In this article, we dive deep into the Celsius Network cryptocurrency lending application. We explore the platform’s history, business model, and recent actions that have made crypto media headlines. This includes taking a more comprehensive look at Celsius’ situation, with the company reporting a string of challenges throughout 2022. Plus, we look at various on-chain insights to see how Celsius is navigating the crypto bear market amidst the suspension of user withdrawals. Also, we consider various lessons from what happened to Celsius Network and how investors can protect themselves in the future.
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What is Celsius Network?
Founded in 2017 by Alex Mashinsky, Daniel Leon, and Nuke Goldstein, Celsius Network LLC is a cryptocurrency lending and borrowing platform headquartered in New Jersey with offices in London, Tel Aviv, Serbia, and Cyprus. Users can seamlessly deposit a wide range of cryptocurrencies and earn up to a 17% annual percentage yield (APY). Plus, users can choose to accrue interest in the same asset or the platform’s native token called CEL. According to the company website, in May 2022, Celsius Network had nearly $12 billion in assets under management (AUM). In addition, the platform had lent out over $8 billion in crypto loans to users.
As a free-to-use service, Celsius Network generates its income via lending fees, token sales, and discretionary cryptocurrency trading. Further, Celsius reinvests up to 80% of its revenue into the community through interest payments on user deposits. In addition, the business model of Celsius Network includes an insurance policy, securing lenders’ funds should a borrower default on their loan. Moreover, the platform offered crypto-backed loans with interest rates varying between zero and 8.95%, depending on the asset.
However, in June 2022, Celsius Network surprised its community by publishing a notice stating they were indefinitely pausing all transfers and withdrawals due to “extreme market conditions”. As a result, all Celsius users cannot gain access to their funds. The startling move from the lending platform has added to the bearish sentiment within the crypto markets.
Crypto Bear Market 2022
Economists consider market sentiment as either “bullish” or “bearish”. In a bull market, asset prices increase. Conversely, a bear market is when the trend of asset prices decreases. Generally speaking, asset prices increase when there is an increase in demand from investors. On the other hand, asset prices decrease when holders begin selling their assets. Furthermore, many macro socioeconomic factors can influence investor confidence. Thus, the uncertainty, instability, or insecurity felt by retail investors can reflect back on the wider market economy.
As the cryptocurrency industry is still relatively small, the prices are more volatile than industries with larger liquidity. In turn, if there is a downturn in the stock market, there is often a more significant decline in the crypto market. However, this does work the other way, with the crypto industry being notorious for its 10x, 20x, or even 100x gains.
Throughout the COVID-19 pandemic, governments printed excessive currency to artificially stimulate economies during national lockdowns. Initially, the capital went directly into stocks and shares, with the US seeing new ATHs (“all-time-highs”) in the stock market. Now, as inflation is steadily rising and the cost of living is substantially increasing, many investors are selling their assets. Furthermore, the world is witnessing an energy crisis, food crisis, supply-chain meltdowns, and the worst war in Europe since World War II. Overall, it appears logical for the markets to be down.
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What Happened to Celsius Network?
In a blog post titled “A Memo to the Celsius Community”, Celsius states: “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, swaps, and transfers between accounts. We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations”. Less than 24 hours before, co-founder Alex Mashinsky dismissed the community’s concerns around Celsius’ liquidity positions as “FUD”, on Twitter.
Due to the extreme market downturn, the assets within Celsius Network’s business model are in jeopardy of becoming liquidated. As such, to prevent the digital equivalent of a bank run, the platform suspended withdrawals. However, Celsius states that users still earn interest on their assets during this time. What happened to Celsius Network is representative of the challenges for any cryptocurrency lending platform. Also, what happened to Celsius appears to be the latest in a continuous line of challenges for the platform.
Shortly before the crypto market downturn, Celsius made a substantial investment in stETH. Further, stETH is a staking token that allows users to stake ETH and yield additional returns via DeFi protocols. However, the recent market turbulence saw the stETH token falling from its “peg”. Larry Cermak, The Block’s VP of research, published in an interview on-chain analysis showing Celsius holds at least 409,170 stETH in its wallets. The instability of the stETH peg put a strain on Celsius’ ability to raise capital for users wishing to withdraw funds. According to Financial Times, the asset value on the Celsius Network platform has fallen from $24 billion to $12 billion between December 2021 and May 2022.
On-Chain Analysis
Cryptocurrency transactions are transparent and immutable. As such, the crypto community has begun viewing block explorers to investigate on-chain activity from wallet addresses associated with Celsius Network. Further, crypto media outlets, including Cointelegraph and CryptoPotato, publish regular on-chain analysis reports surrounding Celsius’ activities.
