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Comment by magnusss | Hacker News Reader

Celsius seemed to be a classic Ponzi scheme wrapped in a cloak of crypto. The founder was a smooth-talking pitch man who claimed to have “discovered” a risk-free way to earn outsized returns by arbitraging some flaw in the centralized finance system. Madoff’s scheme was similar, but with capital markets rather than crypto. What these schemes have in common is that, once the market takes a dip, it becomes impossible to cover redemptions and the whole thing collapses.

I don’t see the collapse of Celsius so much as a cautionary tale against crypto (“not your keys…”), so much as a lesson against investing in Ponzi-like scams. If it sounds to good to be true…

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> a classic Ponzi scheme wrapped in a cloak of crypto.

That's just Ponzi wrapped in Ponzi, innit?

I'm just going to straight up call my crypto scam Pyramid^2.

"I mean what did you expect when you bought in, based on the name?!?"

Not when I steal all your customers and start a competing Pyramid^3 service!

So you're calling it a "Collateralized Ponzi Obligation"?

Have you heard of PonziCoin? Similar concept, except the creator stupidly made actual, functioning smart contracts for it which people bought.

Not by the common definition of a Ponzi scheme. This oversimplification of crypto as a whole on Hacker News is really disappointing each time I see it.

It's not an oversimplification if it is a common use case. Yes, the crypto purist will cringe at considering the entire system a ponzi but if you're that deep into crypto you probably can't see outside.

From the outside perspective, even among technically competent people, crypto has gone from a really cool "FOSS finance" type thing to basically exclusively being used to part morons from their money. That's not even to begin talking about the relative volatility in something that will allegedly replace cash.

While true that it is not crypto as a whole, by-and-large the nature of crypto has been reduced to a scam/crime currency. The community at large who loves crypto should really be doing more to stop every person with a modest twitter following from performing a successful rugpull since now the governments want to be involved.

There's a huge difference being "commonly used for" and "is a". The vast majority of emails and phone calls are spam. But it would be naive to call either of them - particularly email - fundamentally spam services.

Just because people leverage the hype & mostly unregulated nature of most crypto, doesn't make it innately a ponzi scheme. Yes it's a mess. Yes it needs better regulation. Yes, a large number of "use-cases" are better served by existing solutions.

But this is mostly because we're still very early in a slow-burning hype-cycle. There are some fundamentally unique services supplied by (some) currencies, like Ethereum smart contracts (e.g. de-centralized escrow), that enable fundamentally new and useful interactions. It is precisely these features which give (some) currencies innate value beyond speculation. I personally plan on waiting for the hype cycle to shake out a bit longer before I get too involved.

It has been 14 years since the bitcoin white paper, how long will we be in the early stages of crypto?

On unique use cases, maybe but I am convinced the vast majority of crypto usage today falls in 2 camps

1) those speculating to make a quick buck

2) believers who want crypto to work

Both of these camps are working against mass adoption.

1) because for a speculative investment to be successful it must go up, and who wants to spend a currency they think will go up? Remember that guy who bought pizza with his bitcoin? What an idiot right, he traded currency for food?!?

2) the believers hold decentralization as above all else and see crypto as much a political tool as a product, they will sacrifice efficiency and convenience for this, the majority of people in the world won’t.

I said the same thing in 1983: it's been 14 years since ARPANET, how long will we be in the early stages of the internet? It took 50 years of hard work before the day came when you could order a burrito from your couch. Sometimes change takes a generation or two. Be patient.

I wasn’t around then but my impression is that at that point in time basically no one saw the internet coming maybe aside from a few geeks. Utility came piecemeal and eventually the private sector took notice that there was money to be made and something big was here. Today everyone and their mother want to tell me how crypto will revolutionize everything and I just need to wait for it to actually be usable for anything that I care about. It seems very backwards to me. Why is there so much evangelizing and so little product I can actually use?

> It's not an oversimplification if it is a common use case.

If I listed scams successfully cashed out in USD over the last decade, roughly the time Bitcoin existed, and tell you that since this seems to be a very common use case for USD (most likely tens of billions worth world-wide in the last 10 years), all types of fiat money are basically scams now... Wouldn't you tell me I am oversimplifying the issue?

> While true that it is not crypto as a whole [...]

I assume this is you answering the above question, but I feel worth it to clarify, I use Bitcoin as a kind of measuring stick in this example because it is the largest cryptocurrency, it has over a decade track record of maintaining the principles it established without deviating from them and should be a representative project to consider when you pass generalized statements like "crypto = Ponzi".

