Lessons From A Crypto Bankruptcy
On the 24th of April 1854, the Bella was found capsized off the coast of Brazil. It had set sail from Rio De Janeiro for Jamaica four days earlier. No passengers or crew were found, and it was assumed all onboard were lost at sea. However, there was a rumour that another passing ship had rescued the survivors and taken them on its voyage to Australia.
Roger Tichborne was one of those onboard and presumed lost. Back in England, Tichborne was the heir to the Tichborne baronetcy. Despite the chances of survival being extremely slim, his mother, Lady Henriette Tichborne, refused to give up hope. She clung to the story of the passing ship that may have rescued Roger and ferried him to Australia.
Lady Tichborne advertised in Australia for information on Roger’s whereabouts. It took a while, but 12 years after the disappearance, Lady Tichborne received a letter from a lawyer in Australia. It was on behalf of Roger. Yes, he had survived the shipwreck, and it had given him a new outlook on life. He’d tried to make something of himself in Australia, starting various businesses. They’d all failed, and he’d been too embarrassed to contact his mother. He’d recently seen her ads and was filled with remorse for the worry he’d caused. Could she send money for himself and his Australian wife and children to return home?
Lady Tichborne obliged and welcomed Roger back into the family, along with an annual stipend to live off. As you’d expect, much had changed in over a decade. Roger was now an inch taller, had several extra inches around his waist and a new birthmark. His tattoos had disappeared, his eye colour had changed, and he’d also forgotten how to speak French after growing up in France!
While such leaps of faith usually have a day of reckoning, Lady Tichborne believed this was Roger and wouldn’t hear anything to the contrary. She went to her grave believing this truly was her dear son. Her doubting family then rooted out the imposter after her death.
Despite the fraud, the one person who needed to believe in this story didn’t come to any harm and lived in blissful ignorance for the final few years of her life. Unfortunately, most days of reckoning aren’t delayed indefinitely for those who chose to ignore better judgment.
The recent failure of several cryptocurrency platforms has illustrated the leaps of faith some take with their money. We’ve avoided discussing cryptocurrencies too much over the years because they’re unregulated and there are still no good answers on what they are.
Asset? Backed by what? Currency? What business genuinely wants to accept payment in something volatile enough to destroy their profit margin in a few hours?
Despite these questions always being answered by advocates with much excitement, passion, and redirection to talk about “the future”, it’s never lessened the confusion. This hasn’t stopped cryptocurrencies racing upward in price. This only increased peoples’ interest, and in some eyes, crypto’s legitimacy.
And it wasn’t just speculation occurring. Despite the talk of decentralisation away from “the system”, platforms sprung up providing asset custodianship and quasi-banking services. Celsius was one such entity, via Bloomberg January 2022.
Every Friday, Alex Mashinsky sits in front of a video camera and livestreams for more than an hour with a sales pitch for his crypto company, Celsius Network LLC. Send money to Celsius, he says, and he’ll make you rich by paying you interest of as much as 18% a year.
“The beauty of what Celsius managed to do is that we deliver yield, we pay it to the people who would never be able to do it themselves, we take it from the rich, and we beat the index,” Mashinsky said during one stream in December. “That’s like going to the Olympics and getting 15 medals in 15 different fields.”
Celsius is effectively a bank for cryptocurrencies—though it’s not regulated as one. Users deposit their Bitcoin, Ethereum, or Tether and receive weekly interest payments.
There’s no need to elaborate or explain why this is ridiculous. Anyone who thought this was credible was taking a leap of faith akin to that of Lady Tichborne, but many did. Celsius had 1.7 million users, and late last year, $25 billion in assets on the platform.
The recent crash in cryptocurrencies caused a lot of panic. It followed massive gains which likely encouraged the most naïve retail investors into the mix and exacerbated the rout. Holes were going to be exposed as people panicked and fled back to “the system” with its more reliable currency. Celsuis was exposed and it filed for bankruptcy this month, owing its users $4.7 billion with a $1.2 billion hole in its balance sheet. The magic of that 18% yield is explained by allegations it was likely a ponzi scheme. Letters to the judge in the bankruptcy case are being published as they come in, and they aren’t pretty.
The letters reveal those in purgatory are from all around the world, including Australia.
I am a 40-year-old father of 3 from Australia that had his life savings in a Celsius earn account and his entire superannuation stored in a SMSF Celsius account. On 29/03/22 both accounts came to a total of $561,901.79AUD (6.34BTC & 36.78 ETH)… I feel humiliated, angry, anxious and have had many sleepless nights coming to the realisation all my funds I have been saving for my children’s future for the past 20+ years has been gambled away by a liar and a fraud… I would also like to add my father’s situation into this letter, he is a 65-year-old retired man, who I convinced to invest his stake in Crypto currency into Celsius as a “safe haven”.
Many of the letters strike a similar tone. Family involved. Using Celsius as a savings account. Believed what Celsuis told them. And be they large or small sums of money, the words “life savings” appear too often. People weren’t just speculating on the side with their lunch money. As with the prior example, they were throwing everything in.
Why do these things happen and why do people take these leaps of faith with investments or investment platforms that have more red flags than a Chinese communist parade? Greed is too obvious as an answer. It would play a role, but it’s not everything.
There will always be several internal and external influences. The internal influences will be what occurred in a person’s past, what’s occurring in their present, and then their future goals.
Externally there are another three influences that need examining.
Media Offering Legitimacy: Sure, we always blame the media, but too often their focus is on a good story. Good stories often gloss over preposterous elements as journalists can be enamoured with their subject or too excited to be writing about something new. We noted this a couple of years back highlighting an analysis that showed how tech companies use the media to legitimise their activities. The Bloomberg article on Celsius quoted earlier lacked serious rigor.
Widely Understood Investment Truths: There are very few out there. We believe in specific investment truths, but on a society-wide basis knowledge is low. Ask ten different people what they know about investing, you might get ten different answers and they all might be misguided. That’s if you get an answer at all! This bleeds into the media, how do they police and call out nonsense if they don’t have a set of principles under their belt? When something ridiculous comes along it’s hard for the average person to identify it if they don’t know what they don’t know.
Conspiratorial Thinking: Anecdotally, this appears to have increased in recent years. Anything established is now under suspicion, with claims of shadowy groups running the world and the average person being held back. Several large fund managers are now dealing with weird accusations that because they own thousands of companies on behalf of individual investors in managed funds and ETFs, that they are pulling the strings of every company in the world.
Cryptocurrency has been promoted as a way to break free from “the system” controlled by “the elites”. As an example, last year Celsius was encouraging users to share their stories as part of a giveaway. One of them said “I don’t trust the banking system, but I trust Celsius.” Letters to the bankruptcy judge spoke of years of saving and hard work to acquire the wealth they lost. One might note a cruel irony: their wealth was accumulated by toiling and saving within “the system” they refused to trust, and that wealth was destroyed by going outside it.
Like the Celsius affair, the Tichborne affair wound up in court. The fake Roger Tichborne was a butcher from Wagga Wagga named Tom Castro, who on further examination was found to be an Arthur Orton, originally born in London! The case captivated the English public and Orton enjoyed some notoriety, but eventually served ten years for his fraud and died destitute in 1898.
If Celsius is found to be as fraudulent as Arthur Orton, then its founders deserve a similar fate.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation, and individual needs. #investing #goals-based advice #investments #retirement #retirement planning #smsf #wealth creation #personal insurance #superannuation #martincossettini #fiduciary financial advisor #bluediamondfinancia