Celsius Network has been at the tip of everyone’s tongue over the past week, and not without a reason. The platform is at the forefront of the ongoing cryptocurrency storm and market downturn.
A couple of days ago, the company did what many were afraid of – Celsius Network paused all withdrawals, swaps, and transfers between accounts. Users are essentially locked out of their funds as the company promises that “acting in the interest of our community is our top priority.”
“Celsius invented yield and before that no one paid yield. I’m talking about a year and a half before DeFi. Celsius is the first one to come and say “yield Bitcoin on Bitcoin, or if you want to earn more, here’s a token – you can earn with the token.” told us CEO Alex Mashinsky in an exclusive interview in April.
Mashinsky probably didn’t expect the huge mess his company would be facing just two months after.
In any case, Celsius Network is one of the largest cryptocurrency lenders and a huge player in the crypto space. As of the time of this writing, it’s also in obvious distress – a situation which, if further escalated, could have serious consequences for the entire industry. Let’s unwind.
Celsius Network is a centralized platform that offers yields on various cryptocurrencies, including ETH, BTC, and many stablecoins. The way it has positioned itself reminds that of a bank, but in fact, it seems to operate more like a hedge fund.
The business model is multi-fold. First, there’s the part where users are able to earn interest in their cryptocurrency. The way it works is simple – you just deposit your crypto in Celsius and are promised a certain yearly return which may vary but is publicly advertised as “up to 17% APY.”
“Celsius makes all its money in lending, so all other services we give (are) for free,” told us Mahinsky. “We make all of our money on yield, on earning from institutions – we give our customers all the services for free: on-ramps, swaps, loans – everything is pretty much for free. That’s why no one can beat Celsius.”
The second part is where users are able to borrow funds and use their crypto as collateral. For instance, if you find yourself in a situation where you need USDT or USDC, but you don’t want to sell your BTC, you can use it as collateral and receive a loan from Celsius at a certain interest rate, of course.
Celsius is not the only company that offers these services. In fact, over the past few years, many of them have started operating, giving birth to the term CeFi – an alternative of decentralized finance (DeFi) where users still work with a centralized middleman.
What’s relevant to the current market situation and why Celsius is in a state of obvious distress is the part where they promise a certain rate for users to deposit their funds on the platform.
These are the kinds of returns Celsius offers on various stablecoins. Naturally, this attracted massive interest, and the company itself did exceptionally well in the past couple of years. As a matter of fact, the company expanded its latest funding round to a whopping $750 million in November 2021, reaching a valuation upwards of $3.25 billion.
The reason why Celsius was so successful is that they were able to consistently earn higher yields than those they delivered to clients. For example, if they promised up to 7% on USDC, this means they would use the deposited USDC to earn a higher yield.
The only problem? Well, during normal times, there should be no problem. The issues come to light when markets tumble and, well, they tumbled. Over the past few days, ETH lost nearly 50% of its value, whereas BTC – more than 30%. This brought some of Celsius’s problems to the surface, revealing that some of their positions are likely not managed appropriately.
The major red sign that something is very wrong in Celsius came when they flat-out halted withdrawals and transfers, locking out all of their customers out of their money.
The power of blockchain-based technology, however, hides in part in that it’s entirely transparent. The community has been eager to track some of the positions that Celsius holds, and things aren’t looking very good indeed.
For example, we can track the company’s position on a massive DAI loan through Oasis (a protocol that allows users to borrow DAI against any kind of collateral that’s supported by Maker).
What the above tells us is that Celsius has borrowed DAI with a current collateralization ratio of 195.93% and over $545 million in locked WBTC as collateral. They have a liquidation price that’s 26% below the current BTC price, and if that’s reached and they don’t add more collateral, their entire position worth more than half a billion will be liquidated on-chain.
The alarming thing here is that Celsius has so far added collateral multiple times in the past few days alone instead of repaying the loan.
At one point, their position came less than 5% away from being liquidated. Remember – those are likely to be funds that users of Celsius deposited with expectations of earning a yield, and they came just 5% away from being lost entirely – not to mention the aftermath it would cause if over $500 million worth of BTC were to hit the market during times as challenging as right now.
While this might be acceptable for an individual trader with extremely high-risk tolerance, it’s certainly questionable at best for a multi-billion dollar company that’s managing the funds of regular people.
The above is just one of the examples of why the situation is looking grim. Another is that right before they halted withdrawals, the company sent some $320 million to FTX without any disclosure or community heads-up. Perhaps what’s most alarming is that the company has been dead silent in the past 24 hours – at times when all of its users are wondering if they’ll be able to access their funds.
There are at least a few reasons for which the ongoing situation with Celsius is presenting an immediate but also a long-term risk for the entire cryptocurrency industry.
In the short term, Celsius is in possession of a huge amount of crypto. As of writing these lines, their website still advertises that they have 151,534 BTC in assets, although this is not confirmed and is highly questionable after the recent turmoil.
Whatever the number is – Celsius is one of the largest lenders in the industry, and if they start liquidating assets, this will undoubtedly cause a stir in the markets. Some have already speculated that the most recent declines are in part because of the company selling.
This also brings us to the long-tail risk for the entire cryptocurrency community: tight and prohibitive regulations. We already saw what happened when the Terra ecosystem went underwater – regulators from all over the world started issuing warnings and preparing harsh frameworks in a bid to protect investors from similar happenings in the future.
What will happen if a multi-billion-dollar “crypto-native” company goes insolvent because of improper fund management spurred largely because of ambiguous or non-existing regulations? My guess is that it won’t be pretty and it won’t be helpful. Regulators will take every opportunity they have to further scrutinize the industry, and they would also have the perfect excuse to go the distance – retail investor protection.
