Investing in cryptocurrencies was the get-rich craze of the pandemic. Then came the $2 trillion crash. Was it a giant Ponzi scheme all along?
The reality finally hit Fynn Weisgerber, 17, when he was driving home from football practice in May. He pulled over and cried.
"I was having a mental breakdown," he recalls. "I had just watched $1 million disappear before my eyes in, like, hours. It was crazy how fast it happened."
Weisgerber is a polite, articulate teenager from Michigan. The words "Jeez" and "oh man" bubble up regularly as he unspools an incredible story that captures what is sure to go down as one of the great manias of financial history: the cryptocurrency boom.
For a few unbelievable months, you see, Weisgerber was a crypto millionaire. He took US$2000 (about $3242) from his savings last year — with his parents' consent — and, in between Zoom classes during the pandemic, started dabbling in digital currencies like Bitcoin and Ethereum. Over the following year he multiplied his nest egg 500-fold.
"Going to, like, over a million dollars in a year, at 16, with just my computer while I was in school. It was pretty remarkable," he recalls. "I didn't tell anyone at school, it was my secret."
The fuel for his improbable fortune? Not Bitcoin, but a pair of less prominent digital coins he had happened upon, called Luna and TerraUSD. The latter was a so-called "stablecoin", meaning its value was pegged at US$1. It was kept at that level by its sister coin Luna. If the Terra price went above US$1, one could "burn" — or take out of circulation — Luna coins in exchange for newly minted TerraUSD coins, increasing the latter's supply and bringing the cost back down to US$1. The price of Luna, as it became more scarce, would grow.
The goal of the Terra network's creator, a pugnacious programmer called Do Kwon from South Korea, was to invent a stable currency that, unlike the notoriously volatile Bitcoin, would become the world's first truly useful digital money. The only problem with Kwon's scheme? The collateral for his internet currency was another internet currency. The stability was illusory. Kwon, though, would brook no critics. He often dismissed those who dared question him as being too "poor" to merit a response.
And timing was on his side. The combination of pandemic boredom, government stimulus cheques and zero interest rates had kicked off an orgy of speculative betting that sent everything into the stratosphere. Stock markets set new records. House prices exploded. A man paid US$2.9 million for a non-fungible token of Twitter co-founder Jack Dorsey's first tweet. The world had turned into a casino and Kwon's coins were carried along for the ride.
Starting from US$1 in 2019, Luna hit a record of almost US$120 in April. Weisgerber was, by that time, obsessed. He had turned himself into an influencer. He started a weekly newsletter and accrued more than 50,000 followers on Twitter. People started launching new projects linked to Luna and TerraUSD, and asked the 16-year-old to set aside his homework to join their management calls as an "adviser". It was, in his words, "crazy". "Crypto was all I talked about. It was a new world for me," he recalls. "Everything was going so well."
No one could explain exactly why Luna was going up and up. Like the whole crypto complex, though, it was touted as a gauzy gateway to "financial freedom". It tapped into the underlying conceit of much of crypto, which is that the "system" — Wall St, the City, regulators — is unfair or corrupt, and that software-based money that no one controls would rebalance the scales. That theory, and ever-increasing prices, seemed to be enough for most.
In two years bitcoin shot from US$8000 to its November 2021 peak of more than US$67,500. In its wake, more than 10,000 smaller cryptocurrencies were created out of thin air. The vast majority of these so-called "altcoins" had little-to-no use. They might as well have been magic beans. Yet punters poured in, egged on by YouTube influencers and "millionaires" flashing luxury lifestyles, supposedly afforded by betting on the right coin. Richard Heart, a brash American who claims to own the world's largest cut diamond and a fleet of supercars, might be the apotheosis of crypto's conspicuous consumption. In one video Heart, creator of the Hex currency, pans over dozens of Patek Philippe and Rolex watches. "What I got is better than what u got," he tweets. "Learn from me."
My $10,000,00 of wrist watches is more money than most peoples' entire family tree has ever earned. pic.twitter.com/ZPtfe77U9V
— Richard Heart (@RichardHeartWin) August 3, 2022
By June 2021, 2.3 million Britons had invested in crypto, according to the Financial Conduct Authority — a 20 per cent rise from the previous year. Alarmingly, however, public understanding fell. "Some crypto users may not fully understand what they are buying," the watchdog warned. In America, 16 per cent of the population had bought in, up from 1 per cent in 2015. Crypto had finally broken through to the mainstream. The party, of course, could not go on for ever. "Something was bound to happen," Weisgerber says ruefully. And this year, it did.
