Part 4: The crypto part
As mentioned in the last installment, JPMorgan CEO Jamie Dimon referred to Bitcoin as a “decentralized Ponzi scheme.” Now we’re going to find out what he meant by that (Incidentally, Dimon was deposed in a couple of Jeffrey Epstein lawsuits this week; more info on what that might be about here).
We’re going to be building our understanding of Ponzi schemes as we go, but check out Wikipedia if you want to learn more. Because Ponzi schemes aren’t actually making investments with the money they’ve brought in (and are funneling money away), there is never enough money to pay back all the investors. When investors withdraw funds, they are paid back with some of the cash that was never invested.
Because of this, Ponzi schemes are always limited by the cash they have available: when that pile of money runs out, the scheme is over. If a Ponzi scheme has a publicly traded stock, this is the part where the stock price plummets and then the company goes under. For any Ponzi scheme to stay operating, it must keep bringing in more money.
Just as every other industry has grown dramatically with computers and the internet, the same is true for Ponzi schemes. Spreadsheets, advertisements, and training materials could be copied as they moved from one scheme to the next. Once they could make a website and take online payments, they could pull in victims from all over the world. As more things seemed possible, they could promise loftier things like deep sea adventures and trips to space.
But that was nothing compared to what they did with crypto.
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Quick, what’s the first thing you notice when you look at that chart, even if you don’t read the title?
Is it those two years starting August 2018? This is a chart of historical Bitcoin daily volume: the number of Bitcoin moving through whichever exchanges and pools Investing.com pulled their data from.
That is an absolute firehose of volume; here’s how it compared to the average over the two years prior:
· That first day in August was 30 times higher.
· The average over the next two years was 10 times higher.
· That spike at the end was 165 times higher.
Does this mean somebody started buying 30 times more Bitcoin than the entire network of exchanges typically bought or sold in a day? Probably not, no. If that wildly unlikely scenario did occur, you would certainly see it reflected in Bitcoin’s price, which doesn’t correlate. Whatever this movement was, it wasn’t due to buying and selling on public exchanges.
Okay, now let’s see what the volume has done since. I’ve highlighted the first two-year spike so you can see it:
This spike was shorter: just 66 days. But if the first one was a firehose, this was a jet engine: 725 times larger on average, and 3,500 times larger at its peak.
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I’ve mentioned Peter Thiel a few times now: he invested in Clinkle and went to Stanford, and his firm reportedly started last month’s run on Silicon Valley Bank. though he’s more well-known for things like co-founding PayPal, getting in early on Facebook, and bankrolling Hulk Hogan’s lawsuit against Gawker (to name a few).
In 2005, Thiel and two other Stanford grads/PayPal co-founders started a venture capital firm called Founders Fund, which has $11 billion in assets under management, with big stakes in companies like AirBnB, SpaceX, Stripe and Oscar Health.
It's tough to know the investment details of any VC firm: they get to keep things very private. But we can get some clues about Founders Fund’s cryptocurrency holdings over the years:
In March 2018, Thiel said he was “long Bitcoin, and neutral to skeptical of just about everything else.”
In 2022, TechCrunch interviewed two of the firm’s partners. They note that Founders Fund first bought Bitcoin in 2014 when it was a fraction of the price. They note that about two-thirds of their current crypto holdings are in Bitcoin and the rest are in the crypto industry more broadly.
They say the partner who leads their cryptocurrency investments is Napoleon Ta. Ta joined the firm in 2012, shortly after getting his MBA at Stanford. As Forbes notes in their 2018 Midas List, “Napoleon has been instrumental in developing Founders Fund’s cryptocurrency thesis, which led to the firm’s investment in bitcoin.”
A month later, Thiel was the keynote speaker at Bitcoin Miami, where he said the Bitcoin price would likely go up by a factor of 100, and would have a market cap equal to all global equities combined (Ponzi schemers often sound like this, by the way: You promise unbelievable returns because you really don’t want people to withdraw their money).
If we start digging into their crypto investments, we see the first significant move was in 2014 when they backed a unique pair of firms:
MetaStable and Polychain
This article from 2017 introduces both well. MetaStable Capital is one of the oldest investment funds in crypto: they invest “directly in digital currencies” and aim to make “at least decade-long bets.”
In the words of co-founder Josh Seims, “There's… between five and 10 of these major use cases that could be trillion-dollar blockchains.” AngelList founder Naval Ravikant also co-founded MetaStable. The minimum investment they accept is $1 million. They made over 500% return on their investment in their first three years.
