During the Crypto bubble of 2020 and 2021, the crypto lending platform Celsius experienced massive growth, reaching a peak of 25 billion dollar in assets. It's not hard to tell why it was successful as they offered customers up to 17% yields on cryptocurrencies and 12% yields even on stable coins. Of course, if it sounds too good to be true, it almost always is. In the summer of 2022, Celsius halted withdrawals and declared bankruptcy.

The bankruptcy process is still ongoing and customers will suffer huge Bank anupy haircuts. We made a video about this last year as the collapse was unfolding Link in the description below, but since then a lot of new developments have come to light in July of 2023 Celsius Founder and CEO Alex Mashinsky was arrested on charges of Securities fraud, wire fraud in Market manipulation and could spend the rest of his life in prison. According to prosecutors, the entire operation was a fraud from the beginning and Machinski told so many lies that it's difficult to keep count. It's hard to overstate how popular Celsius was.

At its peak, it had 1.7 million users and dozens, if not hundreds of crypto influencers promoted the platform to their audiences as a safe way to generate passive income. In this video, we'll look at the recent Revelations about the extent of the fraud at Celsius and more importantly, we'll look at consumer psychology to see why so many people invested their life savings into what in hindsight was an obvious scam. So what is Celsius It's an app where you can deposit your cryptocurrencies and earn passive yields as high as 17% if you already own crypto anyway. way.

This is clearly a very attractive proposition as you basically get free money for assets you want to own anyway, even if you aren't bullish on cryptocurrencies. Celsius offered yields as high as 12.6% on stable coins like Tether and Usdc. This way you can earn very large amounts of passive income while avoiding the volatility of crypto markets. At the time, the Federal funds rate was at zero and savings accounts at traditional Banks had offered a fraction of a percent.

So how could Celsius offer yields which were orders of magnitude higher according to CEO Alex Mashinsky? The reason savings accounts offer such low yields is because the evil Banks keep most of the profits for themselves. Only a tiny portion of the interest income is passed on to the depositors. Celsius was different. They would lend out their customers crypto deposits and pass 80% of their interest income back to their customers.

Mashinsky repeatedly assured customers that they only lent money to reputable borrowers who could post billions of dollars of collateral. Thus, Celsius was no more risky than a regular. Bank The only difference is that they gave more of the income to their customers. Uh, But on the institutional side, we have very, uh, uh, credible counterparties.

They have billions dollars in a balance sheet, and for those, we have, uh, under collateralized. But we don't offer any non-collateralized loans. So in fact, their due diligence was so great and their lending standards were so high that Celsius had never once in its four-year history suffered a single default on its loans. you know we? We used to tell you every week that we had no loss.

no, uh, what do you call it no uh, counter or institutional investors who have not repaid their loans I'm here to say that again, right? We have amazingly right over four years, never had an institution who took a loan from us who did not pay back, didn't pay their yield, uh, and so on. So we're still uh, betting 100 there or and plan to stay the way. So it's an important thing to say. today.

this all sounded great. Celsius was able to generate high yields with almost no risk and pass 80% of the interest income to their customers. As you might have guessed, this was a massive lie. In reality, the rewards they offered to customers had no connection to how much interest Celsius itself could generate.

They instead looked at the yields offered by their competitors and tried to match or exceed them. During the Crypto Bubble of 2020 and 2021, there were multiple platforms offering very high yields. Most of them were committing fraud by deceiving their customers about the risks involved. Thus, if you didn't commit fraud, you wouldn't be able to compete.

The goal of Celsius was to raise as much money as possible from customers. Celsius succeeded in raising tens of billions of dollars, but now they needed to generate billions of dollars of interest to make good on the promised Rewards Employees at Celsius knew that this was a problem. An internal review found that aggregate rewards that Celsius paid to its customers in 2021 was 120% of its Revenue. This is obviously unsustainable.

If he wanted to keep his House of Cards standing. Mashinsky needed to find a way to increase the yield that they made on their loans. In the beginning, most of the loans were indeed collateralized, but they realized that they could earn higher interest rates if they lent their money to riskier borrowers who couldn't post collateral. By November of 2021, 39% of their loans were uncollateralized.

This was months before he gave the CNBC interview, where he falsely claimed that all of their loans were collateralized. Even for their collateralized loans, the collateral was often of questionable value. For example, between 2020 and 2022 Celsius l approximately $1 billion of customer funds to Alam research receiving Ft tokens as collateral. Thus, we can see they were lending to increasingly risky borrowers in an attempt to earn enough yield to make good on their customer rewards.

