Read on Twitter
I just took my last bit Bitcoin out of @CelsiusNetwork. As a Bitcoin maximalist, I recognize I was slow to do so. But let my story be a lesson to newcomers interested in interest-bearing Bitcoin accounts.
A short thread
A short thread
When I first got into Bitcoin in winter 2019, I was impressed by Celsius Network. The Founder, Alex Maschinsky, spoke evocatively against the existing banking system, and how his company would right the wrongs of the Big Banks.
With Celsius, you could deposit Bitcoin and earn 4% interest. Meanwhile, your Bitcoin was loaned out to Bitcoin market-makers (liquidity providers) who had very low-risk for defaults. Even if they did default, your money was over-collateralized.
Last Fall, farther down the Bitcoin rabbit hole last fall, I finally realized how much risk I was taking by giving up control over 20% of my Bitcoin. So I took most of my holdings out in preparation for proof-of-keys on January 3rd.
This past week I took out the remaining little bit of Bitcoin. I knew Celsius wasn't a good company when they tried to convince people to save long-term in EOS, but the past two months, I have come to see them as outright bad actors.
Celsius claims that they over-collateralized their loans, and they claim that your funds are safe with them, but their Terms of Agreement states that they have the right to rehypothecate any assets stored with them. Most users don't know what this means. Here's a primer.
Rehypothecation is pledging the same collateral to multiple parties. It is illegal for most people to rehypothecate assets. You can’t take out two mortgages on one house. But it has become legal for banks to rehypothecate assets.
Rehypothecation is the reason for the vast majority of money printing since 1913. In most developed countries, most of the inflation doesn’t come directly from Central Banks printing base currency, but instead from fractional reserve loans that get pyramided on top of new money.
If a Central Bank increases the money supply by 2%. The fractional reserve commercial banks take that new money, rehypothecate it, and give out 7 times as much in loans as they have currency to back it. Thus total money increases 14%.
Then the shadow banking industry collateralizes those loans into new fancy securities (CDOs and CLOs), and rehypothecates those, say, thirteen times. So a 2% increase in base money, can become a 14% increase in loaned money and a 169% increase in loaned money and securities.
Most of the inflationary pressure we’ve seen in the world is not from base money-printing, but rather from banks being able to legally rehypothecate money and loans. This pyramid scheme only functions long-term if the base money can constantly expand.
Rehypothecating Bitcoin would try, but fail, to function similarly. An entity would come to Celsius and ask for collateral to back a Bitcoin derivative product. That company would then sell a security that they claim is backed fully by Bitcoin.
However, the Bitcoin would be simultaneously backing ten other Bitcoin securities. So companies like Grayscale could sell legal claims to more than 21 million Bitcoin. In the short term, this will suppress Bitcoin's price. @FriarHass.
In the long-term, when customers begin to try to actually withdraw their Bitcoin, the derivative products will collapse. And unlike dollar-backed securities, with Bitcoin-backed securities, there is no way to stop the resulting Bitcoin bank run.
Ultimately, fractional reserve banking requires either broken contracts or an ever-expanding base asset. So it won't work on a Bitcoin standard.
No company would rehypothecate Bitcoin unless they are incredibly short-sighted, ignorant of how modern fractional reserve banking actually works, or outright scammers.
I got my Bitcoin back safely, but I got lucky. If you have Bitcoin in an interest-bearing account, know that it is most likely a ticking-time-bomb.
Don't take Bitcoin IOUs and don't let anybody make your Bitcoin into IOUs.
Even if it's just 2% of your Bitcoin.
Don't take Bitcoin IOUs and don't let anybody make your Bitcoin into IOUs.
Even if it's just 2% of your Bitcoin.
If you want to read more stories like this, sign up for my weekly Bitcoin newsletter at http://eepurl.com/gMePyT .
Thanks for reading!
Thanks for reading!
