What Is Happening With Celsius Network, Why Is It Such A Big Risk For Cryptocurrency?

The Celsius Network is clearly facing enormous hurdles. As one of the industry’s main lenders, let’s look at why this is such a big deal for the whole business.

Celsius Network has been on everyone’s lips for the past week, and with good reason. The platform is at the epicenter of the current cryptocurrency and market crisis.

Celsius Network halted all withdrawals, swaps, and transfers between accounts a few days ago, as many had predicted. Users’ funds are effectively frozen as the business claims that “acting in the interests of our community is our top priority.”

 CEO Alex Mashinsky said in an exclusive interview in April:

“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.” 

Mashinsky undoubtedly did not anticipate the massive disaster his firm would be in just two months.

In any case, Celsius Network is a major player in the cryptocurrency space and one of the largest cryptocurrency lenders. As of this writing, it is also clearly in crisis – a condition that, if it worsens, could have major ramifications for the entire company. 

What is Celsius, and How Does it Work?

Celsius Network is a centralized network that provides yields on multiple cryptocurrencies such as ETH, BTC, and several stablecoins. Its positioning is similar to that of a bank, yet it appears to behave more like a hedge fund.

The business model has several components. The first feature is the ability for users to earn interest on their cryptocurrency. It works simply: you deposit your cryptocurrency in Celsius and are guaranteed a specific yearly return, which may vary but is publicly touted 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 section allows users to borrow funds and use their cryptocurrency as collateral. For example, if you need USDT or USDC but don’t want to sell your BTC, you can use it as collateral and receive a loan from Celsius at a particular interest rate.

Celsius is not the only business that provides these services. Indeed, several of them have begun to operate in recent years, gives way to the term CeFi – a decentralized finance (DeFi) alternative in which customers continue to interact with a centralized middleman.

The section where they offer a particular rate for consumers to deposit their funds on the platform is pertinent to the present market environment and why Celsius is in clear difficulties.

Celsius provides these types of returns on several stablecoins. Naturally, this sparked a lot of interest, and the company has done remarkably well in recent years. In fact, the company increased its most recent investment round to a stunning $750 million in November 2021, achieving a valuation of up to $3.25 billion.

Celsius’s success stemmed from its ability to routinely earn larger yields than those given to clients. For instance, if they promised up to 7% on USDC, this means they would use the deposited USDC to earn a higher yield.

The only issue? During regular times, there should be no issue. The problems become apparent when markets fall, as they did. ETH has lost about 50% of its value in the last several days, while BTC has lost more than 30%. This brought some of Celsius’s issues to light, demonstrating that some of their positions are most likely not being managed properly.

What Went Wrong?

Celsius’s abrupt halting of withdrawals and transfers, thus shutting out all of its customers, was a significant red flag that something was seriously wrong.

The potential of blockchain-based technology, on the other hand, is hidden in part by the fact that it is completely visible. The community has been keeping a close eye on some of Celsius’s positions, and things aren’t looking good.

For example, we may follow the company’s position on a big DAI loan using Oasis (a protocol that allows users to borrow DAI against any type of collateral).

According to the information above, Celsius has borrowed DAI with a current collateralization ratio of 195.93% and has about $545 million in locked WBTC as collateral. They have a liquidation price that is 26% lower than the current BTC price, and if that is reached and no more collateral is added, their whole stake worth more than $500 million will be liquidated on-chain.

The concerning aspect here is that Celsius has added collateral many times in the last few days alone, rather than returning the loan.

Their position was only 5% away from being liquidated at one time. Remember, they are likely to be money that Celsius users deposited with the hope of making a return, and they were only 5% away from being completely lost — not to mention the fallout if over $500 million worth of BTC were to hit the market during such difficult circumstances as now.

While this may be okay for an individual trader with a high risk tolerance, it is obviously questionable for a multibillion-dollar corporation that manages the wealth of ordinary people.

The preceding is just one illustration of why the situation appears to be dire. Another issue is that, just before they stopped withdrawals, the firm sent $320 million to FTX without any disclosure or community notice. Perhaps more concerning is that the corporation has been silent for the previous 24 hours — at a time when all of its users are concerned about their ability to retrieve their monies.

Significant Risk for the Crypto Industry

There are at least a few reasons why the current scenario with Celsius poses both an immediate and long-term risk to the whole cryptocurrency sector.

In the short term, Celsius has a large amount of cryptocurrency. As of this writing, their website still states that they have 151,534 BTC in assets, though this has not been confirmed and is very suspect given the recent turbulence.

Whatever the figure is, Celsius is one of the industry’s top lenders, and if they begin liquidating assets, the markets will surely react negatively. Some have theorized that the recent declines are due in part to the corporation selling.

This takes us to the long-tail concern for the entire cryptocurrency community: restrictive regulations. We witnessed what happened when the Terra ecosystem fell submerged — authorities all over the world began giving warnings and preparing tough frameworks to safeguard investors from similar events in the future.

What happens if a multibillion-dollar “crypto-native” company goes bankrupt due to poor fund management, which is partly due to vague or non-existent regulations? My guess is that it will be neither lovely nor helpful. Regulators will seize any opportunity to further examine the sector, and they would have the perfect reason to go the extra mile – retail investor protection.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Patrick

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