But given the risky nature of their borrowers, how could it possibly be the case that they had not suffered a single default? It's actually simple: Alex Mashinsky lied since at least early 2021, well be before Missiny claimed that there are never any defaults. Multiple institutional borrowers defaulted on loans. Behind the scenes, Mashinsky himself was heavily involved trying to recover the losses from the borrowers who had defaulted by 2022. Mashinsky was getting desperate every day that went by.

Celsius was paying millions of dollars of rewards to customers and they weren't making nearly enough interest to cover this. On numerous occasions, Mashinsky claimed that Celsius did not take directional bets on the prices of cryptocurrencies. They only gave loans and engag in what he called Delta neutral trading strategies. This too was a lie, as the financial position of Celsius was deterior rating.

Mashinsky started making increasingly risky trades in an attempt to repair the hole in his balance sheet. He would use customer funds to make both long and short bets on the price of Bitcoin and Ethereum. He used Celsius as his personal hedge fund, taking whatever bets he wanted. According to WhatsApp messages obtained by prosecutors, many of Celsius employees saw what he was doing and knew it was a big problem to be gambling with customer money in this way, one Celsius employee texted another saying quote: It seems like Alex is unilaterally trading large positions of our book.

So at what point do we seek outside intervention to get the thing under control? Unquote, they never seek outside intervention and never brought Alex under control. As it turns out, Mashinsky wasn't a very good Trader and incurred tens of millions of dollars of losses on his trades. Remember that during this whole time, they were still paying out rewards as high as 177% per year. It all goes back to the problem that Celsius couldn't make good on the yields they promise to their customers.

They tried lending to collateralize borrowers. This couldn't generate enough interest. They they tried lending to uncollateralized borrowers, but this led to significant defaults and didn't generate enough interest. Mashinsky tried his hand at crypto trading and this also didn't work.

As a last Stitch effort, they started investing customer money into the algorithmic Stable Coin Tera Us, which offered 20% yields, but was basically a Ponzi scheme. Even as they took on far more risk than they LED their customers to believe they never made enough money to make good on their customer rewards. They relied on money from new customers to pay the rewards of old customers. In 2021, they lost $800 million and in the first quarter of 2022 alone they lost another 165 million.

Every day that went by, they were digging themselves into a deeper and deeper hole. Many Celsius employees knew that what Masinski was doing was illegal, but they were either unwilling or unable to stop him. One of the ways Celsius would communicate with current and prospective customers was with weekly live streams hosted by Alex Machinski, where he would answer questions with customers as well as giving General commentary on the crypto markets They called the these broadcasts ask Me Anything or Amas. For short, the Amas were broadcast live and uploaded to YouTube after the fact.

If you watch the Amas, you can notice that many of them have been heavily edited with some parts having been removed According to prosecutors, Mashinsky made so many false and misleading statements in the Amas that Celsius employees from multiple departments began to review the Amas after they had been aired. Flagg False and misleading statements by Mashinsky and at times edit Mashinsky misrepresentations out of the recorded versions of the Amas posted on YouTube For example, in March of 2022, Mashinsky gave an AMA where he was asked about the sustainability of Celsius his rewards. He said quote: Celsius is trying to do something very simple. Okay, how about we charge borrowers 9% and pay users 7% right? So most of the yield goes to the community or the coin owners unquote after the fact Celsius employees removed this statement from the video before they posted it on YouTube because they knew it was false Celsius was not earning 9% interest on the customer deposits it lent out.

Another important part of the Celsius story is their native cryptocurrency called Cal Celsius had various tiers based on how much of your portfolio you hold in Cal tokens. If at least 25% of the value of your portfolio is held in Cal tokens, you get the Platinum tier which gives you a 25% bonus on the yield you receive. Also, if you El to receive your yield in Celsius you can earn higher rates of yield. For example, in April of 2021, you could earn a 10% yield by depositing stable coins onto Celsius.

but if if you elect to receive the yield in Cal tokens instead, the yield goes up to 12.65% The Cal token was created in 2018 with an initial coin offering or Ico. Mashinsky claimed that the 325 million C tokens from the Ico sold out and the company raised $50 million. In reality, they only sold 2third of the Cal tokens and raised $32 million. $7 million of the coins went unsold.

According to the Celsius white paper. If the Ico failed to sell all 325 million coins, the remainder would be burned instead of burning them. Celsius just kept the 117 million coins on their own balance sheet and use them at their own discretion. Theoretically, as the popularity of the Celsius platform increases, the value of the Cal tokens should also increase both because new users will buy the Cal tokens and access the higher tiers, and because Celsius has to buy C tokens on the secondary Market to pay Cal yield to its customers.

