How the fall of Celsius dragged down crypto investors

The fact that C filed for bankruptcy this week hardly surprises anyone. When a platform freezes client assets, it usually ends. But just because the demise of this stranded crypto lender wasn’t a shock, doesn’t mean it isn’t a really big deal for the industry.

In October 2021, CEO Alex Mashinsky said crypto lender with $25 billion in assets under management. Even as recently as May – despite the drop in cryptocurrency prices – Lenders are managing about $11.8 billion in assets, according to its website. The company has an additional 8 billion dollars Loans to customersmaking it one of the biggest names in the world in crypto lending.

Now, degrees Celsius down to $167 million “cash”, which it says will provide “abundant liquidity” to support operations during the restructuring.

Meanwhile, Celsius owes its users about $4.7 billion, according to its bankruptcy filing – and had a loss of about $1.2 billion on its balance sheet.

It shows that leverage is a drug, but the moment you suck up all that liquidity, it will be a lot harder to keep the party going.

The drop in degrees Celsius marks the third major bust in the crypto ecosystem in two weeks, and it is being billed as crypto’s Lehman Brothers moment – compare the contagion impact of a single lender Cryptocurrency failed with the collapse of a major Wall Street bank that ultimately heralded 2008 mortgage debt and the financial crisis.

Regardless of whether the boom in degrees Celsius represents a larger collapse of the larger crypto ecosystem, the days when customers raked in double-digit annual returns are over. For Celsius, promising those massive yields as a means of reaching new users was a big part of its eventual demise.

“They’re subsidizing and taking losses to get customers in,” said Nic Carter of Castle Island Venture. “The returns on the other end are fake and subsidized. Basically, they’re pulling profits from [Ponzi schemes]. “

Who will get their money back

Three weeks after Celsius halted all withdrawals due to “extreme market conditions” – and a few days before the last crypto lender filed for bankruptcy protection – the platform is still in the works. Bold text ads on its website, an annual return of nearly 19%, paid out weekly.

“Switch your crypto to degrees Celsius and you can earn up to 18.63% APY in minutes,” reads the website on July 3.

Such promises helped to quickly attract new users. Celsius says it has 1.7 million customers, as of June.

The company’s bankruptcy filing shows that Celsius also has more than 100,000 creditors, some of whom lent the platform cash without any collateral to back the deal. Its top 50 list of unsecured creditors includes Sam Bankman-Fried’s trading firm Alameda Research, as well as an investment firm based in the Cayman Islands.

Those creditors are likely to be first in line to get their money back, if there’s anything to be had – with mom and pop investors still holding their pockets.

After filing for bankruptcy, Celsius make that clear “most account activity will be suspended until further notice” and “no authorities are required to allow customers to withdraw funds at this time.”

The FAQ goes on to say that reward accumulation is also paused through Chapter 11 bankruptcy and that customers will not receive reward distributions at this time.

That means customers trying to access their crypto are now out of luck. It is also unclear whether bankruptcy proceedings will eventually allow clients to cover their losses. If there is a payment at the end of a multi-year process, there is also the question of who will receive it first.

Unlike the traditional banking system, which typically guarantees customer deposits, there are no formal consumer protections to protect user funds in the event of a crash.

In Celsius terms and conditions, any digital asset transferred to the platform constitutes a loan from the user to Celsius. As there is no collateral offered by Celsius, client funds are essentially just unsecured loans to the platform.

Also in fine print Celsius’ terms and conditions is a warning that in the event of bankruptcy, “any Eligible Digital Assets used in Monetization Services or as collateral under the Loan Service may be irrevocable” and the customer “may not have any remedy or legal right with respect to Celsius’ obligations.” Disclosure constitutes an attempt to waive total immunity. illegal acts, if things will go south.

Another popular lending platform that caters to retail investors with high yielding services is Voyager Digitalhas 3.5 million customers and also recently filed for bankruptcy.

To reassure their millions of users, Voyager’s CEO Stephen Ehrlich tweeted that after the company goes through bankruptcy proceedings, users with crypto in their accounts will potentially be eligible for an assortment of bags, consisting of a combination of crypto in their account, common stock in reorganized Voyager, Voyager tokens, and then whatever proceeds they may receive from the company’s now-defunct loan to a crypto hedge fund the once famous Three Arrows Capital.

It’s unclear what the Voyager token will actually be worth or whether any of these will eventually come together.

Three Arrows Capital is the third-largest crypto player seeking bankruptcy protection in the US federal courtroom, in a trend that cannot help but raise the question: Will bankruptcy courts ultimately be right? Is it a place to set a new precedent in the field of cryptocurrency? of the rule-adjusted model?

Lawmakers on Capitol Hill are looking to establish more ground rules.

Sens. Cynthia Lummis, R-Wyo. And Kirsten Gillibrand, DN.Y., is aiming to provide clarity with The bill provides a comprehensive framework to regulate the cryptocurrency industry and increase oversight among regulatory bodies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission.

What happens

Celsius’s overarching problem is that almost 20% of the APY they offer to customers is bogus.

In a lawsuitCelsius is allegedly operating a Ponzi scheme in which it pays early depositors with funds it acquires from new users.

Celsius also invests its money in other platforms that offer similarly high returns, to keep its business model afloat.

A report from The Block discovered that Celsius has invested at least half a billion dollars in Anchor, which is the leading lending platform of stablecoin project pegged to US dollars has now failed terraUSD (UST). Anchor promises investors 20% annual percentage return on their UST holdings – a rate that many analysts consider unsustainable.

Celsius is one of many platforms to use its cash with Anchor, which is a big part of why the series of major setbacks was so significant and rapid after the UST project hit in May.

Nik Bhatia, founder of The Bitcoin Class and assistant professor of finance at the University of Southern California.

As for the $1.2 billion gap in its balance sheet, Bhatia considers it poor risk modeling and the fact that the collateral has been sold off by lending institutions.

“They may lose customer deposits in UST,” Bhatia added. “When assets go down in price, that’s how you get the ‘loss’. Liability remains, so again, poor risk models.”

Celsius is not alone. Cracks continue to form in the lending corner of the crypto market. Castle Island Venture’s Carter says the real impact of all of this is that credit is being destroyed and withdrawn, underwriting standards are tightening and solvency is being tested, as So people are withdrawing liquidity from crypto lenders.

“This has the effect of boosting yields, as credit becomes more scarce,” Carter said.

Carter expects to see inflation generally de-leverage in the U.S. and elsewhere, which he said only adds to the case for stablecoins, as a relatively hard currency, and bitcoin, as one. really hard money.

“But the part of the industry that depends on issuing vanity tokens will be forced to change,” he said. “So I would expect the results to be heterogeneous in the crypto space, depending on the specific sector.”

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