The truth about Velvet Cacoon is that it's a band created by a guy named Josh from Portland, Oregon. He really does do drugs, including DXM, and the real recordings created by the band were inspired by his experiences with these substances.
The stories about the band members, the dieselharp, the fake releases, the music he used from other bands and every other weird thing about the band were all done as a joke that originated on the Full Moon Productions forums, because he doesn't take black metal fans and many musicians seriously because, quite frankly, many of them are idiots.
Anyone who thinks it's really a joke band, or that all of the recordings are fake, isn't really right, though the actual quality of his real music is entirely debatable.
How do I know all of this? I've talked to him quite often over the last year or so and he's a pretty normal guy with a big sense of humor.