On May 9, TerraUSD suddenly lost its dollar peg, falling to US35c. Luna swiftly followed suit. Within 72 hours it was worthless, going from US$80 to a couple of cents. The collective belief that fuelled their rise simply … vanished. "Once everybody stops collectively agreeing that something is worth something, it's suddenly not worth anything at all," says Benedict Evans, a prominent tech commentator. "And that can happen very suddenly."
Central banks delivered the fatal blow. The world had been in the grip of the longest bull market in history. But then Russia invaded Ukraine. Inflation arrived on a scale not seen since the 1980s, and central banks began jacking up interest rates. Money got much more expensive. Economic growth went into reverse. Just like that, the bull market was over and risky ideas like TerraUSD, Luna and the whole crypto complex were exposed.
The TerraUSD-Luna implosion vapourised US$80 billion in a matter of hours. The collapse was akin to Lehman Brothers in 2008, whose downfall lit the touch paper on the Great Recession. In much the same way as that implosion, a cascade of bankruptcies followed. Cryptocurrencies that collectively topped US$3 trillion in value in November plunged below US$1 trillion. Life savings were obliterated. Chat rooms in the messaging app Telegram, and on social media sites like Reddit, once served as forums for crypto enthusiasts to make fun of the "normies" who had let the bonanza pass them by. Now they were littered with suicide hotline numbers.
As the lawyers and regulators pick through the rubble, the picture that has begun to emerge is not of a revolution gone off the rails, but of something far more familiar: a Wild West in which companies took customer deposits, used them to invest in each other's projects and took out huge loans to pump up valuations while promising unsustainable returns. It was a Russian nesting doll of Ponzi schemes and, perhaps most amazingly, regulators just stood by and let it happen.
The fallout has sparked a fierce debate. Critics have been quick to double down on what they have argued: that crypto is a gargantuan waste of time and money. Ewan Kirk, a Scottish tech investor and former hedge fund manager, reflects the views of many: "It was just a giant fleecing of ordinary people." Others claim that this is simply another tech boom-and-bust cycle, like the dot-com implosion, which was painful but left us with some useful, even revolutionary, technologies. Those arguments will rage on, but in the meantime, more pain is likely as recession looms, crypto prices stay pinned to the floor and bills come due.
Weisgerber was in nappies when Lehman went bust. As he watched the TerraUSD-Luna collapse happen, he held on, white-knuckled, to hope. He never sold. "I really messed up in the crash. I only saw it going up, and so as it was cascading down, I still had that part in me that believed." He adds with a hint of satisfaction: "Not many 17-year-olds can say they were already a millionaire."
Weisgerber is one of millions. But how is it that so many people were drawn in? How did this "industry" get so out of control that it could turn a teenager into a millionaire and then take it all away overnight? To find the answer, one must go back to the beginning.
The first 50 Bitcoins were created on January 3, 2009, by Satoshi Nakamoto, the mysterious inventor of what he (or she, or they) said would be a new "peer-to-peer electronic cash system". Tucked within the code of the so-called "genesis block" was a headline from that day's edition of The Times — "Chancellor on brink of second bailout for banks" — a nod to the troubled financial system that bitcoin might ameliorate.
Crypto not only rose amid the Great Recession, it was a reaction to it. Indeed, many of its early converts were libertarians and anarchists who viewed a new form of stateless digital money as a vital tool of the eventual uprising. "It became an ideology: regulation is bad," said Paul Romer, the Nobel prizewinning economist at New York University. "But regulation is just another word for law, and law is what protects people."
Bitcoin's core technology is called blockchain, a digital public ledger that exists on thousands of computers around the world and records every transaction for all to see. Its key innovation is to replace trusted third parties — like, say, banks — that make sure transactions go off without a hitch, with software. Blockchain, in other words, replaces middlemen with code, opening the door for a new way to move value outside the traditional financial system. Even its critics allow that the core concept is intriguing. "From a computer science perspective, blockchain is really interesting," Kirk says. "Can you really have a trustless, distributed, always-correct, append-only database? Yes, you can. And that's sort of interesting."
Initially, though, Bitcoin was favoured by drug dealers. They found it a useful way to get paid for contraband. It became the preferred currency on Silk Road, a dark-web drugs and arms bazaar that was shut down by the FBI in 2013.
