In June 2022, the crypto lender Celsius Network (CEL), which had pledged a new dawn for the decentralized finance (DeFi) movement, failed, prompting a wave of skepticism regarding the future of digital currency. A year later, we reflect on the events that transpired and evaluate the crypto market's future.
Celsius Network, which was created with the intention of emulating traditional banking with a crypto flavor, enjoyed a brief period of success before confronting insurmountable obstacles.
At its zenith, the corporation claimed to have 1,7 million users, to have managed $11.7 billion in assets, and to have made loans in excess of $8 billion.
Then, June 13, 2022 arrived. In response to "extreme market conditions," Celsius Network froze all client accounts. This unexpected action sent the price of bitcoin (BTC) and other cryptocurrencies into a tailspin, causing market ripples.
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The financial health of Celsius appeared dismal. According to court documents, the company was in the red by $1.2 billion, with astronomical $5.5 billion in liabilities and only $4.3 billion in assets.
The majority of liabilities, $4.7 billion, were consumer holdings. During the restructuring process, Celsius had only $170 million in currency on hand to sustain its operations.
What occurred, and what is the current status of Celsius Network? Let's find out.
What exactly is Celsius Network?
Celsius Network LLC was a global cryptocurrency lending corporation with offices in four countries, headquartered in Hoboken, New Jersey.
As a prominent participant in the digital finance industry, the company sought to revolutionize the financial industry by fostering decentralization and providing cryptocurrency holders with high-yield opportunities.
At the core of its operations, Celsius provided a mechanism through which users could deposit BTC and ETH into a Celsius wallet. This innovative model enabled users to earn a percentage yield on their digital assets, capitalizing on the market's growth and potential.
In addition, Celsius Network provided a service that allowed clients to secure loans using their cryptocurrency holdings as collateral. This allowed users to borrow funds using their digital assets as collateral, resulting in the creation of a crypto-backed lending system that became popular among investors in the volatile cryptocurrency market.
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Prime Trust and re-hypothecation contributed to Celsius's demise.
In March 2020, Celsius utilized Prime Trust, a cryptocurrency custodian, to store a portion of its clients' assets.
However, this partnership ended in June 2021 due to Prime Trust's risk team's concerns regarding Celsius's re-hypothecation strategy.
This practice involved repeatedly lending the same assets to increase yields, a business model that the founder of Prime Trust, Scott Purcell, considered highly vulnerable to abrupt market fluctuations and potentially disastrous for the company.
Celsius initiated legal action against Prime Trust in August 2022, alleging that the custodian withheld $17 million in assets following the dissolution of their partnership.
Denial of the crisis and public opinion
Celsius was a significant force in the crypto lending landscape in the second quarter of 2022, with nearly $12 billion in assets under management and 1.7 million clients.
However, rumors circulated about possible mismanagement of investments and an impending liquidity crisis, which the company categorically denied.
During his weekly YouTube sessions, CEO Alex Mashinsky dispelled these falsehoods by assuring customers of their funds' accessibility.
In addition, he asserted that Celsius possessed ample liquidity and faulted the company's detractors for sowing dread and uncertainty.
The domino effect: market influence and internal modifications
To stabilize operations, Celsius took drastic action on June 13, 2022, halting all client withdrawals due to "extreme market conditions."
The announcement precipitated a significant decline in the pricing of bitcoin and ethereum, as well as Celsius's CEL token, which lost a third of its value.
The total market value of cryptocurrencies fell below $1 trillion for the first time since January 2021.
Additionally, the crisis caused significant internal adjustments at Celsius. The CFO, Rod Bolger, resigned and was replaced by Chris Ferraro; shortly thereafter, the company laid off 25% of its personnel.
The bankruptcy filing and resignation of the CEO
On July 13, a month after halting consumer withdrawals, Celsius filed for Chapter 11 bankruptcy, citing a $1.2 billion shortfall on the balance sheet.
On September 27, 2022, Celsius's CEO, Mashinsky, resigned after confessing to the company's weak asset deployment decisions. Chris Ferraro, who had assumed the position of CFO, was named interim CEO.
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The convergence of factors that led to Celsius Network's demise
The demise of Celsius Network can be attributed to poor choices and market conditions. These commenced with the collapse of LUNA, were followed by an overleverage issue, and culminated with inadequately executed WBTC and ETH/stETH positions that resulted in the complete closure of their platform.