And as Celsius became more popular as a platform, the price of Cal token did increase dramatically from about 5 cents per coin in 2019 to a peak of almost $8 in 2021. Mashinsky often touted the increasing price of the Cal token as an indication of success and financial strength of the Celsius platform, but as it turned out, this was mostly smoke and mirrors. Celsius spent hundreds of millions of dollars of customer money to buy Cal tokens in the secondary Market to pump up the price. At the same time, Mashinsky was selling his personal Holdings of C tokens.

Machinski claimed that Celsius was only buying Cal tokens to pay Celsius customers their weekly Cal rewards. In reality, the purchases were far in excess of this. Machinski himself made $42 Million by selling his personal Holdings of Cal tokens at inflated prices. This ultimately came at the expense of Celsius customers as much of their deposits have been spent pumping up the price of this now almost worthless token.

The House of Cards began to crumble in May of 2022 with the collapse of the algorithmic stable coin Terara, as well as its sister coin Luna Celsius had invested more than $500 million into Us, but they withdrew the funds quickly and only suffered an $18 million loss. They also lent $75 million to the crypto hedge fund 3 Arrows Capital which invested heavily in Luna and went bankrupt shortly thereafter. The loan was only partially collateralized and Celsius lost an estimated $40 million. So in total, Celsius lost about $60 million from the Teruna collapse, which isn't huge compared to the tens of billions of customer funds they raised.

The problem is is Celsius had been losing money and was already ins solvent before the terror collapse. The collapse created fear in the markets and Celsius depositors started withd drawing their funds. By this point, it was clear that Celsius was nearing bankruptcy. Mashinsky continued conducting his AMA broadcast, reassuring customers that everything was fine.

At the same time, he was quietly withdrawing millions of dollars worth of his own personal crypto assets from Celsius on. June. 2nd, it became clear within Celsius that it was game over. An internal Pres presentation stated quote: Celsius has been consistently losing money and is facing an erosion in the capital position as well as liquidity constraints.

The current business model is not sustainable. Unquote. Even as Maschinski knew that the company was on the brink of bankruptcy, he desperately tried to save the situation by convincing customers to stop withdrawing their funds on June 7th. Just 5 days after the initial presentation, saying that the business model was unsustainable, they published a Blog titled Damn the Torpedoes Full Speed Ahead.

At the time, many media and social media Outlets were questioning the company's Financial Health Celsius claimed that this was misinformation. Importantly, they claimed that they had sufficient Reserve to meet all their customer obligations. The problem is, this was not even close to being true. Just a few days later, Celsius Froze all withdrawals and declared bankruptcy, leaving tens if not hundreds of thousands of customers holding the bag.

With the luxury of hindsight and the information in Msk's recently unsealed indictment, we can see that Celsius was a fraud from the beginning and its collapse was inevitable. But it's important to look back at all the information available before the collapse and see what red flags were missed by the dozens of Crypto influencers who promoted Celsius to their followers and the hundreds of thousands of people who deposited money on the platform. Celsius claimed to be making 15% yields on stable coins with almost no risk. At a time when the Federal Funds rate was 0% they were only giving 12% yields to depositors.

But remember that they said they pass on 80% of interest income to customers and the remaining 20% is their profit. How could anyone believe that they can make 15% returns with almost no risk? We don't have to guess. We can look at a video posted by the popular Crypto YouTube Channel Coin Bureo in October of 2020, which attempted to give an explanation to the Casual Observer. It seems that those super high interest payments are being magicked out of thin air or being paid for out of the deposits of new users.

According to Celsius, they basically take the coins that are deposited by people like you and me and lend them to institutions. Now, let's call that it is. it's Securities lending. This is actually one of the major ways that companies like Robin Hood make money.

Celsius simply takes that model and applies it to crypto. So what's happening is that Celsius is aggregating the supply of crypto from retail, lending it to institutions that pay Celsius interest and then they take 80% of that interest and give it back to the community. The fancy term for this is rehypothecation. What that means is that crypto depositors on Celsius get to benefit from 0 % of the value being created and that's how those insanely High interest rates are generated.

Now think about Banks Like City they give the customer practically nothing when they rehypothecation model and applied it to crypto. This is the vast majority of the business that Celsius does. What Celsius is doing is effectively Securities lending that's actually one of the most secure businesses on Wall Street you'll struggle to find an example of One bank that made a loss on their Securities lending business. Basically, that's due to the fact that transactions are being made with collateral.

