Crypto markets were shaken as the not-so-stablecoin UST and sister cryptocurrency LUNA collapsed last month, bringing the digital asset economy down with them and exposing smaller, more vulnerable players.
Now, we’re seeing crypto whales like Celsius floating up to the surface for different reasons, causing the global crypto market capitalization to fall below $1 trillion for the first time since January 2021.
Late last night, Celsius, one of the largest centralized crypto lenders, announced it was pausing all withdrawals, swaps and transfers for users. The firm attempted to justify its actions by stating in a press release that it is “acting in the interest” of its community of about 2 million people and “to put Celsius in a better position to honor, over time, its withdrawal obligations.”
Celsius held over 151,000 bitcoin and had about $12 billion in assets under management as of May 17. The company even boasted in April that it owns more bitcoin than public companies like MicroStrategy, Tesla, Galaxy Digital, Square and Coinbase.
In the past, the firm made headlines for raising one of the biggest funding rounds in 2021, an oversubscribed $750 million, while simultaneously suspending (and later firing) its former chief financial officer, Yaron Shalem, for external fraud and sexual assault allegations in November of last year.
The two largest cryptocurrencies by market cap, bitcoin and ether, have respectively fallen around 15% and 17% in the past 24 hours as sell-offs across the market continue and the Celsius situation exacerbates already bearish market sentiments.
What caused Celsius’ freeze?
There’s no firm answer at the moment, but many market participants indicated Celsius may be a riskier firm than many originally believed it to be, with some pointing toward a lack of confidence in its operations. That sentiment resulted in a bank-run scenario similar to what we saw last month with UST and LUNA: Investors didn’t want to get their cryptocurrency stuck on the platform and, in anticipation of a freeze or crisis occurring, they wanted to get out first.
“People were withdrawing their coins from Celsius and they didn’t have enough [liquidity] to meet redemption requests,” Cory Klippsten, CEO of Swan Bitcoin, said to TechCrunch. “If they had fulfilled all their redemption requests from users, they would be completely insolvent.”
Celsius CEO Alex Mashinsky did not respond to requests for comment by TechCrunch on Monday.
“Celsius has borrowed a lot of money. They are an unsecured creditor to their lenders — that’s the actual structure of the contract when you’re a Celsius member: You give them your coins and they owe you your coins back,” Klippsten said. “On the back end, they take those coins and trade them and invest them in risky DeFi protocols and some of them go badly.”
Prior to UST collapsing in May, Celsius withdrew over $500 million from Anchor Protocol, the lending and borrowing platform on Terra’s now-defunct network. Separately, the firm sent about $320 million worth of wrapped bitcoin and ether to the crypto exchange FTX before its announcement to freeze withdrawals on Sunday.
“They narrowly escaped pulling $500 million of funds off of Anchor a day or two before LUNA collapsed,” Klippsten said. “This risky behavior is now being punished by the markets.”
As users withdraw coins, Celsius owes those assets to users because it led users to suspect they could withdraw at any time, but that mismatch of expectations versus reality is what’s wrecking Celsius right now, he added. “You think there’s an arbitrage but what they’ve really done is sold volatility.”
While Celsius’ native token, CEL, isn’t even in the top 100 cryptocurrencies, the No. 331 crypto has fallen around 24% over the past 24 hours to about 32 cents, according to CoinMarketCap data at the time of publication. (CEL was historically used to apportion rewards to users, though with the token in free fall, those payouts are quickly losing luster.)
What does this mean for the entire crypto market?
Although people are seeing red across the board as prices fall, not everyone views this as a be-all, end-all moment.
“Like every one of these times with crypto, the market is in a correction phase,” Mark Fidelman, founder of SmartBlocks, said to TechCrunch. “The beauty of crypto is, we weed out all the bad ones and a new generation of crypto comes in that’s better and badder than the previous generation, so I see it as a good thing.”
There will be short-term pain for crypto markets that could extend for a long time for alternative coins, Klippsten said. “People will learn to hold their own keys and not trust companies like Celsius.”
As the days go by, the crypto market will see some audits occur and the “bad” players, or “the ones that weren’t designed properly, are going to fall by the wayside and, again, that’s a healthy thing,” Fidelman said. “It’s really a Darwinian type of situation, as it should be, because in the end they’ll get stronger and stronger. We can’t prop up, nor should we invest in, weak ones.”
Even though more of these bad players might — or might not — be exposed as time goes on, the true pain lies with millions of retail investors holding tight on their crypto investments, which have been treated as exit liquidity as the market continues to turn down.
Holding your own keys
As this situation unfolds, community members are realizing that they should have followed the old crypto saying “not your keys, not your coins,” which means they should have held their own tokens off a centralized entity in their own crypto wallet so they could control their assets. Even Celsius’ FAQ section says “your account is only as protected as you make it.”
Crypto holders are feeling the heat as sell-off panic sets in, the market continues to liquidate and Celsius users are sitting on their hands instead of slamming the sell button because their assets are frozen with no end in sight.
Rival crypto lending firm Nexo has also made a public offer and shared its letter of intent (with an expiration date of June 20 at 4:30 a.m. UTC) to acquire the assets and collateralized loans of Celsius.
“Right now, retail investors are those most at risk of losing the largest percentage of their funds,” Antoni Trenchev, co-founder and managing partner at Nexo, said to TechCrunch. “Those are the people we would ideally like to support by providing Celsius with liquidity.”
TechCrunch has not seen evidence that Celsius has responded, let alone responded affirmatively, to the Nexo offer. Nor can we confirm that Nexo has the needed capital for such a transaction. That said, it’s nice to see someone attempt to come to the aid of smaller investors, even if it is being done at a time of maximum PR return.
