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How crypto lender Celsius stumbled on risky bank-like investments

Jimmy Khan

Jun 16, 2022 14:58

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Celsius, located in New Jersey, halted withdrawals and transfers between accounts this week "to stabilize liquidity," citing extraordinary market circumstances. The company's finance director claimed in a video on Friday that redemptions had increased since the crash of cryptocurrency TerraUSD in May.


Cryptocurrencies have lost more than $400 billion in value since then.


Celsius collects crypto deposits from retail customers and invests them in the wholesale crypto market, which includes "decentralized finance" or DeFi sites that use blockchain technology to provide services such as loans and insurance outside of the traditional financial sector.


Unlike banks, Celsius guarantees enormous profits to retail clients, up to 18.6% yearly in certain cases. Individual investors have poured money into Celsius and similar platforms because of the promise of large gains. Celsius's CEO, Alex Mashinsky, announced in October that the company had $25 billion in assets, but that figure had dropped to roughly $11.8 billion as of last month, according to the company's website.


According to public blockchain statistics and researchers who watch such data, Celsius looks to have made a mistake with its wholesale crypto buys. According to analysts, the company was unable to meet redemptions from customers fleeing the broader crypto market slump as those investments soured.


Noelle Acheson, director of market research at Genesis, a digital currency prime brokerage, said, "This is the closest we've seen to a bank run" in the cryptocurrency business.


Requests for comment from Mashinsky and a representative for Celsius were not returned. On Sunday, the company stated that it was taking steps to meet redemption requests, but that "there may be delays."


According to public blockchain data, Celsius' difficulties stretch back to at least December, when hackers stole $54 million worth of bitcoin it had invested with DeFi platform BadgerDao. Mashinsky stated at the time that Celsius had lost money, but did not specify how much.


Celsius had also put money into the Anchor protocol, which offered up to 20% returns on TerraUSD deposits. According to public blockchain data, Celsius withdrew more than $535 million in crypto assets from Anchor as TerraUSD plummeted.


The company's greatest blunder seems to have been investing customers' ether tokens with Lido Finance, a DeFi platform that allows investors to benefit from a new version of ether that is currently under development. "Staked" ether, or stETH, is the name given to the investments.


Customers that deposited ether with Celsius were guaranteed returns of between 6% and 8%.


According to Andrew Thurman, an analyst at analytics firm Nansen, which tracks blockchain data, it had at least $450 million in stETH in its primary DeFi wallet, but likely has more stored elsewhere.


While one stETH is supposed to be redeemable for one ether, the price of stETH has fallen in recent weeks in comparison to ether as the crypto market has fallen, prompting holders to sell their stETH.

According to analysts, this disparity made it difficult for Celsius to convert its stETH to ether to meet customer withdrawals.


"Everyone could see that they had jobs that were seriously jeopardized," Thurman added.


Celsius has been impacted by the fall in bitcoin's value, which has lost nearly half of its value this year. According to Thurman, it pledged bitcoin-pegged crypto assets as security against a loan of other cryptocurrencies. According to Thurman, when bitcoin decreased in value, Celsius had to increase their collateral.


Celsius had crypto loans collateralized with bitcoin, Mashinsky told the Financial Times in 2019.

Celsius' business model, according to Cory Klippsten, CEO of crypto investment platform Swan Bitcoin, is "just mispriced risk."

Concerns about the spread of disease

The Wall Street Journal reported on Tuesday that Celsius has hired restructuring lawyers. Its problems have sparked concerns that other crypto lending platforms may face investor exodus as a result of their problems.


On Tuesday, the United States' chairman of the International Monetary Fund (IMF) announced his resignation. According to the Securities and Exchange Commission, such platforms operate similarly to banks, and the high returns promised may be "too good to be true."


stETH's peers have quickly distanced themselves from Celsius. BlockFi, based in New Jersey, tweeted on Monday that it does not hold any stETH as a principal or collateral. Voyager Digital, which is also based in New Jersey, tweeted that it has never engaged in DeFi lending and has no stETH exposure.


Several other crypto lending firms, like as Aave, invest in stETH and use it as collateral, according to Thurman. There is a "risk of quite big liquidations" if it continues to fall in relation to ether.


Requests for feedback from Aave were not returned.

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