Celsius does the exact same thing when they lend to Big institutions coin. Bureau says that Securities lending is an incredibly safe business and traditional Banks almost never incur any losses by doing it. Which is true, But what exactly is Security's lending and how much can you actually make from it? He specifically mentioned City Bank City Bank does operate a stock brokerage, but it represents a tiny fraction of their revenue insecurities. Lending represents a tiny fraction of this tiny fraction let's say, you own shares of Apple Your broker can lend your shares to another investor who wants to initiate a short position on Apple.

The short seller is required to post collateral and their broker will liquidate them if their collateral Falls below a certain threshold. Also, there is generally a third- party custodian or Clearing House involved who puts up their own collateral. This makes the chance of the original stockholder losing any money extremely small. But how much does a broker actually make by lending out their customers shares? The answer is very little.

for large liquid stocks like Apple, for example, there are huge numbers of shares available, making it very easy for short sellers to locate shares to borrow from a huge number of sources. This competition pushes the price down and the interest rate on the Securities loan is a fraction of a percent. For illiquid penny stocks, the cost of borrowing can be much higher, but these are companies with small market caps. so by definition, Brokers won't have that many shares to lend out.

Most investors don't short stocks, so aggregate short interest usually represents a single- digit percentage of total market capitalization. Thus, the vast majority of shares are not lent out, And no, Securities lending fees are earned. For traditional brokerages, the amount of money they can make from Securities lending is a tiny fraction of a percent of their customers's assets. The majority of their revenue comes from transaction fees, payment for order flow, or selling their own investment products.

These are revenue streams that Cus does not have. Also, for most banks, their brokerage segment is a tiny percentage of total revenue. The vast majority comes from lending cash to borrowers. Coin Bureau touches on this aspect as well.

For those that think these types of interest rates are too good to be true, consider that Banks like JP Morgan can borrow from central banks like the Fed or the Bank of England at next to no cost. However, how many of these banks have lowered the amount that they charge custom customers on a credit card? I Can't seem to find that many. Now get the Sapphire Reserve card from Chase Bank and you'll pay 17 to 24% on outstanding balances. That's basically money that those greedy JP Morgan Bankers can get practically free from.

the FED What all that means is bigger profits for banks. However, Celsius takes a different approach and passes on 80% of that value to users in the form of higher interest rates for depositors and lower interest rates for borrowers. It is not true that Banks can borrow from the Federal Reserve for free. Even when the Federal Funds rate was zero, a bank would have to pay a significant premium above this to access the discount window.

The Federal Funds rate is the rate that Banks can lend to each other on a short-term basis, usually overnight. Banks Do this to smooth out daily fluctuations in the reserves they hold with the FED to meet statutory reserve requirements. Because of the short-term nature of these inbank loans, they cannot be used as a primary source of funds for a bank. The idea that Banks can just borrow money from the FED for free and turn around and make credit card loans at 20% is a gross oversimplification.

Credit card loans are unsecured and risky. Banks are legally required to set aside credit loss provisions and maintain certain Capital ratios to cover any losses. Remember that Celsius claims that all of their loans are collateralized and the coin Bureau video specifically talks about collateralization as a key reason that Celsius is safe, but then he implies that Celsius can generate similar interest rates as risky, unsec ured credit card loans. This comparison makes no logical sense.

The idea that Celsius is doing the same thing as a regular bank, but just returning more the money to customers was a big lie. For example, in 2021, JP Morgan made $54 billion of net interest income and had $3.7 trillion of assets, giving them a net interest margin of just 1.5% Even if Celsius could somehow generate high yields by lending out their customer crypto deposits to short sellers, there is no explanation for how they can generate 15% yields on stable coins. Stable coins are picked to the US dollar and are thus equivalent to US dollars in so far as how much it should cost the borrow them. The idea that any reputable institution with significant collateral would pay 15% to borrow US dollars is absurd.

This alone should have raised massive alarm. Bells But the crypto influencers who promoted Celsius never talk about this. The great majority of them had referral links and were compensated by Celsius for each new user they brought in, giving them a massive incentive to portray the platform as legitimate. With that being said, there's no reason to believe that these crypto influencers knew that Celsius was a fraud, and in many cases, they too invested their own money into the platform.

The reality is, these crypto influencers aren't very smart and have only a superficial understanding of how the financial system works, but they delude themselves into thinking that they are great. Geniuses Who understand the new and magical world of crypto? This makes them highly effective, albeit unwitting tools for frauders like Alex Mashinsky. Instead of doing their own research, investors assumed that the crypto influencers knew what they were talking about. In many cases, they invested their life savings into.

Celsius The results were predictably disastrous. All right guys, that wraps it up for this video. What do you think about? Celsius Let us know in the comment section below. As always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.