As the crypto collapse continues, many crypto companies have started cutting their workforces. Some crypto companies have gone under, and a few other crypto companies are expected to follow suit. Celsius is a crypto company that falls into the lattermost category, and suspicions about its insolvency have been circulating ever since it paused withdrawals for its 1.7 million users earlier this month.
Today I’m going to give you a bit of background about Celsius, tell you what I think is going on behind the scenes based on the best evidence we could find, and explain what it could all mean for the CEL token. And before we get started, I’d want to introduce you to the Jet-Bot trading platform. It provides a fantastic offer that you can take advantage of right now. You can earn from 200% up to 2,000% APY. You may copy the best-performing traders and their trades immediately on the platform.
If you’re unfamiliar with Celsius, here’s what you need to know. Celsius, also known as the Celsius network, is a centralized cryptocurrency lending, borrowing, saving, and trading platform based in the United States. Celsius was founded in 2017 by Daniel León Goldstein and Alex Mashinsky.
Daniel spent most of his career in the telecommunications industry, holding multiple executive positions at multiple companies. Daniel currently serves as the chief strategy officer of Celsius. Nuke has spent most of his career working as a software engineer. He has likewise held many executive positions at multiple companies. Alex currently serves as the chief technology officer of Celsius. Before that, he spent most of his career in the telecommunications industry where he helped develop the voice over internet protocol, or VoIP, which is used by most applications today for audio and video content. Alex currently serves as the CEO of Celsius and has basically been the face of the company.
Celsius got off the ground with the help of an initial coin offering it conducted for its CEL token in early 2018. This saw 325 million CEL tokens sold for 20 cents each to pre-sale participants and for 30 cents each to crowsale participants. The CEL ICO generated approximately $50 million in revenue. During the CEL ICO, half of CEL’s initial supply of 650 million units were sold. The team received 19% of the CEL supply, while advisors received 2%. Another 2% went to partners, and the remaining 27% went into the Celsius treasury. Vesting for all CEL tokens ended in September last year.
Now, Celsius has since raised an additional 810 million dollars, 750 million of which was raised last autumn in an expanded funding round that included Canada’s second largest government pension fund. Ironically, that same pension fund said at the time that it would ‘absolutely not be investing in bitcoin’.
Like the other platforms in its niche, Celsius was known for the incredibly high interest rates it offered on the cryptocurrencies it supported. Naturally, the highest interest rates were only available to those who held significant amounts of CEL tokens, and the highest interest rates were often paid in CEL, besides high interest rates on cryptocurrencies.
Celsius was also known for the extremely low interest rate on stablecoin loans it offered, which could be reduced even further if you held enough CEL tokens. If you’re wondering where Celsius’s high interest rates are coming from, the answer is lending. Whenever you deposited your crypto into Celsius, the company would do things like lend your crypto to institutions, deposit your crypto into DeFi protocols, and even use your crypto for staking and mining. In other words, Celsius would do whatever it needed behind the scenes to ensure that the interest rates it was earning on its users’ assets were always enough to pay out the interest rates it was promising to its users, and Celsius the company would keep the difference if any.
Celsius would pay its users every Monday, and a portion of the interest earned by the platform would be used to buy back and burn the CEL token, causing its price to rise. As such, you can think of CEL as being an exchange token like FTX’s FTT, which has similar buyback and burn dynamics.
Celsius Starts To Crack
In any case, at its peak, Celsius held over $30 billion in cryptocurrency, which had been deposited by more than 1.7 million users, who earned an estimated $3 million per day on their coins and tokens. Insane statistics included Celsius CEO Alex Mashinsky, who mentioned in many interviews that he had deposited 300 million dollars of his own money into the platform.
It looks like Celsius’s troubles began in earnest last July when liquid staking protocol Stakehound lost access to the keys to its ethereum wallet, resulting in 74 million dollars of ETH being locked forever on-chain. Analysis by Nansen suggests most of this ETH belonged to Celsius.