Bitcoin's first mainstream moment did not come until 2017, when the price leapt from US$900 to more than US$19,000, sparking a flurry of public interest. It was the first time that, say, your father-in-law or your taxi driver might bend your ear about their little crypto bet. The mini-boom was a dress rehearsal for what would come a few years later; public interest swiftly receded as Bitcoin's price fell back to a few thousand dollars.
But the appeal had broadened. Messianic crypto-maximalists began to believe that blockchain technology represented the future of virtually everything — money, art, music, the internet itself. Crypto birthed its own language. "DeFi", or decentralised finance, became the umbrella term for financial products that would, one day soon, sweep away "TradFi", or traditional finance. Punters were urged to "HODL", or "Hold on for dear life", amid the price swings. "Web3" captured the idea that the internet itself will be re-architected on the blockchain and lubricated by digital money.
And the excitement drew in a new generation of opportunists. People like Alex Mashinsky. Today Mashinsky may well be the most hated man in crypto, but back in 2017 the fast-talking entrepreneur was in search of his next money-making scheme. Born in Ukraine, he lives in New York with his wife and six children. He has led a colourful business life. In the 1980s Mashinsky imported poisonous sodium cyanide from China for US goldmines (quite legally — sodium cyanide is used to leach gold from ore). In the 1990s he started a company that traded excess telecoms bandwidth, but was forced out by investors. He even proposed a "body transplant" start-up, in which people would extend life by retaining their head while his company, leveraging advances in genetics, would "re-create the rest". That idea didn't pan out.
By 2017, though, he was at a loose end. He had been fired in late 2015 by Novatel Wireless, a telecoms gear company he ran. Cryptocurrencies were having their first breakthrough moment and it was then that Mashinsky, a newbie to the industry, came up with his scheme: a crypto lender.
His argument was alluring. Banks were raking in record profits but only offering retail customers, say, 1 per cent on their savings. He would do better. Hand him your Bitcoin or Ethereum or whatever and he would pay dramatically higher rates that got to as much as 18 per cent. How? By making smart, safe bets on other cryptocurrencies and sharing the spoils with clients, rather than hoarding them like the banks.
He started his lender, called Celsius Network, in 2017. As lockdowns forced people inside and online in 2020 and 2021, Celsius exploded. By the beginning of this year it had signed up more than 1.7 million people and amassed assets of more than US$20 billion. Mashinsky would appear every week on YouTube, wearing his "Banks are not your friends" T-shirt. He would rail against Wall St and urge people to "unbank" themselves, claiming that Celsius was "safer" because of its "military-grade security" and "industry-leading" risk management.
The pitch could be boiled down to a simple message: trust me. This, of course, was paradoxical, given the core crypto ethos is that you don't have to trust anyone. "I have my own $300 million in Celsius. Do you want to put your money next to mine? I'm a captain," Mashinsky told me earlier this year. "Do you go to sleep in the cabin, trusting the captain is not going to hit an iceberg or navigate you to the pirates? What we're trying to do is help everybody, not just the rich, also the middle class, the poor, navigate through this path together."
In a world where interest rates were effectively zero, "Celsians" were earning, with metronome regularity, returns even the savviest money manager in the world would give his left arm to deliver. It was the promise of DeFi realised.
And then Terra and Luna collapsed. The next domino to fall was Three Arrows Capital, a Singapore hedge fund that had become one of the biggest crypto investors in the world. It had borrowed US$670 million from Voyager, a publicly traded crypto lender from Canada that had lured in more than 3.5 million customers with promises, like Celsius, of safe, steady, outsized returns.
Three Arrows used Voyager's money to make a huge bet on Luna just weeks before it crashed. The collapse blew a giant hole in its finances. Three Arrows defaulted in June and its two founders, high-school friends Su Zhu and Kyle Davies, both 35, went into hiding before surfacing in an interview with Bloomberg last month. Even then they declined to reveal their location, citing death threats. Zhu explained: "We feel that it's just the interest for everyone if we can be physically secured and keep a low profile."
Creditors have been left to pick through the wreckage, which includes a US$50 million down payment the duo made on a super-yacht that was due to be delivered to them in Italy this summer.
The Three Arrows meltdown created a huge problem for Voyager. With crypto prices in freefall, customers began yanking their money out. Voyager couldn't meet the requests because the money it lent to Three Arrows was gone. It abruptly froze customer withdrawals last month and filed for bankruptcy.
Mashinsky, meanwhile, was attempting to avoid a similar fate. On June 7 Celsius published a blog post under the heading, "Damn the torpedoes, full steam ahead." It reassured customers that its finances were strong and leaned hard into the well-worn crypto-revolution narrative. "We believe that those partaking in crypto today are pioneers. You are charting a bold new course towards financial freedom for humanity. The road can sometimes be difficult, but with grit and passion, we will succeed."
