BOOK EXCERPT
ONCE A BITCOIN MINER: SCANDAL AND TURMOIL IN THE CRYPTOCURRENCY WILD WEST. ETHAN LOU ON THE EARLY DAYS OF CRYPTOCURRENCY.
Amid the 2017 Bitcoin boom, one man in Calgary rises to riches. But how everything ended in scandal is a story bigger than itself. The following is adapted from Ethan Lou’s new book, Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West.
Almost an hour into the meeting, I heard Jan Cerato say from the back, “I’ll give $100 in bitcoin to everyone right now!”
Heads turned, and all eyes were on Cerato, the bald, bespectacled cryptocurrency promoter in the slogan T-shirt and baseball cap.
There were about 20 people in that Calgary boardroom that day in the spring of 2018 discussing an upcoming conference, the Bitcoin Rodeo. I couldn’t get a seat at the table, and Cerato, who arrived later than me, had to stand. On hearing his offer, the room surveyed him, perhaps as they would modern art that they didn’t understand. Then they went back to their conversation.
But afterward, people swarmed Cerato like hungry children. At one point, he had to add a caveat: he would only give bitcoin to people who had not owned cryptocurrency before. I can’t remember what exactly he exclaimed after each transaction, and it seems neither can any others. Their recollections include, “Yahoo!” “Booyah!” and “Woohoo!” But there is no question Cerato shouted something to express his excitement each time he gave bitcoin away, as he raised a fist into the air amid all the eyes upon him.
It was not the first time he had done a no-stringsattached giveaway. Against the backdrop of the 2017 boom when bitcoin spiked to US$20,000, Cerato had done very well for himself.
With a background in marketing, he held weekly cryptocurrency meetups at a local gambling house called Cowboys Casino, where he often promoted all manner of products and services. In an oil-dominated economy still reeling from the bust, 20 to 30 people would go every week to those events. “We had a million ideas,” he said at one meetup, “right down to, like, bitcoin underwear, OK?”
The most prominent project associated with Cerato was what he called a “whaleclub” pooled investment service. He would later say that he had not been in charge, but he had promoted the project, dealt directly with investors, distributed their money to his whaleclub team to trade and frequently issued instructions. And those whaleclub investors, he said, “trusted me with a million bucks, and they trust me even with more.”
But amid the ensuing 2018 cryptocurrency bust, the whaleclub’s “profits” fell to as low as -69 per cent. Cerato denied any wrongdoing, but the matter ultimately landed before the Alberta Securities Commission (ASC). Its hearings ended earlier this year and a decision is currently pending.
Cerato and the whaleclub had begun as a success story, but it would wind up a cautionary
tale for navigating the growing world of cryptocurrency, which is puffed with opportunity and potential, yet murky, harsh and unpredictable.
In 2017, Coinbase Global Inc., which operates a cryptocurrency exchange platform, became the sector’s first proverbial “unicorn,” valued at more than US$1 billion. By the end of 2017, blockchain projects had collectively raised more than US$5 billion through the initial coin offering (ICO) mechanism — selling newly minted digital assets and bypassing regulators.
There were more than 1,000 different coins and tokens, and they had appreciated so much that their combined value would reach more than US$820 billion in early 2018, nearly hitting the magical 13 digits that would thrust the new asset class into the same trillion-dollar club as gold or oil.
For many retail investors then, it may have seemed like the whispers from 19th-century California: Gold swam in streams like carp and bristlemouths. Grab a pan, bend your back over the water, and a baron rises.
At the same time, 2017 was a particularly low point for Calgary and the Alberta oil industry, with the withdrawals of major internationals including Royal Dutch Shell PLC, which took with them a more-than-$24-billion footprint that would have translated into plenty of jobs and tax revenue. Its departure continued a long-running decline that had seen layoffs and bankruptcies empty the downtown.
It was, perhaps, no surprise that so many in Calgary would flock to the casino meetups hosted by Cerato, a self-described “flashy” man who had a certain talent for public speaking.
The city’s fate was so tied to an unpredictable commodity that it had changed its slogan in 2015 to “Be Part of the Energy,” from the previous “Heart of the New
West.” Calgary understood at a visceral level what beat within cryptocurrency. It was, after all, a vigour it had long known, yet had not seen in a long time. Travelling in the local crypto circles, I would come to see that, whether Cerato knew it or not, he had tapped into something.
Pre-bitcoin, Cerato had been named a “notable young entrepreneur” by the lifestyle publication Notable. But before that, he had been evicted and racked up debts that he had been successfully sued over.
Cerato, who has a daughter, wrote on Facebook: “There were times … I’ve had just $50 to feed myself and my family.” According to Lannie Clarkson, an assistant he hired late in 2017, he believed people “always underestimated me.” To me, Cerato said in a text message: “Im (sic) using the crypto movement to my advantage … to capitalize on the moments.”
