Celsius Crypto Meltdown: A Crypto Lender In Crisis

It’s been a difficult year for cryptocurrency investors, made more challenging by a slew of insolvencies among crypto lenders. Celsius Network (CEL) announced on July 13 that it filed for Chapter 11 bankruptcy after a month of turmoil.

The embattled crypto lender made headlines last month after freezing customer accounts, citing “extreme market conditions.”

In a prepared statement regarding its bankruptcy, the company said it decided “last month to pause withdrawals, swaps, and transfers on its platform to stabilize its business and protect its customers. Without a pause, the acceleration of withdrawals would have allowed certain customers, those who were first to act, to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities before they receive a recovery.”

Court filings show that Celsius is around $1.2 billion in the red, with $5.5 billion in liabilities and $4.3 billion. It also looks like customers may bear the brunt of Celsius’ collapse, as the filings show that most of the liabilities, $4.7 billion, represent customer holdings.

Celsius’ bankruptcy it’s just one among several high-profile crypto insolvencies. Voyager, another consumer-facing crypto lender, filed for bankruptcy protection last week after it suffered losses from its exposure from lending to crypto hedge fund Three Arrows Capital (3AC). 3AC defaulted on its loans, turning things south for Voyager and BlockFi.

Six states have launched investigations into Celsius, with Vermont being the latest to sue.

What Is Celsius?

Celsius was intended to operate somewhat like a traditional bank, albeit for crypto rather than fiat currency. It was once considered among the most successful parts of the decentralized finance (DeFi) movement.

A mere two months ago, Celsius claimed that it had 1.7 million users and assets under management (AUM) of $11.7 billion. The company said that it has made more than $8 billion in loans, and until recently had offered extremely high annual percentage yields (APYs) with up to 17% on cryptocurrency deposits.

But on June 12, it all came crashing down. Celsius posted a memo informing users that it had frozen their assets, sending the price of Bitcoin and other cryptos down along with it.

The post read: “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts,” read the statement. “We are taking this necessary action for the benefit of our entire community to stabilize liquidity and operations while we take steps to preserve and protect assets.”

In the company’s July 13 statement, Celsius said it had a paltry $167 million in cash on hand, to support “certain operations” during its restructuring process.

This also isn’t the first controversy for the crypto lender. Earlier this year, the platform stopped offering interest-bearing accounts to non-accredited investors following pressures from regulators.

Last year, the states of Alabama, New Jersey and Texas filed orders against Celsius for allegedly selling unregistered securities to its users.

Why Celsius Matters for Crypto

Cryptocurrency prices have been pressured throughout 2022 as markets retreated in the face of persistently high inflation and aggressive Federal Reserve interest rate hikes. There has been persistent selling pressure in the crypto market and for other risk assets.

Negative sentiment surrounding crypto was compounded in May when Luna, associated with the stablecoin TerraUSD (UST), completely collapsed after UST lost its $1 peg.

The collapse of Luna and TerraUSD wiped out $60 billion in investor value. More ominously, it undermined confidence in the entire cryptocurrency market, which already had a reputation for extreme volatility and rampant speculation.

Some crypto experts also accused Celsius Network of contributing to the collapse of Luna, but Celsius has denied those claims.

Crypto Market Free-Fall

Cryptocurrency investors may be concerned about potential contagion spreading to other crypto platforms, similar to the type of mass withdrawals that can occur during bank runs.

Omid Malekan, an adjunct professor at the Columbia Business School who teaches classes on cryptocurrency and blockchain, said the uncertainty surrounding the Celsius situation contributes to bearish crypto market sentiment.

Experts say fear and uncertainty, the liquidity crunch and U.S. inflation data are hitting crypto markets hard. On July 13, the Labor Department reported a 9.1% rise in the Consumer Price Index (CPI) for June, the most accelerated pace of inflation since November 1981.