Celsius and Alex Mashinsky under spotlight over billions


The steep fall

As with many crypto companies in recent months, Celsius’s story is one of a climb from the ashes before a potentially sharp descent.

As the crypto market was undergoing a depression in 2018 that saw the price of Bitcoin drop more than 400 per cent, Mashinsky travelled the globe to whip up interest in his new digital bank. At blockchain conferences and events in dozens of cities, he pressed the flesh – meeting whales, cajoling influencers and generally creating a media storm, an old-fashioned marketing triumph in a newfangled digital world.

Viral moments seemed to follow. Mashinsky became a crypto-community celebrity when a panel he participated in with the economist and crypto-sceptic Nouriel Roubini at the 2018 Milken Conference in Beverly Hills became a gloves-off verbal slugfest. Suddenly everyday people who had never heard of Celsius or thought about putting their money in a crypto bank were aware of this wry 50-something contrarian.

He made the case to Wall Street that he could offer much higher yields without the bureaucratic costs and profit-taking of traditional banks, and he also marketed those yields – which could reach between 20 per cent and 30 per cent – to depositors.

The pitch could often be ideological: A 2019 deck for investors argued that “the decentralised digital economy needs next generation financial tools and a system that will work for the benefit of the community,” while his communications to customers stressed his disdain for conventional banks. He also cited his experience in other cutting-edge technologies – for instance, he was among the inventors of the tech that allows internet phone calls, though some critics have questioned the significance of his role.

Still, business was slow. The company’s own CEL token, launched in the fall of 2018 to help facilitate transactions, ended 2019 at just 14 cents – only the slightest improvement from the 10 cents it was worth the previous spring.

The company struggled enough that at one point its offices were moved from Midtown Manhattan to Mashinsky’s home in the city.

Then came the pandemic. Mashinsky and co-founder and chief technology officer Nuke Goldstein – an engineer prone to grand statements like “We are disrupting giants” – found a growing audience for their vision.

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The rise of ‘The Machine’

Mashinsky held frequent “Ask Mashinsky Anything” online sessions, posted regularly on Twitter and released YouTube videos explaining how the company was able to generate such rich yields with little risk – building an intimate relationship with a broadening fan base in a world often driven by faceless computer code.

In these videos he often came across as plain-spoken but forceful, arguing that viewers were falling into a traditionalist mind-set when questioning the company’s model. “There’s a lot of confusion about where yield comes from,” Mashinsky, who came to be known to followers as “The Machine,” said in one. “And we keep going back and comparing apples and oranges.”

His signature T-shirt read, “Banks are not your friends,” and the populist message resonated. Depositor money began flowing in by the billions.

“I quickly fell in love with the idea of never having to sell my Bitcoin, never having to worry about timing market tops, and turning my family’s Bitcoin into passive income,” one Celsius depositor, who asked that only his first name, Joseph, be used to protect his identity online, said in an electronic message to The Post.

Joseph, a father of two, said it was Mashinsky’s online question-and-answer sessions that helped persuade him to put the majority of his crypto holdings in Celsius.

The CEL token, whose value was just 42 cents in August 2020, finished the year at more than $US5.50. It would go up a further $US2 by May 2021. The company hired hundreds of people and moved its headquarters to Hoboken, New Jersey, in addition to offices in Britain, Serbia and Israel.

Crypto markets were rocked by the move by Celsius.Credit:Getty

Last October, Celsius reached what seemed like a legitimising pinnacle – a $US400 million investment round led by the private-equity firm WestCap and the Canadian public-pension giant CDPQ.

Social media cheered the rise. A Celsius YouTube channel attracted 70,000 subscribers. “Celsius has totally changed my life. From working welding on my knees in a shipyard to being free of work and thinking how I can help people,” wrote a user named Chris Wood.

Another, Ralph Galasso, enthused: “Amazing quality ! best company in crypto !!!! Love Celsius!”

The company even began selling “The Machine” T-shirts.

But problems were brewing.

Losing faith

In September, regulators from Texas, New Jersey and Alabama initiated cease-and-desist proceedings, seeking to stop Celsius from accepting depositor accounts. New Jersey stopped deposits right away; Alabama and Texas gave the company a window before eventually blocking them. The regulators said the accounts were unregistered securities. Celsius denied the claim.

Sceptics also raised questions about where Celsius was putting depositors’ money to produce such yields – and whether it was embodying a crypto culture that promises wealth too shiny to resist but, in the end, also too good to be true.

