What was once a beacon of hope for cryptocurrency investors spiraled into a major financial fiasco. The crypto lender Celsius Network (CEL) that promised a new dawn in the decentralized finance (DeFi) movement collapsed in June 2022, sparking a wave of skepticism about the future of digital currency. A year later, we look back at the events that unfolded and assess what lies ahead for the crypto market.
Born with the ambition to mimic traditional banking but with a crypto flavor, Celsius Network enjoyed a brief moment of success before facing insurmountable challenges.
At its peak, the company claimed to have 1.7 million users, managed assets worth $11.7 billion, and made loans exceeding $8 billion.
Then came June 13, 2022. Citing “extreme market conditions,” Celsius Network decided to freeze all customer accounts. This unexpected move sent the price of bitcoin (BTC) and other cryptos into a tailspin, causing a ripple effect in the market.
Celsius’ financial health appeared grim. According to court filings, the company was $1.2 billion in the red, with a staggering $5.5 billion in liabilities and assets worth just $4.3 billion.
Most of the liabilities, $4.7 billion, represented customer holdings. To make matters worse, Celsius had a mere $170 million in cash to support its operations during its restructuring process.
What happened, and how is Celsius Network doing now? Let’s find out.
What is Celsius Network
Celsius Network LLC was a global cryptocurrency lending company headquartered in Hoboken, New Jersey, and branches in four countries.
As a prominent player in the digital finance arena, the company aimed to revolutionize the financial industry by promoting decentralization and offering high-yield opportunities to cryptocurrency holders.
At the heart of its operations, Celsius provided a platform where users could deposit cryptocurrencies into a Celsius wallet such as BTC and ETH. This innovative model allowed users to earn a percentage yield on their digital assets, leveraging the growth and potential of the cryptocurrency market.
Moreover, Celsius Network offered a unique service where customers could secure loans using their cryptocurrencies as collateral. This means users could borrow funds while pledging their digital assets as security, creating a crypto-backed lending system that became popular among investors in the volatile crypto market.
Prime Trust and re-hypothecation in Celsius’s downfall
In March 2020, Celsius utilized the services of Prime Trust, a crypto custodian, to house some of its client’s assets.
However, this association ceased in June 2021 due to concerns raised by Prime Trust’s risk team regarding Celsius’s re-hypothecation strategy.
This practice involved repeatedly lending the same assets to augment yields, a business model Prime Trust’s founder, Scott Purcell, deemed highly vulnerable to sharp market fluctuations and potentially catastrophic for the company.
By August 2022, Celsius had launched legal proceedings against Prime Trust, claiming the custodian had withheld assets worth $17 million following the dissolution of their partnership.
Denying the crisis and public perception
In the second quarter of 2022, Celsius was a significant force in the crypto lending landscape, with nearly $12 billion in assets under management and a client base of 1.7 million.
However, rumors circulated about possible mismanaged investments and a looming liquidity crisis, which the company vehemently dismissed as misinformation.
To mitigate these rumors, CEO Alex Mashinsky publicly reassured customers of their funds’ accessibility during his weekly YouTube sessions.
He further claimed that Celsius had ample liquidity and blamed the company’s critics for instigating fear and uncertainty.
The domino effect: market impact and internal changes
On June 13, 2022, Celsius took a drastic step, freezing all customer withdrawals due to ‘extreme market conditions’ to stabilize operations.
The announcement triggered a substantial fall in bitcoin and ethereum prices, along with Celsius’s own CEL token, which lost a third of its value.
This incident marked the first time since January 2021 that the total value of the cryptocurrency market fell below $1 trillion.
The crisis also led to significant internal changes at Celsius. The CFO, Rod Bolger, resigned and was succeeded by Chris Ferraro, with the company laying off 25% of its workforce shortly after.
The bankruptcy filing and CEO resignation
A month after freezing customer withdrawals, Celsius filed for Chapter 11 bankruptcy on July 13, reporting a $1.2 billion shortfall on the balance sheet.
Celsius’s CEO, Mashinsky, eventually stepped down on September 27, 2022, admitting to the company’s poor asset deployment decisions. Chris Ferraro, who had taken over the CFO position, was appointed interim CEO.
The confluence of factors behind Celsius Network’s collapse
Celsius Network’s collapse can be attributed to problematic decisions and market conditions. These began with the collapse of LUNA, followed by an overleveraging issue, and concluded with poorly executed WBTC and ETH/stETH positions that led to a total lockdown of their platform.
Risky bets on LUNA and consequences
LUNA’s Anchor protocol offered a desirable 20% interest on UST, its USD-pegged stablecoin. Celsius was heavily invested in this, allowing them to provide high yields to their customers and make a profit.
However, on-chain investigations revealed that Celsius had staked approximately $535 million worth of UST on Anchor, despite their denials.
The full de-pegging of UST reportedly allowed Celsius to withdraw funds with minimal damage, but this incident was a red flag for the high-risk strategies employed by Celsius.
Mismanagement of WBTC and DAI
Celsius used the customer’s WBTC (Wrapped BTC on Ethereum) as collateral to borrow DAI on the Maker protocol. They then staked the borrowed DAI for high yields.
However, when the BTC prices plummeted following the UST collapse, Celsius chose to add more collateral instead of paying off their DAI debt, hoping for a market turnaround. Unfortunately, this strategy came at the expense of customers’ funds.
ETH and stETH missteps
Celsius offered customers an attractive yield on ETH by taking advantage of staked ETH (stETH) from Lido Finance.
This stretch is a liquid ETH derivative fully collateralized by ETH staked on the Ethereum PoS Beacon chain. Celsius was using customers’ ETH in three ways to generate high yields:
- Lending ETH on DeFi protocols
- Swapping ETH for stETH and lending out stETH
- Staking ETH on the Beacon chain
However, the value of stETH is not pegged to ETH, and stETH cannot be directly converted back to ETH. The price disparity between ETH and stETH and the lack of liquidity have resulted in a devaluation of assets, with Celsius holding only about $0.94 for every $1 worth of ETH owed to their customers.
As BTC and ETH prices fell, Celsius faced an acute liquidity crisis. To avoid margin calls, they had to top up their WBTC collateral frequently.
To prevent a bank run that could have entirely drained their holdings, Celsius stopped all withdrawals, swaps, and transfers between accounts from June 12, 2022, effectively locking users out of their assets.
Legal tussle with crypto blogger Tiffany Fong
Amid its struggles, Celsius was embroiled in a legal predicament with crypto blogger Tiffany Fong. Fong, a creditor of Celsius, was accused of leaking confidential company data on her social media platforms.
Legal representatives of Celsius Network have spent considerable time and resources investigating the information leak Fong reported while preparing for potential litigation.
Though no specific legal action has been filed yet, Fong’s disclosures, including corporate bids for Celsius assets, confidential company discussions, and executives’ transaction activities, have raised significant concerns.
In a tweet on June 12, Fong took a sarcastic jab at Celsius Network, expressing faux-apology for the leaks and thanking the company for “using my $ 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.