Six days later Celsius froze withdrawals. Mashinsky cancelled his weekly YouTube show and has not been heard from since. On July 14 Celsius filed for bankruptcy protection, citing the Luna "domino effect" and stranding US$4.7 billion. Customers will be lucky to recover cents on the dollar.
With hindsight it is hard to believe the edifice remained upright for so long. NYU's Romer says: "Elements of this look very familiar — these guaranteed high rates of return: this is just pure Bernie Madoff [the notorious Ponzi schemer]. Despite all of the New Age sophistication and tech wizardry, this is all pretty garden variety stuff."
The Celsius bankruptcy may serve as a watershed moment because for most retail investors it was platforms such as Celsius and Voyager that served as the on-ramp to the crypto highway. Yet, unlike banks or stockbrokers, there is no federal deposit insurance or government backstop. If a company goes bust you lose all of your money. The conditions of that bargain were buried in the terms of service, but they were wildly at odds with the relentless marketing of these platforms as the "safer" option.
Mike Alfred, an investor who raised the red flag on Celsius last year, explains: "The whole grift of these crypto lending businesses is representing yourself both as a bank but also as not a bank."
The results are tragic. The bankruptcy judge overseeing the Celsius case has been flooded with hundreds of letters from customers in Belgium and Brazil, Britain, Ireland, Australia and beyond. Some lost a few thousand; others lost their life savings. "My brother tried to suicide [sic] and I had mental disorder and I cannot sleep now. I haven't slept since the account was frozen," one wrote. A pensioner in America pleaded for a swift resolution: "I trusted Celsius to give me a reasonable rate of return on my life's savings of about 5 per cent. The mental pressure is almost unbearable. The actions of Mr [Mashinsky] have created unspeakable misery for many people and I am sure will result in suicides. I'm crying as I write this and feel sorry for us all."
David Adler, a bankruptcy attorney in New York who is representing several customers, said that the outpouring was unprecedented in a bankruptcy proceeding. "I've never seen anything like this," he says. "You can rest assured the judge is reading every single letter."
Britain's regulators deserve some credit. Mashinsky actually set up Celsius in London in 2017, but moved its headquarters to New Jersey last year after the Financial Conduct Authority imposed rules requiring crypto firms to comply with anti-money laundering measures. Of 273 applications, only 35 firms were approved. As part of the move, Celsius shut down access for new British customers but it is understood thousands of Britons retained their accounts.
Over the course of covering crypto's rise and fall these past few years, I have asked dozens of people what drew them in. For some it was greed. For others it was frustration with the tiny rates offered by banks. Many hoped to make a quick return and use the proceeds to jump-start a business or finance university education. Yet virtually all of them pointed to one factor that really pulled them down the rabbit hole: YouTube.
The video-sharing site is the beating heart of the crypto-influencer complex, and it is populated by a cast of personalities that reflects the industry itself. It is not a place where economists or City types opine on the latest price movements. Instead mostly amateur enthusiasts preach to an audience eager to hear about what might be the next coin to go stratospheric.
Ben Armstrong, aka BitBoy Crypto, a 39-year-old former meth addict-turned-counsellor near Atlanta, Georgia, has amassed nearly 1.5 million followers, to whom he hands out advice about what coins to buy, which to avoid and when. His one-man band has turned into a full media operation with 70 employees that brings in millions each year. Part of that revenue came from generous fees he would take to promote different coins, a practice he claims to have stopped this year.
Guy Turner, a 40-year-old Londoner, fronts a news-style programme for Coin Bureau that has more than 2 million subscribers. In his previous life Turner was a corporate writing instructor, teaching companies how to write press releases. Coin Bureau makes money via links to exchanges, like FTX and KuCoin, which pay kickbacks, amazingly, every time a customer makes a trade. Turner admits the incentive to encourage people to trade more is there, but he insists, "We never push people to trade. This means less revenue at times like this, but we've built our brand on being the opposite of the hype merchants elsewhere. We get by nonetheless."
Enthusiasts like Armstrong, who declined to comment, and Turner are not accused of acting illegally or outside of YouTube's rules. Ivy Choi, a YouTube spokeswoman, says the platform prohibits content intended to scam its users, including cryptocurrency scams. "Additionally we require creators to disclose paid promotions" and follow its partner policies "if they wish to monetise". In the first quarter of this year YouTube removed more than 3.9 million channels and 367,000 videos for violating its scams policies.
