Celcius seems to have overtaken Terra (luna) as the most talked about crypto disaster.
On June 13th of this year, as crypto markets tumbled, Celsius did the unthinkable and paused all withdrawals, swaps, and transfers on their platform. Essentially locking users out of access to their funds ”acting in the interest’’ of their community. Far from trusting behavior from one of the largest crypto lenders in the space.
But what is Celcius?
Celsius Network is a centralized finance lending and borrowing platform founded in 2017. Users can deposit crypto assets onto the platform and can earn generous interest rates in return, up to 15-18% every year with 80% of celsius earnings going back to their user base.
Celsius uses crypto deposits to generate profits by loaning them out to other institutions at a higher interest rate, a similar model to a traditional banking system. Any of its 1.7 million users could purchase the Celcius token (CEL), giving holders guaranteed higher rates and lower costs. Sounds perfect, right?
Where did it all go wrong?
In theory, the banking model works but what Celcius didn’t account for is the volatility in the crypto market. When BTC and ETH suffered a pounding back in June, Celsius’ asset value fell by 50% from $24bn down to $12bn. This left the platform facing a liquidity crisis, meaning that if all investors chose to withdraw at the same time, they would not be able to fulfill demand – forcing a suspension of user funds.
What’s happening now?
Things have gone from bad to worse for Celsius members in the last few days with the platform filing for Bankruptcy on the 13th of July, casting further uncertainty over investors looking to recoup their funds.
Celsius said in a press release that the reason for the filing was “to provide the Company with the opportunity to stabilize its business and consummate a comprehensive restructuring transaction that maximizes value for all stakeholders.” 1.
In a nutshell, this means that Celcius doesn’t have the capital to cover its debts and is looking for a way forward to survive.
Will investors get their money back?
Not any time soon, unfortunately. There will be a long line of creditors looking to get their funds back and depositors on the platform will have to join that queue. Many commentators think that the wait for a refund may take years.
Crypto and inflation
In times of economic downturn, consumers go out in droves to find an asset to hedge against inflation.
Typically we would consider precious metals such as gold and silver as a safe bet in the markets. Cryptocurrencies have often been referred to as “inflation-proof” but with what we have seen recently, is anything truly safe from inflation?
There isn’t much doubt between speculators that BTC and ETH will bounce back, but when platforms do fail, does this help or hinder larger platforms in building trust with skeptics?..
Only time will tell.
References
1. Celsius. (2022, July 13) Celsius Network Initiates Financial Restructuring to Stabilize Business and Maximize Value for All Stakeholders. [press release]
“https://finance.yahoo.com/news/celsius-network-initiates-financial-restructuring-001400688.html”