Jobs Data, Celsius Lawsuit And Mt. Gox BTC
Markets sell off as U.S. June jobs numbers beat expectations. KeyFi files a major lawsuit against Celsius. Mt.Gox-recovered bitcoin gets closer to being released.
In today’s issue we have three different sections to cover: the market’s reaction to the latest U.S. jobs data this morning, a lawsuit filed against Celsius last night detailing inner workings of the company and the latest on the 142,000 bitcoin from Mt. Gox to be repaid to creditors.
Good Jobs Data Is Bad News
After what looks like a bear market rally taking over for broader risk assets and bitcoin this week, the markets sharply reversed on good economic news: 372,000 jobs were added in June versus expectations of 265,000 and an unchanged unemployment rate at 3.6%. May was also a positive-surprise month for jobs, beating consensus expectations.
However, this is “good news is bad news” for the market because now expectations of Federal Reserve rate hikes are rising. The Fed has been clear in their messaging that they need unemployment to rise and labor demand to turn over as a result of their attempt to curb inflation. Although a lagging economic indicator, the jobs data will give more confidence to hike at 75-bps moves as the Fed is reactive, not proactive. Jerome Powell has mentioned that an unemployment rate above 4% “will still be very strong.”
The market looks to be reflecting those concerns, with rising rate expectations and falling prices of risk assets in the immediate move after the release this morning. Both SPX and bitcoin fell sharply while eurodollar futures implied Fed funds rate for December 2022 moved up 12 bps. That may not completely stop the latest rally but it gives us glimpses on how monetary policy expectations are changing.
Celsius Lawsuit
Every day we’re finding out more about the crypto contagion details and second- (and third-) order effects. First we have Blockchain.com, which recently raised funds at a $14 billion valuation, announced potential losses of $270 million from a Three Arrows Capital default. Blockchain.com’s CEO has said that the company “remains liquid, solvent and our customers will not be impacted.”
Next, we have a bombshell of a lawsuit filed last night against Celsius from KeyFi, a partner that managed $2 billion in customer assets across staking and DeFi yield strategies. We wanted to recap the highlights from this lawsuit just to shed light on the inner workings of the Ponzi-like scheme that Celsius had allegedly become.
You can read KeyFi’s founder’s Twitter thread below or the full lawsuit here. Notes below are paraphrased from the document:
Celsius was desperately seeking an investment that could earn them more than they owed to depositors. Otherwise they would have to use additional deposits to pay interest owed on prior deposits, a Ponzi scheme.
Celsius lacked DeFi experience so they sought out KeyFi to manage these strategies in 2020 starting with a new Ethereum wallet address referred to as the “0xb1” account.
After the Celsius platform suffered a DNS attack, Celsius provided KeyFi with the private keys to this account. All of the account activity can be tracked here.
Celsius lacked basic security controls to protect billions of dollars in customer funds while actively using funds to manipulate crypto asset markets to their benefit.
Multiple incidents of failure to perform basic accounting that endangered customer funds. One example resulted in a $200-million liability the company didn’t understand how or why it owed.
Celsius assured KeyFi that the company had necessary hedging and risk management strategies in place but failed to implement basic strategies.
KeyFi estimates that a percentage of gross profits owed to them is $838 million, less costs and expenses. Celsius refused to pay its agreed share of profits.
Celsius gave crypto assets to KeyFi to invest but measured profits in USD. As a result, there was inherent exchange rate and impairment loss risks to manage as Celsius owed customers interest in crypto-native coins. Prices of crypto appreciated against USD and Celsius failed to hedge or manage that risk. KeyFi says no hedging transaction activity ever even occurred.
In January 2021, KeyFi found these business practices improper and corrupt and wished to no longer do business with Celsius.
Celsuis engaged in a series of transactions to inflate the CEL token price using 4,500 bitcoin worth $90 million in customer deposits to purchase CEL. Artificially inflating CEL benefited Celsius by paying customers interest payments in the form of CEL. Mashinksy personally owned hundreds of millions of dollars’ worth of CEL. It also created substantial demand and volume for the token to convince lenders that it was a sizable, liquid treasury to be borrowed against.
With the price of ether rising 50% in just a couple of days in January 2021, Celsius had massive liabilities to depositors denominated in ether but had not maintained ETH holdings equal to those liabilities. As customers sought to withdraw, Celsius was forced to buy ether in the open market at higher prices, thus suffering heavy losses.
Now faced with a liquidity crisis, Celsius began to offer double-digit interest rates to lure new depositors in. Those new depositor funds were used to pay earlier depositors and creditors.
Alex Mashinksy used the 0xb1 account to transfer valuable NFTs to his wife’s wallet.
Celsius took out a $1 billion loan from Tether at 5-6% interest while owing clients much higher interest rates on popular coin deposits.
The alarming allegations and detail in this lawsuit lay out how and why poor business risk management, lack of execution and greed quickly turned Celsius into operating as a fraudulent business and a Ponzi scheme if allegations are true. This likely won’t be the only lawsuit against Celsius and many other yield-generating exchange shops we see unfold over the next few months.
Mt. Gox Repayments
Approximately 142,000 bitcoin from the loss of over 700,000 bitcoin from Mt. Gox in 2014 are now closer to making their way back to the hands of the victims. Mt. Gox creditors were sent a correspondence two days ago that confirmed repayments were being prepared. Creditors have options to be repaid in bitcoin or cash but a date has not been set for transferring repayments.
Everyone is now concerned with this bitcoin flooding the market, which would add additional sell pressure as Mt. Gox creditors would stand to make a substantial return on their claims even with bitcoin around a $20,000 price. In February 2014 when Mt. Gox halted withdrawals, bitcoin’s average price was around $650 (the bankruptcy claim price was around $450) so we’re talking about a ~30X or more return over 6 years.
However, a lot of the recent FUD is likely unfounded and speculative as we don’t really know how much bitcoin will be sold into the market. Some original Mt. Gox creditors have been bought out by larger institutions over time offering discounted payouts. For example, Fortress Investment Group offered creditors $900 per bitcoin back in 2019. Off The Chain Capital and Galaxy Digital also have significant claim holdings. Yes, we may see some of that bitcoin liquidated and profit realized, but it’s also been a way for investors who can withstand the legal and duration risks to acquire bitcoin on the cheap.
In a future issue, we will cover the holdings and likely market impact more in-depth as we move closer to the claims and repayment resolution.
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