One month later, Celsius announced that it had surpassed 1 million users and had 20 billion dollars in assets under management. It’s safe to say that the platform’s exponential growth and high interest rates are what started to attract the attention of regulators in the United States at around this time. (t didn’t help that Alex was explicit in his mission to disrupt and eventually replace the banks using Celsius the same way voice over internet protocol disrupted and eventually replaced many telecommunications companies. It didn’t help that Celsius had reportedly received a 1 billion USD loan from USDT issuer Tether, which isn’t exactly known for its transparency. Tether invested $10 million in Celsius in 2020, despite Alex’s assurances at the time that Tether would have no influence over Celsius.
It seems that Celsius’s willingness to engage with regulators and its aforementioned 750 million dollar raise kept the guys in suits at bay for a few months, but the scrutiny returned last November when Celsius’s CFO was arrested in connection with an alleged crypto money laundering scheme in Israel. The bad press continued in December when the DeFi protocol BadgerDAO was exploited for 120 million dollars, 51 million of which was in the form of wrapped BTC believed to have belonged to Celsius.
Now I’ll quickly note that Celsius’s ethereum wallets are public on its website, hence these on-chain analytics.
In January of this year, Bloomberg reported that everyone’s favorite regulator, which is, of course, the securities and the exchange commission was investigating Celsius and one of its competitors, voyager digital and cryptocurrency exchange, Gemini, over their high interest rate offerings. Whereas another Celsius competitor, BlockFi, was subsequently fined 100 million dollars by the Sec, Celsius is assumed to have struck a deal which would see it avoid additional scrutiny if it limited its high interest rate products to accredited investors, i.e. rich people in the USA.
Anyhow, around the time that Celsius restricted its high interest rate products to these accredited investors in the USA, the platform started to see hundreds of millions of dollars of outflows as retail investors fled to greener pastures or cashed out completely. By that point, the value of the crypto custodied by Celsius had collapsed along with the rest of the crypto market.
Celsius Starts to Overheat
As you can see, the About Us page of the Celsius website states that the platform held just under 12 billion dollars of crypto in May, which appears to be the last time this figure was updated. The About Us page also notes that Celsius had processed 8.2 billion dollars in loans at the time, which presumably means that users had borrowed 8.2 billion dollars worth of stable coins from the platform using their crypto as collateral.
As it so happens, Celsius has been aggressively promoting its loan products since last autumn and started offering sub-zero interest rates on stablecoin loans in May of this year. This is extremely significant because just a few days later, CNBC reported that credit card debt in the United States as well as the interest rates associated with said credit card debt were headed for all-time highs because of all the economic stress associated with the de facto recession we’re arguably in.
This makes me wonder whether Celsius has started to see hundreds of thousands of new and existing users turn to its platform to leverage its low interest rate loans for debt relief. There’s obviously no way of knowing for sure, but I reckon it’s possible, if not likely, that the demand for Celsius loans is very high.
In addition to making loans more accessible, Celsius is also investing heavily in crypto mining. After having signed a multi-million dollar deal with a data center for its crypto mining operations and having poured 500 million dollars into the mining itself. Celsius even filed to take its own crypto mining public in May this year in the hope that it would start trading on stock exchanges and attract even more investment. By this point, as it was becoming clear that Celsius was becoming desperate for yields that had been reduced by crypto market conditions.
As many of you will know, another thing that happened in May was the collapse of Terra’s Luna and its UST stablecoin, both of which had apparently been added to Celsius just a couple of months prior. Contrary to what the critics have claimed, there’s little to no evidence that Celsius was directly affected by Terra’s collapse. That’s because Celsius immediately cashed out when it lost its peg, as per a follow-up interview with CEO Alex Mashinsky. something later confirmed by Nansen’s on-chain analysis.
Celsius Starts To Collapse
Anywho, this is where the facts start to get a bit fuzzy. Although Celsius wasn’t directly affected by the terrace collapse, it didn’t stop the critics from claiming that it had been, and many began to spread rumors that Celsius was secretly insolvent.
Given the carnage in the crypto market, many Celsius users fell for the fud, and Celsius subsequently saw billions of dollars of outflows. Keep in mind that all this happened back in mid-May. Shortly after, Alex stated in a Twitter space discussion that ‘Wall Street sharks were attempting to bring down Celsius tether and create a DAO after successfully destroying Terra’, and that ‘they were all looking for any weakness to exploit and destroy’.
