For those of you involved in the crypto space, you have most likely heard people talking about “Celsius” and how it is affecting the whole market. In this first crypto classrom series we will look at what Celsius is, explain what is happening, and discuss the potential fallout from this situation.
What Is Celsius?
Celsius is a crypto lending platform that has been around since 2017 and aims to give users yield on their crypto assets. This platform allows users to deposit their assets, which Celsius can then lend out to users who seek to borrow assets in the form of a loan.
So why would someone want to lend or borrow crypto assets?
Let us look at an example. Let’s say you own 1 Ethereum. You would then go to Celsius, deposit your Ethereum, which now sits in a big Ethereum pool on the Celsius network.
A different Celsius user may be interested in borrowing 1 Ethereum because they want a loan for more money to use for trading. This new user pays Celsius a fee to borrow the Eth, and then they receive 1 Eth in their account to do with as they please until they decide to return the Eth. While the new user has your Eth, you still have a share that can be redeemed for 1 Eth, and you get paid interest. You get your interest, the borrower gets a loan, and both parties benefit.
Celsius offered APYs of approximately 8% interest on Bitcoin and Ethereum. Users could also receive around 7% interest on stablecoins, which was treated as a much more lucrative alternative to a savings account in a bank.
Many users own these big assets and stablecoins already, so many thought why not put them on the Celsius platform to earn some extra interest? The allure of extra yield is what allowed for a platform like Celsius to get as big as it did.
How Does it Generate Yield?
In the crypto world, many are not equipped to understand where “yield” comes from. In many cases, projects tell you how they believe their project will earn money, but that does not guarantee things will work out as they hope.
Celsius made a lot of money through arbitrage opportunity (buying assets at a low price from one exchange, then selling them quickly at a higher price on another exchange) and potentially through Anchor protocol on Luna.
They offered yield on non-staked assets, which potentially means they were also additionally participating in trading for profits (very risky).
At this point, most of you know the crypto market has entered its bear cycle. Prices continue to fall, and financial stress has been put on all investors. This sort of pressure has exposed many vulnerabilities in the market that would not be seen in a bull cycle when making money is easy.
The model of Celsius has put it in a precarious situation, one that was so grim it suspended all withdrawals. A real-life “pause button” if you will.
The reason Celsius needed to hit pause can be summed up by a need for Celsius to generate yield that it could no longer give. Celsius was making easy money during the bull run, and when the market turned bearish, it was forced to lower yields.
There are rumors Celsius was putting money into the Anchor protocol on Luna which offered 20% yields. Many companies were earning 20% with user funds in the protocol and then giving users a percentage of the profit. After the collapse of Luna, many companies took a huge blow.
In addition, Celsius was found to have a position with stEth, which is supposed to be a 1:1 version of Eth. stEth is the form of Eth that will be available for use once Ethereum merges. Celsius owned a lot of stEth. However, the peg that keeps stEth in a 1:1 ratio with Eth broke, so stEth was now worth less than original Eth.
The turn-off of stEth that once you stake an Eth for stEth is that you can not redeem your Eth until the merge, which means you are locking your funds away. Not something you want to do as markets tank!
With few people buying stEth, the market became illiquid, and if Celsius wanted to sell their stEth, they would essentially tank the price of stEth and incur big losses.
Combined with the 2 financial blows brought on by Luna and stEth, users were withdrawing funds as fear became extreme in the market.
Celsius couldn’t control Luna or stEth, but they decided to control the one thing they could, keeping user funds trapped.
In a memo released on June 12, Celesius said it was pausing all withdrawls for it 1.7 million customers:
"Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts."
What Is the Fallout?
The fallout from this Celsius drama is still playing out in front of our very eyes. The impact of this situation will likely be seen financially in the short-term, and regulatory in the mid/long-term.
When it comes to the effect on the pricing of assets, the main risk to the whole market would come from Celsius getting liquidated.
For those who are unaware, liquidation is the forced selling of assets if someone is losing too much money on their loan.
When someone wants a crypto loan, they need to put money/assets up to back their loan. Think of it as insurance. You can’t walk into a bank and ask for a $1 million loan and tell them you promise you’re going to pay it back. You must give them money as protection in case you lose all the loan money and can’t repay the loan.
The money given to the bank (or the loan lender) is known as “collateral”. In the case of Celsius, they own approximately 24k Bitcoins worth around $530 million. Based on the terms of their loan, the liquidation threshold for those Bitcoin is just around $15k. This means that as things stand if Bitcoin’s price hit the threshold, it would trigger the sale of those 24K Bitcoins, likely driving the price of Bitcoin down even further.
Celsius could continue to fend off a liquidation by adding more collateral and lowering the price of a liquidation threshold. However, this strategy is incredibly risky, as doubling down and trading on margin rarely ends well.
There are some rumors that Celsius does not have the money to repay its loan, which would essentially nuke the company to nothing if prices continued downward. This level of risk has forced Celsius to pause its platform as they try and figure things out.
The fact Celsius was able to pause all trading is a move that will without a doubt change the crypto landscape going forward. Many users of Celsius have their assets locked inside, and they are left wondering if they will ever get them back.
In the crypto world, there is a phrase “not your keys not your crypto”, meaning that if you aren’t keeping coins in your own wallet, you don’t necessarily own your crypto outright.
This situation has shown how true this is. Celsius could be a sinking ship, and they may be taking all their user’s assets down with it. If this is the case, crypto lending platforms will be under the watchful eyes of regulators moving forward.