Enjoy the Crypto Bounce While It Lasts, Worse is to Come

Shah Gilani Jul 21, 2022

Bitcoin and a lot of other cryptocurrencies are enjoying a much-needed bounce. Too bad it won’t last.

The token space is a black hole inhabited by fraudsters and criminal masterminds who are going to continue to cheat every one they can to make ungodly sums of money for themselves.

If you’re into cryptos, you know about the latest big failures in the space: the bankruptcies of Celsius Network, Voyager Digital, Three Arrows Capital, Terraform Labs, and the implosions of Terra, Luna, and Cel tokens. You may have even lost money in one or all of them.

But most people, whether they’re into cryptos or have only read about them, probably don’t know how these entities and their tokens, along with bitcoin, Ethereum, and other popular cryptos, are interrelated. And they don’t know how greed, manipulation, and fraud brought down those big players, and the entire crypto space, and why it’s going to happen again a nd again.

We’re looking not just at the collapse of a few famous crypto-brokers. This could infect legitimate capital markets.

Masterminds of Greed

To get an idea of how we got here and how everything is related, let’s start nearly a decade ago in Singapore.

Three Arrows Capital (3AC), founded in 2012, wa s a Singapore-based hedge fund run by two former forex traders. Over the next decade, they would set on a mission to acquire and manage billions of dollars of cryptocurrency – often times in alternative currencies like Luna, Avalanche, and Solana.

The demise of the crypto- crazy fund, which had $3.56 billion in digital assets under “management” was the result of unbridled belief in the entire crypto infrastructure they came to rely upon – though they knew it was a house of cards. 3AC imploded when they couldn’t pay back more than a billion dollars of loans they got from the likes of Celsius Network and Voyager Digital, which they used to leverage up their positions in cryptocurrencies they believed they’d ride to the moon as long as the game was afoot.

Voyager Digital, a Jersey City -based company that listed its shares in Canada, is a crypto brokerage business that (at its peak) boasted 3.5 million users and $5.9 billion in assets on its platforms. Too bad for Voyager’s retail customers, with an average account balance of $10,000 in digital assets ( which most can’t withdraw), Voyager provided a $650 million unsecured loan to 3AC. When 3AC tried to sell coins to make loan payments, crypto prices were hammered, causing Voyager customers to lose money and close their accounts.

But Voyager couldn’t give them their money because it had lost it or lent it out. End of game.

Celsius Network is a crypto lender with 17 million customers headquartered in Hoboken, New Jersey (a stone’s throw from Jersey City). A nd at its peak, it had $11.8 billion in deposits and operated globally. N ot only had it lent money to 3AC and facilitated loans and leverage to Voyager Digital, but it also issued its own coin, called C el , which it fraudulently manipulated to benefit its owners.

The Original Sin of Crypto: Stablecoins

What underpins a lot of the otherwise violently volatile and insanely leveraged crypto speculation space are cryptocurrencies known as stablecoins. All of this fraudlent activity couldn’t have happened without them.

You only need to know three things about stablecoins:

  1. They’re called stablecoins because they’re pegged to a fiat currency, usually the U.S. dollar (USD), and are supposed to maintain a one-to-one, stable relationship to the dollar, so one Terra is and can be exchanged for one dollar, or one Tether can be exchanged for one dollar.
  2. They’re used to buy and trade other cryptos. Because U.S. banking regulations require lots of paperwork and paper trails, it’s inconvenient to buy and sell cryptos using U.S. dollars, so players buy stablecoins and use those to buy and sell other cryptocurrencies around the world.
  3. They’re not stable. In fact, their “stability” at best, is accepted to be unstable. A nd at worst is outright fraud.

Terraform Labs’ “project” was a stablecoin called Terra that algorithmically was tied to another token issued by Terraform, called Luna. Without driving you crazy trying to explain the inexplicable, Terra was supposed to be stable because it was tied to a completely unstable, made-up token, luna, that would facilitate a magic arbitrage that would keep one Terra worth one dollar.

Needless to say, it was garbage.

But people bought it. I n fact, they bought T erra and L una because if T erra was going to be a worldwide stablecoin, then L una itsel f would rise in value because of its global use, and traders could make money on a rising L una coin and fund it with a stable terra coin.

Too bad it didn’t work. When Terra became unstable, L una crashed, and the founders of Terraform Labs, who were speculating in L una ( by manipulating it higher and borrowing to do so), crashed along with it. So did Terra and all the ecosystem projects they were working up around Terra and luna. In other words, the whole edifice was a massive Ponzi scheme.

That brings me to T ether, the world’s most popular and widely used stablecoin. It’s a fraud people.

Terra is supposed to have dollar reserves equal to every Tether in existence. They don’t and have never been able to prove otherwise, and believe me they’ve been asked, and hounded, and sued…

Which led to nothing.

But because it works. M illions – maybe probably hundreds of millions – of people around the world use T ether to trade other coins.

Tether is issued by Tether Limited, which is owned by iFinex, the Hong Kong-based owner of Bitfinex. Not only does Bitfinex use Tether, Tether is the preferred stable coin used on the world’s largest crypto exchange, Binance, and all other crypto exchanges.

What’s scary is if the means of financing dollar equivalent purchases of cryptos around the world, meaning stablecoins, are ultimately frauds and devices conjured up by criminal masterminds, yes, I’m saying they are, then the whole crypto speculation game is doomed.

Thank goodness there’s still blockchain. Just don’t get the two confused.

I’m betting on blockchain and betting against fraudulent crypto schemes. You might want to think about what all that fraud coming down on crypto speculators could do, and will do to legitimate capital markets, like U.S. stock markets.

That’s contagion – and I’ll be addressing that next Thursday in a special edition of Total Wealth Research.

In the meantime,

look out below.

You’ve been warned,

Shah

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