Polychain Capital was founded by Olaf Carlson-Wee: He was the first ever employee of crypto exchange Coinbase in 2013 and has graced the cover of Forbes. While MetaStable invests in coins directly, Polychain “specializes in investing in other blockchain companies.”
These two companies have many connections, but the clearest is in their investors. Along with investments from Founders Fund, both firms have two other major backers who will stick around this story:
Andreessen Horowitz: They started with $300 million in 2009 and have grown to over $28 billion in assets (nearly 3 times the size of Founders Fund). Co-founder Marc Andreessen was an early investor in Facebook, getting a seat on the board in 2008 where he has sat alongside Thiel ever since.
Sequoia Capital: They’ve got an eye-popping $85 billion in assets under management, having made early investments in Apple and Google, among many others.
Similar to Clinkle, it may not say much if one of these funds invests in a company. But when several of the biggest, most well-known tech VCs invest in a pair of companies, it can signal an industry-wide push in that direction.
I dug through Polychain’s various funds to learn more about these companies. Their three “Ecosystem” funds are where they’re investing in specific new crypto technologies – Googling each provides more information.
First, a quick crypto lesson: Blockchains are distributed ledgers that list all the transactions on that chain. They’re a real mathematical and digital thing that was first created for Bitcoin in 2008 in an anonymous white paper. These technologies are kind of like that: Infrastructural and mathematical developments that allow new things within the digital space.
Polkadot allows seamless, secure transactions across blockchains, including between public and private blockchains, explained in great detail here.
The writer explains the need for Polkadot with an apt analogy: “Think of different banks, for example, that were not allowed to interact — we would not be able to transfer money smoothly from one bank to another.” Polkadot is like a being able to transfer cryptocurrency from a public blockchain to one you don’t know exists.CELO provides anonymous mobile phone cryptocurrency transactions using zero-knowledge proofs, an impressive feat of mathematics where a transaction can be confirmed without providing any information about the parties or the transaction.
Dfinity is all about increasing the speed and volume of blockchain transactions: “efficiency that is many orders of magnitude improved…to scale without bound” (emphasis mine).
If Polychain could get all three of these developed, new things would be possible. With Polkadot and CELO, they could hide the movement of virtually any cryptocurrency from anywhere in the world. With Dfinity, they could shuttle these coins all over the world with unprecedented speed and volume.
Remember in our Ponzi scheme lesson above how they’re limited by the liquidity they have available? If someone had established multiple exchanges on opposite sides of the planet (just like Summer Highlands Ltd. attempted to do in part 2), they would now have the tools to create a shared liquidity pool that all parties could secretly tap into, lying to their customers about the investments they’re not making. So investors see their bitcoin listed in their account, but it’s bogus: there isn’t enough bitcoin to cover everybody’s investments; just a dark pool for all the co-conspirators to pull from.
So what were those massive spikes of volume we saw at the top, exactly? That appears to be the decentralized Ponzi scheme in action, moving massive amounts of Bitcoin around the planet.
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There’s a lot more to this story after Polychain (and a lot more evidence around this decentralized Ponzi scheme), but let’s just add a couple data points that may support the theory for now so we can take a nice break from the crypto weeds.
If you dig through a VC firm’s SEC filings, you often don’t have much to go off: They basically just say “We sold some unregistered securities for X dollars”. But a few things stand out about the filing for Founders Fund’s Founders Growth II, LP:
While almost all of the company’s filings list the co-founders, this is the only fund that includes Napoleon Ta, the long-time partner who led their crypto strategy, as a director. This means Ta played a very active role, and it would suggest this fund is related to crypto.
The fund sold $3.4 billion worth of investments; this is the company’s largest reported sale by far.
The sale was filed with the SEC on March 4, 2022. This was the same exact day that the Bitcoin volume suddenly shot up over 1,500 times the typical average.
This was also the day that two Founders Fund partners gave the TechCrunch interview where they revealed more about their cryptocurrency investments than they ever had. With our three March 4th data points, it looks like Founders Fund funneled $3.4 billion of assets into the dark pool and then took the rare interview to pump cryptocurrency. Do I know this is the case? No. Would it explain all of the above? Absolutely.
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In 2018, Metastable was acquired by a firm called Dragonfly, which was looking to “help crypto startups bridge China and Silicon Valley,” according to the Forbes headline. “Having a fund that can toe the line between the two hemispheres is a powerful advantage,” says a MetaStable general partner.
Dragonfly’s investors included Marc Andreessen; Sequoia China; Polychain’s Olaf Carlson-Wee; and Founders Fund partner Cyan Banister.
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Next time: Why did the Metaverse look like a Ponzi scheme?