You might recall that Alex was explicit about his intention to replace Banks with Celsius. For the benefit of the doubt, let’s assume that Alex has mentioned in many interviews that he had no shortage of enemies on Wall Street and that this has been the case since his telecommunications days. In one interview, Alex said that he doesn’t even get invited to high-profile parties with other billionaires because “they hate me.” It should go without saying that these statements should be taken with a grain of salt, but for the benefit of the doubt, let’s assume they’re true.
In any case, Alex made his now-famous Wall Street Sharks remark on the same day. Celsius released a road map for 2022, which included a crypto card, more stable coin loans, lower fees, crypto staking that’s available to retail investors, and other stuff that likely made Celsius critics and competitors seethe.
The critics and competitors needed a new source of fuel for their flood campaign, and in the first week of June they got just what they needed. Concerns around Ethereum’s transition from proof-of-work to proof-of-stake and the implications thereof could have on liquid staking tokens like Lido finances stETH. stETH is a sort of receipt that’s given to you when you stake ETH on ethereum’s Beacon chain via the Lido protocol. This receipt more or less mirrors the price of ETH and it can be freely traded on exchanges while it earns staking rewards in real time.
As you might have guessed, stETH is essentially the holy grail for platforms like Celsius and CoinTelegraph reported that some of them have converted as much as 80% of their users’ ETH into stETH. In Coindesk reported that 70% of its users’ ETH has been converted into stETH.
There’s only one small problem, and that’s that converting ETH into stETH is a one-way trip for the time being. It’s not possible to claim the staked ETH backing the stETHon the Beacon chain until the merge is complete, and even then it could be months before it’s possible to unstake any staked.
So what this means is that if you have stETH and want to get the actual ETH back, you must go to a centralized or decentralized exchange and sell your stETH for ETH. If too many people do this at once, then the CEL pressure has the potential to push the stETH below its peg. And that’s exactly what happened when the news broke that Ethereum’s developers had delayed the difficulty bomb.
Many individuals and institutions began to sell off their stETH. This is because the difficulty bomb is meant to incentivize miners to switch to proof-of-stake. The delay logically meant the merge itself would be delayed.
The stETH sell-off prompted many crypto analysts to speculate that stETH could fall to as much as 50% below ETH, and those who remembered the Terra collapse fell for the fiction that stETH could fall to zero. Even though this is unlikely since stETH is fundamentally backed by staked ETH, just with a bit of delay.
Because it was easy to see how exposed Celsius was to stETH thanks to its transparency, some believe that bad actors took advantage of the chaos to push ETH down as much as possible to liquidate the hundreds of millions of dollars of loans that Celsius had taken on DeFi protocols using ETH as collateral.
Regardless of over leveraged individuals and institutions like crypto hedge funds. Three Arrows Capital began selling stock in order to meet their own debt obligations and protect profits. Crypto trading firm Alameda Research alone drained 20 of stETH liquidity with their massive sell-off, according to gate.io. The whole ordeal spooked Celsius users enough to cause a real run on the bank, with everyone rushing to the platform to withdraw their ETH. Because stETH had lost its peg and so much of it was locked up in DeFi protocols, it’s suspected that Celsius couldn’t get the ether it needed to honor user withdrawals.
As a result, Celsius paused all withdrawals, swaps, and transfers on the 12th of June, seemingly confirming that the critics and competitors were right this time around. Celsius had in fact become functionally insolvent, i.e., it didn’t have enough cash on hand to pay out withdrawals.
It’s important to stress, though, that this is different from balance sheet insolvency, i.e., not having enough assets liquid or otherwise to pay out liabilities. No one really knows about Celsius’s balance sheet solvency, but the headlines we’ve seen since then, such as Celsius’s competitor Nexo offering to buy them out and Celsius’s investors refusing to bail them out, are widely considered to be an indirect confirmation of insolvency.
All the while, Celsius has been selling off hundreds of millions of dollars of crypto, causing many coins and tokens to crash, including CEL, and urging its users to stay calm while they wonder whether the collateral for their loans has been liquidated and whether they’ll ever get their coins and tokens back.
This brings me to the three big questions at the forefront of everyone’s minds, and those are:
- Whose Celsius’s current state is?
