal wrangling that followed, as European governments (primarily the Dutch and British, but also some Scandinavian countries) sought compensation from the Icelandic government. Nor is the Icelandic banking crisis some distant historical event, having occurred just fifteen years ago.

And thus the most obvious question, in my mind, is asking Mashinsky why nobody else is doing this in traditional finance. His answer would have been mealy-mouthed - something about the value of cryptocurrencies and the future of money - but one could push from there and say “that isn’t an answer.Why has nobody tried this before? And how are you generating a profit?”

The answer, I believe, is that people would much rather believe a beautiful lie than have the courage to ask an inconvenient question. It is the height of recklessness to even accept their framing as “the bank of crypto.” Celsius has never operated like a bank in any sense, though it used the language of traditional finance to legitimize an enterprise that was crooked from its inception. Those who helped pump Celsius’ brand are guilty of hurting real people, like the parents that have been tricked into putting their life-savings into a platform that used said funds to enrich one guy.

This is not a case where “interest-free money” channeled from the Fed via gullible VC investors allowed people to do anything. This was blatant fraud, pushed by fraudsters, aided by a media that desperately didn’t want to be left behind after they were “wrong” about the last crash. They learned nothing from last time - that cryptocurrency is inherently manipulated, used by some of the worst people in the world to take advantage of the desperate. Instead, they chose to “get on board” with “the future” without daring to ask the very obvious questions that might have saved people from losing billions of dollars.

And this is exactly why I considered articles like the Latecomer’s Guide To Crypto to be so dangerous. To quote Kevin Roose, who wrote arguably one of the more harmful pieces of journalism I can remember in March 2022:

Some critics believe that cryptocurrency markets are fundamentally fraudulent, either because early investors get rich at the expense of late investors (a pyramid scheme), or because crypto projects lure in unsuspecting investors with promises of safe returns, then collapse once new money stops coming in (a Ponzi scheme).

Yes, Kevin, wouldn’t that be horrible? Wouldn’t it be horrible if someone lured in unsuspecting investors with promises of safe returns, only to collapse if new money stopped coming in?

If only someone had said something.

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