Nevertheless, for the crypto carnival barkers on the site, Carlos Magana was an easy mark. Some 20 years ago the 46-year-old IT worker from California had let the dot-com boom pass him by. The knowledge of that still irked him. So when crypto came on to his radar, he was determined not to miss out. He explains: "I started watching these YouTube videos. I wasn't aware of pump-and-dump scams and 's***coins'. I'm just thinking: the crypto community, it's starting to come up. I'm going to get in early. I'm going to make a ton of money."
"S***coin" is the term for a coin with no clear purpose or value. Yet many are promoted by YouTubers who, for example, will have been given a large allocation that explodes in value when they talk it up. "You can literally jump on to a trading platform and watch a coin start pumping during the live stream," Magana explains. What he realised later was that he, and others like him, were being used as "exit liquidity" — buying the coins as insiders dumped them. "So here I am buying these tokens for, let's say, $1 per token. And literally within two days it drops back down to 30c. And I'm, like, 'What the hell happened?'"
Indeed, for crypto investors, avoiding scams became a job unto itself. Punters were last year swindled out of US$7.7 billion — mostly in "rug pulls", according to the research firm Chainalysis, where someone spins up a crypto project, sells a currency to fund it and then absconds with the cash.
Magana, however, was unbowed by his early misadventures. In fact he did well. He had taken US$10,000 out of savings and increased it fivefold. "I was, like, 'Holy s***, I'm so smart.'" Feeling confident, he decided to take out a US$50,000 personal loan, at 13 per cent interest, and ploughed it into crypto, thinking that he could quickly triple or quintuple his money and pay back the principal.
But he put his money on Voyager's platform. When it went bankrupt he lost access to all of it. Now he is paying US$1000 a month for money he no longer has. "I felt safe with my money in Voyager. Apparently that wasn't the case," he says. "I got caught with my pants down."
The crypto crash is, in one sense, a story as old as time: an easy money scheme that left a lot of people with nothing. The thing that is different is how it has been sold: the vague, grander "purpose" that one was supposed to be buying into. But was it all just a hill of magic beans, sautéed in technobabble? In the midst of a US$2 trillion meltdown, it is hard to argue otherwise.
Indeed, subject even the savviest crypto investor to a basic interrogation of how blockchain or cryptocurrencies will meaningfully improve an industry, a process or a service, and it swiftly devolves into generalities. Liron Shapira, a noted crypto sceptic and tech investor, calls this crypto's "hollow abstraction".
He explains: "There is a specific human flaw where somebody will explain something to you abstractly, you'll feel it click and you're, like, 'I get this.' But actually it's hollow. And the reason it's hollow is because you didn't unpack the abstraction and get into specifics." The believers, of course, disagree. We are simply too early, they say. Just because it doesn't work yet doesn't mean it won't work. Marc Andreessen, the billionaire venture capitalist who is also one of the single biggest backers of crypto start-ups, famously said of the dot-com boom: "Every failed idea from the dot-com bubble would work now." Might this apply, at some future date, to crypto? Perhaps.
Working in his favour is that, even among those who have been burnt, the dream survives. Magana says he "still believes" in crypto and plans to start investing again — though "I'm way more cautious now".
And Weisgerber? He is soon applying to university and plans to use his US$1 million year as fodder for his entrance essays. And, of course, he is still dabbling in crypto. "I'm young," he says. "If I did it once, I can hopefully do it again."
Hope springs eternal.
Crypto speak
Bitcoin
The original decentralised digital currency, which was launched in 2009.
Stablecoin
A cryptocurrency whose value is pegged to an external asset — for example, the dollar.
Altcoin
Strictly any coin that isn't Bitcoin; but generally used to describe a smaller, newer cryptocurrency.
DeFi
Decentralised finance, and the opposite of TradFi — traditional finance.
Pump-and-dump
This is when a group of traders spread misleading (or incorrect) information in order to inflate the price of a coin, then sell it off at a higher price to make a profit. The currency inevitably crashes, and other investors lose out.
Crypto lender
Basically an unregulated bank. Invest your crypto with a lender and they offer a return on your investment. The lender finances this by betting your cryptocurrency on other cryptocurrency.
Blockchain
A shared and unalterable digital ledger that keeps a record of transactions.
Web3
A voguish term for a new iteration of the internet — a collaborative project created by users rather than big companies, in which the main currency is crypto tokens.
Written by: Danny Fortson
© The Times of London