Notably, Celsius owes significant funds in DAI stablecoins to the MakerDAO platform with a current collateralization ratio of 195.93%, according to CryptoPotato. Having repaid over $142 million worth of DAI to MakerDAO since July 1st, Celsius still has over $82 million in outstanding debt. In addition, Celsius holds over $545 million in locked wrapped Bitcoin (WBTC) as collateral. After a $114 million DAI payment, Celsius has reduced the liquidation price on its loan by nearly half to $4,966.99 Bitcoin (BTC). At one point, Celsius was 5% away from its half a billion worth of BTC assets becoming liquidated on-chain.
According to Cointelegraph, Celsius Network made just over $1.8 billion in crypto investments over its lifetime. Currently, the platform’s losses are around $667.2 million, or just over 30%. Plus, Celsius’ investment strategy surprises some of the crypto community with the platform continually adding collateral to positions rather than repayments of the loans.
Broader Story of What Happened to Celsius Network
While the story of what happened to Celsius Network is a common risk for cryptocurrency lending platforms, Celsius has faced numerous challenges throughout the last 18 months. In April 2021, a security breach meant a substantial portion of Celsius user data was compromised. In May 2022, Financial Times published the decline in the value of assets held by Celsius Network. During the same month, the platform halved its Tether stablecoin (USDT) borrowings amid the temporary loss of Tether’s dollar peg.
A few weeks later, Celsius announced its suspension of withdrawals and transfers between accounts. Although there is no date advising when the suspension will lift, Celsius states its users will still earn yields on their deposits. Moreover, after boasting a 350% growth in its workforce in 2021, Celsius announced that they will lay off approximately 150 workers in July 2022. With rumors of Celsius’ imminent insolvency, Goldman Sachs is reportedly raising capital in preparation for purchasing Celsius’ remaining assets. This would be the latest in the world-leading investment group’s strategy of incorporating crypto assets into its business model.
Lessons to Learn From What Happened to Celsius Network
Regardless of whether you have first-hand experience with the platform, there are plenty of lessons to learn from what happened to Celsius Network. Most importantly, as the notorious crypto community says, “not your keys, not your coins”. In short, this means if users don’t have access to their private keys, someone else is the gatekeeper to their funds. Celsius is a centralized lending platform. No matter how reputable a platform may be, it falls vulnerable to centralized gatekeeping and a single point of failure. Therefore, what happened to Celsius Network is a valuable example of why it is safer to use a non-custodial service.
Also, what happened to Celsius Network can be a valuable reminder when considering investment strategies. When investing in crypto, you are your own bank, responsible for the security and storage of your own assets. Users who keep all their funds in one wallet, exchange, or platform also make themselves vulnerable to a single point of failure. As a result, what happened to Celsius Network reminds investors not to put all their eggs in one basket.
A range of broader market conditions influenced what happened to Celsius Network. Learning about why and how certain variables influence the market can assist with planning investment strategies. You can use what happened to Celsius Network to educate yourself about market fluctuations to read and calculate trend reversals. If that sounds interesting, why not save our “Understanding Crypto Crashes” article for later reading?
Finally, many consider what happened to Celsius Network to spur on the development of regulatory compliances. Centralized crypto lending platforms have the potential to introduce law and regulation into the crypto industry more so than decentralized applications running on code.
Is CeFi in Trouble?
Other prominent centralized finance (CeFi) blockchain lending companies have also come under fire in recent weeks. The recent filing for bankruptcy by crypto broker Voyager Capital also highlights the importance of self-custody in crypto. In addition, crypto lending firm BlockFi is narrowly avoiding trouble thanks to a buyout from leading crypto exchange FTX. In the future, we may see an increase in the number of CeFi platforms struggling to ride out the crypto winter. However, as the saying goes, “not your keys, not your coins”.
Exploring What Happened to Celsius Network – Summary
Celsius Network is a cryptocurrency lending platform once considered a “blue-chip” company within the crypto industry. Its business model allows a “fee-free” service for users while reinvesting 80% of its profits back into community funds. However, the recent turbulence in the crypto market made Celsius freeze all transfers and withdrawals from the platform. Recent on-chain insights show Celsius came within 5% of more than $500 million worth of Bitcoin (BTC) of becoming liquidated. Crypto media outlets are regularly publishing insights into Celsius’ on-chain activities. This includes numerous payments from the platform increasing the collateral on its debt positions.
What happened to Celsius Network is a typical risk of any lending platform, particularly within the crypto industry. However, what happened to Celsius Network is a reminder of the risks that come with using a centralized platform. Unfortunately, all of Celsius’ nearly two million users cannot gain access to their funds. Also, what happened to Celsius Network could potentially be a catalyst for increased regulation surrounding crypto lending platforms. Further, this could bode well for the future legitimization and application of DeFi within mainstream financial operations. Nevertheless, Celsius’ situation is leaving many investors on the edge of their seats. With the future of the crypto market uncertain, so too is the future of Celsius Network, along with the assets of its users.
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