Risky wagers on LUNA and repercussions
The Anchor protocol of LUNA offered a 20% interest rate on its USD-pegged stablecoin, UST. This was a significant investment for Celsius, allowing them to provide high yields to customers and generate a profit.
Despite their denials, however, on-chain investigations revealed that Celsius had bet approximately $535 million worth of UST on Anchor.
Reportedly, the complete de-peg of UST allowed Celsius to extract funds with minimal losses, but this incident was a red flag for Celsius' high-risk strategies.
Poor administration of WBTC and DAI
Celsius used the customer's Wrapped Bitcoin on Ethereum (WBTC) as collateral to acquire DAI on the Maker protocol. The borrowed DAI was then invested for high returns.
However, when BTC prices plummeted after the collapse of the UST, Celsius decided to add more collateral rather than pay off their DAI debt in hopes of a market recovery. Sadly, this strategy was implemented at the expense of consumers' funds.
ETH and stETH missteps
Celsius offered clients an appealing return on ETH by leveraging staked ETH (stETH) from Lido Finance.
This stretch is a liquid ETH derivative backed by ETH staked on the Ethereum PoS Beacon chain. Celsius utilized ETH from clients in three methods to generate high returns:
- Leveraging DeFi protocols to lend ETH
- Exchanging ETH for stETH and lending stETH out
- Staking Ethereum on the Beacon network
However, stETH's value is not bound to ETH, and stETH cannot be converted directly into ETH. The price difference between ETH and stETH and the lack of liquidity have resulted in a devaluation of assets, with Celsius retaining only about $0.94 worth of ETH for every $1 of ETH owed to customers.
As the prices of BTC and ETH declined, Celsius confronted a severe liquidity crisis. To avoid margin calls, they had to frequently replenish their WBTC collateral.
To prevent a bank run that could have completely depleted their holdings, Celsius ceased all withdrawals, swaps, and transfers between accounts on June 12, 2022, effectively preventing users from accessing their assets.
Conflict with cryptocurrency blogger Tiffany Fong
Celsius was involved in a legal dispute with crypto blogger Tiffany Fong amidst its difficulties. Fong, a creditor of Celsius, was accused of disclosing confidential company information on her social media accounts.
In preparation for prospective litigation, Celsius Network's legal representatives have invested considerable time and resources investigating the information leak reported by Fong.
Fong's disclosures, including corporate proposals for Celsius assets, confidential company discussions, and executives' transaction activities, have raised significant concerns despite the absence of specific legal action.
Fong took a sarcastic dig at Celsius Network in a June 12 tweet, apologizing for the disclosures and applauding the company for "using my money to try to sue me."
The tweet ended with a cheeky note marking their contentious relationship’s anniversary: “Happy 1-year babe.” The post underscores the ongoing tension between Fong and the beleaguered Celsius Network. Fahrenheit acquires Celsius Network According to recent court filings, Celsius Network was acquired by the cryptocurrency consortium Fahrenheit on May 26.
The group, composed of entities including venture capital firm Arrington Capital and miner US Bitcoin Corp, won the bid following an extensive auction process, with the Blockchain Recovery Investment Consortium standing by as a backup. The terms of the acquisition grant Fahrenheit ownership of Celsius’s institutional loan portfolio, staked cryptocurrencies, mining unit, and additional alternative investments. The group must also deposit $10 million within three days to seal the deal. While the bid has been accepted by both Celsius and its creditors’ committee, it still needs regulatory approval to finalize the acquisition. The deal also entails the construction of various crypto mining facilities by US Bitcoin Corp, including a new 100-megawatt plant. Fahrenheit is set to gain between $450 and $500 million in liquid cryptocurrency as part of the transaction. As Celsius steps into its new chapter with Fahrenheit, it’s crucial for the two entities involved and the crypto industry, especially those recovering from similar challenges.
The road ahead
From its rise to its fall, the Celsius Network story is a cautionary tale of how quickly fortunes can change in the volatile world of cryptocurrencies. A year on, Fahrenheit’s acquisition offers hope for the embattled company. However, only time will tell whether the new company can avoid its predecessor’s mistakes and truly deliver on the promise of DeFi.