“I think one of the biggest problems Celsius has always had is we don’t really know where any of their positions are,” said Cory Klippsten, a crypto-industry veteran who has been a longtime Celsius critic.

“I think one of the biggest problems Celsius has always had is we don’t really know where any of their positions are,”

Cory Klippsten, a crypto-industry veteran who has been a longtime Celsius critic

As a private unregulated company, Celsius does not come under any requirement for disclosure. Mashinsky has said the company is simply lending the crypto to investors willing to pay a premium for it. Critics including Klippsten say it has more likely been taking risky bets with that cash in a host of volatile coins and funds.

That can work, they say, when a bull market keeps the company’s own returns high and depositors’ demand for cash low. But when the market crashes, as it has over the past month, the value of Celsius’s holdings plummet at the same time that a lot of people want their money out.

“They engaged in risky strategies for generating yield on their depositors’ funds – riskier than their competitors,” Laura Shin, a crypto journalist and podcaster who wrote the book “The Cryptopians,” about the field’s pioneers, said in a message to The Post. “This is one of the big reasons they likely could not meet redemptions.”

One problem she and others have pointed to is Celsius “staking eth” – in simple terms, putting digital money on the ethereum blockchain for a fixed time in return for a fee paid to the person who is lending their crypto. The problem is that the money can be untouchable for many months – not good when customers are demanding it.

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Celsius also invested in a crypto platform called BadgerDao, which in December was revealed to have been hacked to the tune of $US120 million. A blockchain analysis by the site CryptoBriefing traced $US51 million of the missing money to an account that has been linked to other Celsius transactions, suggesting that the company took a major hit in the hack.

The identities of Celsius’s borrowers are also unknown, said Mike Burgersburg, the online alias of one of the leading critics and chroniclers of Celsius, who has been writing a series of investigative posts under the Substack name Dirty Bubble Media. Burgersburg has done extensive work trying to track down entities that have borrowed from Celsius, but he says he has found few that admit to doing so. That makes it unclear what their terms were and how easy it might be for Celsius to collect the debts in a liquidity crunch.

The company has fallen in the eyes of a number of the faithful. After Mashinsky tweeted a stay-strong message last week (“@CelsiusNetwork team is working nonstop. . . . To see you come together is a clear sign our community is the strongest in the world”), one user replied angrily. “Please allow us to withdraw OUR funds,” wrote @TzannakosPat. “People have their life savings on Celsius. The community is strong and together we should demand and [sic] formal investigation. You can’t just take peoples money and coins.”

That frustration was felt by Alex, a Celsius customer in Maryland who asked not to be fully identified to protect himself online. He has about $US20,000 in his account now, he said, money he was counting on to help support his son. “I’m feeling pretty bad to be honest,” he said.

Bitboy Crypto, the pseudonym of a prominent crypto influencer named Ben Armstrong, who has nearly 900,000 followers on Twitter, had long advocated Celsius to his followers. But after the freeze, he changed his tune.

“We were lied to about the safety of our funds by Alex @Mashinsky,” he tweeted Saturday as he offered suggestions for legal action – in turn prompting some to blame him for cheerleading for Celsius for so long.

Yet many of Mashinsky’s adherents have refused to give up. They see the freeze not as a sign of malfeasance, but as one more piece of evidence that traditional finance wants to destroy crypto and will stop at nothing to realise its aim.

“Everyone take a look. If this is true, it’s a coordinated attack to take Celsius out. My anger is not at Alex & Celsius but at the short sellers. Spread the word!!!” said a user with the handle @evanrodts, referring to a theory that the company has been victimised by those betting on its failure.

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“I have all my savings in Celsius because I trust your company,” noted the Celsius advocate @MichalMike18. “Please pull through.”

Burgersburg said many of these messages weren’t just financial denialism – they were the sincere emotions of people who had come to believe deeply in Mashinsky.

“Talking to a lot of people who invested in this company, a lot of the reason they did that is him,” he said. “They have this strong impression of Alex as a successful businessman who came up with this great idea. And they don’t want to let go of that.”

That was vividly on display from some users this weekend. For all the challenges, Joseph, the Celsius customer, said he remained “hopeful and positive” in his outlook on the company.

“Alex personally has answered several of my questions directly in the various AMAs that he does,” he said, referring to Mashinsky’s question-and-answer sessions. “Should I trust him to do what’s right, or should I continue to trust that my bank won’t?”

The Washington Post

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