- Whether Celsius can recover?
- What this all means for the CEL token?
Who’s To Blame? What’s Next?
I’ll start by saying that it’s quite clear that Celsius had spread themselves very thin, and I honestly think they were completely blindsided by Terra’s collapse and the crypto market carnage that ensued. I think this is because Celsius CEO Alex Mashinsky was saying at the end of April that BTC and ETH would hit new all-time highs in 2022, just a couple of weeks before Terra’s collapse. While Alex could have been just saying this to make the headlines, recall that he was literally putting his money where his mouth is.
Not only that, but in a January interview, Alex mentioned that Celsius was looking to double its workforce of 800, a workforce that had already grown by 3x over the last year or so. Comments Alex made in other interviews also suggest that the hiring process wasn’t exactly thorough, to put it mildly.
So what happens when you have a massive company of one thousand plus people, most of whom are new billions of dollars spread across multiple DeFi protocols exchanges and mining operations, billions of dollars of user loans, and lots of crypto market volatility? Well, you get a show, and that’s what Celsius got.
However, this doesn’t mean that nobody took advantage of the situation to capitalize on the chaos. There seems to be some evidence that some institutions were actively working to take Celsius out when it was down, and most of this evidence comes from a thread by a Twitter user named PlanC.
The TLDR is that institutional investors were furious when Celsius pulled out of Luna and UST. This is because Celsius withdrew 500 million UST from Terra’s Anchor protocol is believed to have been one of the primary catalysts that led to Terra’s collapse. Now to be clear, I’m not saying that Celsius caused Terra’s collapse. I’m simply saying that Celsius withdrew such a large amount of UST after it fell below its peg due in part to market manipulation by another entity on curve finance, which scared many UST holders into selling, which accelerated the de-pegging.
In their twitter thread about Celsius plan c provided screenshots that strongly suggest institutional investors were working on restoring UST’s peg by pouring billions of dollars into UST trading pairs, something that was actually confirmed to us here at Coin Bureau by a Terra insider.
The story goes that Celsius refused the calls to help rescue Terra and instead decided to cash out to protect their users’ assets. This in turn led to the run on the Anchor and the UST sell-off I just mentioned, which ultimately led to Terra’s collapse. This left the institutional investors that were trying to restore UST’s peg with billions of dollars of losses. As you might have guessed, PlanC’s theory is that these institutions decided to get back some of these billions by liquidating Celsius and crashing and shorting its CEL token. Many seem to be pointing the finger at Alameda Research, but Alameda Research founder and FTX CEO Sam Bankman-Fried claims that is BS because Alameda and FTX are committed to supporting crypto companies like Celsius. To that end, Alameda and FTX have provided hundreds of millions of dollars in loans to BlockFi and Voyager Digital to make sure they stay solvent.
Now when it comes to whether Celsius will recover, I reckon there’s a high likelihood that Celsius will survive in some form, be it under its own brand or the brand of a competitor like Nexo. A user base of 1.7 million is no small feat in crypto, and it’s something that many companies would happily acquire.
One wild card is potential regulation. Platforms like Celsius are extremely unpopular with regulators, and Celsius owes much of its success to the fact that it was actively poking fun at the big banks, who actively lobby regulators like the Sec.
Another wild card is whether the CEL token would survive the rebrand. If any, If Caesar does get taken over, I find it unlikely that the CEL token would play a big part of that new setup. For the time being, the only thing supporting sales prices appears to be a massive short squeeze in which everyone buys and sells; prices go up; shorts get liquidated; and so on.
The most important thing is that Celsius users get their coins and tokens back. I believe this is very much within the realms of possibility; as stretched and leveraged as Celsius was, it appears to have had the capital required to compensate its users. It will just take some time. If the worst comes to the absolute worst, the silver lining is that we’re in a crypto bear market and that means Celsius users will have lots of time to accumulate the positions they’ve lost at much lower prices. If you’re one of them, know this: so long as you’re healthy, stay optimistic, and continue to work hard, you can recover from any financial loss and then some. Believe me, I’ve been there. And that’s all about Celsius’s supposed collapse.
[This article is a transcription of a video made by Coin Bureau]
Original video: https://youtu.be/_ndb5y9nsLg ]