Celsius Network co-founder Alex Mashinsky was in a challenging mood on Twitter last weekend. When a user asked him why he had so many enemies, Mashinsky boasted, “because I’m winning and giving everything to my community.” Days later, his crypto investment company is in crisis after blocking customer withdrawals, a move that shook crypto markets.
The abrupt halt in repayments highlights the risks for investors who have joined high-yielding complex digital asset products. Celsius claimed to have 1.7 million retail customers, including the US, UK and Israel, and earned a reputation for betting aggressively on its depositors’ money.
The investment group, which is generally unregulated beyond lending licenses in a handful of U.S. states, had grown to $ 24 billion in cryptocurrency assets managed in December last year. It gained revenue shortly after winning the investment of Canada’s second largest pension fund, Caisse de dépôt et placement du Québec (CDPQ) and Westcap, a fund led by Blackstone and Airbnb executive Laurence Tosi.
Celsius presents itself as a simple company that helps everyday investors achieve “financial freedom” that is not available in conventional finance.
“Crypto is the first time in history that the average Joe is ahead of Goldman Sachs and Morgan Stanley,” Mashinsky said in a September interview with the Financial Times.
Celsius’ problems, however, lie in complex, risky trades that are usually hidden in the bowels of Wall Street.
The group, which was founded in 2017, rode the latest cryptocurrency bullfight to become one of the leading companies offering impressive returns of up to 18 percent to customers who deposited their digital assets. Similar to how a bank counts deposits as liabilities, Celsius customers are unsecured lenders, although in the unregulated crypto world they do not have government-backed insurance for their funds.
Celsius deployed these deposits in loans to major manufacturers of cryptocurrencies and hedge funds, as well as in so-called decentralized financial projects. Several market players had a policy of not granting credit to Celsius, even when they had borrowed it, according to people familiar with the matter.
As cryptocurrency prices fell this year, Celsius has been hit hard by withdrawals, totaling $ 2.5 billion from the platform since March. In May, the company had only $ 12 billion in assets, half of which started the year. Subsequently, it ceased to disclose total assets under management; however, CDPQ told FT that Celsius has suffered a “strong volume of customer withdrawals” in recent weeks. Celsius did not respond to a request for comment Monday.
The cryptocurrency lender had also been challenged in recent months by several U.S. state regulators, who argue that their deposit accounts are unregulated securities. Celsius said in April that it had been in “ongoing talks with U.S. regulators” and that, as a result, it would stop new deposits of U.S.-based retail investors in its yielding accounts.
The final tightening came last week with a severe liquidity mismatch that Celsius had created. The company borrowed ether, an important digital testimony, from users and then blocked large sums of assets for an indefinite period in a new version of the cryptocurrency that is under construction and has experienced delays. Blocking the ether to the new version got rewards that would eventually be released.
Celsius had blocked the ether directly, but also through a service called Lido that emits a derivative of the blocked ether, known as “staking ethereum” or stETH, which is thought to be easily negotiable and treated as an equivalent. one by one from the ether itself. He used this stETH as collateral for more loans, and posted a value of $ 450 million on a platform called Aave, according to public blockchain data.
The holders of stETH last week sold the derivative out of concerns about delays in the deployment of the new Ethereum network, the main digital ledger where ether is being traded. According to cryptocurrency analysts, the sale has drained liquidity from the main trading group for the derivative, leaving Celsius unable to exchange its stETH for normal ether to meet customer withdrawal requests without incurring large losses.
The challenge is compounded by the threat of being forced to issue additional collateral to Aave or liquidate its loans if the price of stETH continues to fall.
The group said on Monday that it would pause withdrawals due to “extreme market conditions” and said it had decided to put Celsius in a better position to meet its obligations over time. withdrawal “.
The company’s own cryptocurrency token, CEL, has plummeted to just 30 cents due to its recent problems. It was trading at nearly $ 8 last June. The broader crypto market has also been hit by Celsius’ problems, with bitcoin dropping about 25 percent from Friday to trading below $ 23,000.
Celsius has managed to get out of the previous difficult points, all of which have been detailed by a growing group of online critics who for months have warned of the risks Celsius was taking. Among them were an American blogger, CJ Block, who writes under the pseudonym Mike Burgersburg, and a bitcoin businessman Cory Klippsten.
“They were putting their money into all sorts of risky bets… At best they were like a hedge fund that used retail money,” said Block, who recently graduated from medical school after spending months analyzing Celsius positions using blockchain data.
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In May, Celsius withdrew $ 500 million from the Earth ecosystem shortly before it collapsed, contributing to the rush to the exits that brought down the stable earth currency and its linked moon token. Last year the company had a more difficult time when it lost 900 bitcoins it had deposited with a crypto company called Badger DAO which was later hacked. Celsius was also the owner of large amounts of stETH issued by another company, StakeHound, which had virtually no value when StakeHound lost the keys to the underlying ether.
Max Boonen, founder of the cryptocurrency broker B2C2, compared cryptocurrency lenders to banks that need to carefully match their assets and liabilities to stay solvent.
“Banks have learned from past crises and are now quite careful and sophisticated with their mismatch between assets and liabilities. It’s a skill set and I still don’t know how far the cryptocurrency market has learned,” he said. to say.
Additional report by Josephine Cumbo