In casino parlance, “whales” are wealthy patrons who get special attention because they spend so much. In cryptocurrency, the term refers to people who hold large amounts. Starting in late 2017, the whaleclub had people handing over money or bitcoin to four traders who would actively play the market.
Other than Cerato’s own claims of investors having “trusted me with a million bucks,” it is unclear how much money the whaleclub was managing. A minimum investment was $10,000, and statements sent to investors, which I have seen, indicated there were 34 of them, suggesting the club was handling low-six-figure money at least.
Neither Cerato nor the whaleclub’s traders had a deep trading background, but with the raging bull market of 2017, and nearly every coin surging, you didn’t need to know what you were doing to make money. And of the investors, Cerato said, “They trust me, and they love me.”
One trader, though, quit almost as soon as the whaleclub started, citing potential legal issues. In Alberta, as in many other places, a private investment club cannot be publicly advertised or take cuts from the profits.
On these and other matters, I have persistently sought comment from Cerato, at times enduring abuse and baseless accusations that I had been trying to “out shine ” him business-wise. While he has not addressed every issue put to him, I have presented throughout what I’ve obtained of his side of the story.
A lawyer for Cerato, John Zang, would later argue before the ASC that because of his connections with investors through the local cryptocurrency scene and a Telegram chat room they all used, the whaleclub solicitation was not publicly done.
“They’re not like me, sitting in a bar with your friends, discussing investment ideas,” Zang said. “They’re discussing their investment ideas in chat rooms.”
Zang also said that while the club was advertised as taking a 25-per-cent cut from the profits, that was later rescinded, and such fees were never charged.
Of course, given that the club lost money for the investors, there were no profits from which to take fees. And Cerato did promote the service widely — including directly to me, even when we had only a brushing, tangential connection. One investor said he met Cerato for the first time in a chance encounter at a bar and wrote him a $10,000 cheque on the spot because “he was a good talker.”
In response to legal concerns at the time, Cerato told his team in a private whaleclub group chat: “We are good as far as the legal confines of these rules right now! ... I had my aunty (sic) who is a paralegal get me the docs and read the rules for me.” But chat logs, shown to me by two separate sources with access to them, reveal that, at least once, Cerato seemed unaware of even basic information such as to which investor some money in the club belonged.
By July 2018, by the time of the Bitcoin Rodeo at whose planning event Cerato had given away bitcoin, the whaleclub had grown disquiet. From its then-peak of US$20,000, bitcoin had fallen two-thirds to US$6,700, and with it sank the wider cryptocurrency market and the whaleclub funds.
The prospect of losing money is to be expected for any investment, to be sure, and it’s not a reflection of any ill intention on the part of whoever manages the money. Cerato has said that none of the investors had been upset, and that any complaints had only come from “all the jealous people” who disliked his success.
I’ve spoken to eight investors, and most, much later, did get partial refunds after the ASC started investigating. But, all the same, the whole episode had been frustrating and disappointing for all parties.
The whaleclub did not involve an extravagant amount of money, and the aspects of it before the ASC only deal with some narrow technicalities of paperwork. But the whole episode that had begun in Calgary in 2017 is not insignificant.
The whaleclub investors said they were not experts in cryptocurrency and had simply wanted to make some profit in that new world — the same profit that they saw everyone else making. They said they turned to someone they thought knew better than them. But while Cerato at one casino meetup said, “I became an investor when I was 28 years old,” he later said, “I know nothing about the investing world.”
In a way, the episode reflects the wider cryptocurrency world, especially back in 2017. The field was still so new that even many established players did not have a remotely related background. It was no law society. There was no test to pass the blockchain bar. It was not easy to screen people and projects.
There were so many different coins based on marijuana alone that publications were creating top-five lists. Celebrity endorsements of blockchain ICO projects had run so rife that the U.S. Securities and Exchange Commission issued a warning. And after all those ICOS had hauled in more than US$5 billion in 2017, a Boston College study found half of the projects died within four months of their fund raises. There is indeed a lot of money to be made in this domain, but also a lot of pitfalls.
Toward the end of 2019, as the days grew shorter, Cerato’s world shrank. His original business associates had long left and he had also been explicitly excluded from a new blockchain industry consortium in Calgary.
Then his name popped up on a well-known user-submitted website in a post related to his cryptocurrency dealings. The post was anonymous and unproven, but clearly involved above-average effort, complete with graphic design, indicating whoever submitted it had a white-hot vendetta.
On Christmas Eve of 2019, Cerato sent a message to his Meetup.com group. He wrote about himself in the third person: “Jan felt it was important to End all ties to people, places & things that were not producing the proper Positive results he was looking for especially from various people in the community.”
Cerato followed up by removing his last name from his social media profiles, going instead by “Jan Gregory,” and stepping down as an organizer from his meetup group. He said he was “retiring completely from Crypto Currency 100%.” It was the second time Cerato had made such an announcement, and, just like the first time, he did not actually end up retiring.
Adapted from Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West. Copyright Ethan Lou, 2021. Published by ECW Press.