> The community at large who loves crypto should really be doing more to stop every person with a modest twitter following from performing a successful rugpull since now the governments want to be involved.

Social media platforms can deal with this through moderation and reputation. They have to abide to both market laws (harboring too many scammers will lead to people fleeing away, so they have incentives to fight this) and legal codes.

Why should we limit the set of tools available to humanity to transfer value to stop a minority of scammers? We already "try" this with fiat and it just doesn't work, the current planned escalation to answer is more restriction (switching to CBDC with total control for Central Banks), more censorship.

Tools like Bitcoin want to provide an alternative to all of this, provide you with an option with wich even if you have more responsibilities/risks, you are in control. And the bonus is that all of these restrictions can become walled gardens on top of Bitcoin, for people who want/need the reversibility (use escrows, like they pretty much already do), but the basic right for you to transact with anyone else can't be removed by governments.

No. Someone holding bitcoin is not the same as someone convincing others to invest in a wholly controlled fund in which you pay for withdrawals with new investment money.

Of course not; the person holding the coin is a mark.

Can you explain in this thought-framework which asset markets are not ponzis?

>> Madoff’s scheme was similar, but with capital markets rather than crypto.

A lot of people have no idea the reason Bobby Bonilla still gets paid over a million dollars a year from the Mets was because of the Madoff scheme:

The Mets released Bonilla in January 2000 but were still on the hook for his $5.9 million salary that season. Believing they were poised to make a significant profit through their investments with Bernie Madoff, Mets ownership instead agreed to defer Bonilla's salary with 8 percent interest and spread it across 25 years from 2011-35.

Well, the Madoff ponzi scheme fell apart, and Bonilla's $5.9 million swelled to $29.8 million from 2000-11. That $29.8 million divided by 25 years equals the annual $1.19 million payment.

He'll be 72 when the last payment is made.

https://www.cbssports.com/mlb/news/bobby-bonilla-day-why-met...

I suppose it isn't exactly finance 101, but one of the more fundamental rules of markets is that if you discover an opportunity for arbitrage, you never tell anyone and you exploit it as fast and hard as possible, because once it's publicly discovered, it will quickly be exploited until it's gone.

Therefore, no one is going to pitch a legit arbitrage opportunity to you.

There’s probably something to be said for not buying a Ferrari first chance you get either. Smart thing to do is behave like you won the lottery. Lawyer up, spend your money on semi invisible things like paying down debt.

Once you’re successful everyone starts asking questions.

Apart from being financial advice, that has nothing to do.

> you never tell anyone and you exploit it as fast and hard as possible

How do you tell someone you found a get rich quick scheme without telling them you found a get rich quick scheme? Conspicuous consumption. I’m not talking about your neighbors wondering what’s up, I’m talking about your industrial peers connecting the dots and stalking you to figure out what’s up.

You are missing the point. The reason not to tell anyone is there is limited money to be made from arbitage. If someone else finds it they make the money instead of you.

Not telling people you struck gold might be great life advice, but other people knowing you are rich, in and of itself, wont affect the arbitarge opportunity.

> The reason not to tell anyone is there is limited money to be made from arbitage.

>> I’m talking about your industrial peers connecting the dots and stalking you to figure out what’s up.

I'm well aware. Perhaps you need to recalibrate your opinion of other people.

But I don't understand this:

> How do you tell someone you found a get rich quick scheme without telling them you found a get rich quick scheme?

Why even tell anyone at all? There's no need to buy anything physical, just save it up and spend it on a market ETF for example.

In this case, taking off a couple hundred grand and buying a Ferrari (rather than leaving in Celsius) would have been the smart move. At least you’d hold the keys to the Ferrari.

Heh, fair enough. There's a whole chess game with these sorts of things. I think it's probably very good advice to try to take a little money out of any investment before adding more to it, but it's also documented that con artists and pyramid schemes will sacrifice part of their take to maintain the illusion. Some investors get to take money out, so that the rest of the marks think they are going to get the same treatment. Or with a confidence scheme you might make a little money in step 1 and 2 and then in step 3 their phones are disconnected and they have skipped town.

[Edit] It does piss me off though how common the conceit is, "Well if I'd held my AAPL stock until last year I'd be a millionaire". That's not how investments work. You don't let the money ride forever on one bet. You sell it bit by bit to balance your portfolio. Nobody responsible in your life would let that go without energetic commentary about what a bad idea it is.

There are a lot of 'soft' arbitrage opportunities out there, such as risk arbitrage or merger arbitrage. You may not have 100% certainty of a deal closing, but can still profit over hundreds of events.

Most 'pure' arbs are exploited, but many still exist. They often require capital, expertise, and experience.

There are also sort of structural arbs, like for ETF funds (baskets in/out).

Precisely, which require significant upfront investment/expertise in a consolidated space

And the risk vs return is baked into the trade setup and fairly bounded.

> Most 'pure' arbs are exploited, but many still exist. They often require capital, expertise, and experience.

Not really.

Usually it is a higher tolerance for risk combined with not telling the customer how much risk they actually are taking.

It is all good until it is not, and by then it is too late

Alameda Research made billions arbitraging wide spreads in Asian bitcoin exchanges relative to the rest of the world. Required working with local banks to solve logistics around wire transfers and such.

Obviously a run of the mill crypto ponzi offering 30% interest or something will eventually collapse.

Difficult to balance incentives when it comes to traditional finance offerings such as structured products or an actively managed investment vehicle.

As you point out, customers struggle in evaluating risk

What a fitting username!

; )

> They often require capital, expertise, and experience.

I would tend to classify that as someone offering you work/a partnership rather than an arbitrage.

>Therefore, no one is going to pitch a legit arbitrage opportunity to you.

I'm feeling parallels to "How to get rich quick" or "Make $5000 a week from your home" pay-per-click sites from 20 years ago.

I think the lesson here is always be wary of easy money. If it seems too good to be true, it probably is.

>Therefore, no one is going to pitch a legit arbitrage opportunity to you.

I once wrote a quick and dirty arbitrage tool for Magic: the Gathering cards (stores publish price lists they will both buy and sell at). It really did work but (of course) it quickly caused a lot of the best arbs available on the market to go away.

Eventually the store owners themselves paid me to tell them if they ever had arbitrage opportunities for their own stores (to avoid accidental mispricing versus competitors) and the whole thing sort of went away but we absolutely DID pitch a legit arbitrage opportunity to people that people paid us for (and, in fact, still pay for today).

A super old test version of the free version of the tool is here: https://mtgpricer-uat.appspot.com/arbitrageTool I doubt it actually works any more though.

A hundred-dollar bill is lying on the ground. An economist walks past it. A friend asks: "Didn't you see the money there?" The economist replies: "I thought I saw something, but I must've imagined it. If there had been $100 on the ground, someone would've picked it up."

This analogy bothers me. It feels overly simplistic. To 'see' the bill--which the economist isn't even willing to believe can exist--in practice you need to observe and understand an increasingly convoluted financial world.

Said another way, to know whether someone is really pointing out a bill on the ground or just another scam you'd have to understand crypto and/or arbitrage to the same or better degree than them.

It's more like:

I know where you can find a $100 bill on the ground. I'm selling maps to it for $10.

Yeah, if someone is saying they are going to tell you where you can find a 100 dollar bill lying on the ground if you pay them $10s I would be suspicious.

My point is that humans are not wholly rational creatures. Due to that fact, there is always an opportunity for arbitrage. I never said it was easy though, it may well indeed require understanding of crypto and arbitrage, more than others.

Thanks for clarifying. IME the analogy comes out too often when someone is implying "stupid economists are overlooking obvious opportunity", yet their bill-on-the-ground is actually some convoluted, borderline scam.

Under the hood celsius was investing user funds in typical degen ways: liquidity pools and token farming operations. Many users were using Celsius to leverage their assets for the same reason. This recursive borrowing becomes ever more precarious, and then the dominos fall. So I think there were actually layers involved, where some of the deeper layers were more ponzi-esque than celsius itself, which was operating more like a hedge fund.

To be honest aren't they all to some extent?

No, not all ponzi schemes are wrapped in a cloak of crypto.

All crypto is a Ponzi scheme, but not all Ponzi schemes are crypto.

Even if cryptocurrency isn't a Ponzi itself, cryptobros and definitely responsible. The same bad economics promoted by crypto enthusiasts that made it so popular were the same arguments that Celsius used to get popular.

I am conflicted on the definition of a ponzi. It seems to me that there are ponzi dynamics at play but sometimes the intent that makes it a "scheme", ala Bernie Madoff, with ringleaders is not always there. In this case there is Maschinsky with a lucrative insider exit, but was that planned all along, and did he cause the collapse that influenced his exit? I think not.

He didn’t cause the collapse, but he failed to deliver on his promise to his customers that Celsius was structured to protect their savings from market volatility. In fact, the promise was fake — it was never possible to fulfill, from the outset.

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