Carnage in the Major Crypto ‘Bank’ Celsius Tank Market. It could get worse.

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When and if Celsius’ withdrawal ban is lifted, rapid withdrawals could cause it to liquidate assets, putting pressure on everything the company has invested in.

The time of dreams

Investors fear that a major cryptocurrency production company is on the verge of collapse. The fallout could bring the market down with it.

On Sunday evening, Hoboken, New Jersey-based crypto firm Celsius Network said it was suspending customer withdrawals from its platform “to stabilize liquidity and operations while we take steps to preserve and protect assets”. At least for now, billions of crypto dollars in the company, which some customers treated like a bank, are trapped.

Celsius’s announcement seemed at least partly responsible for the price crash, which took the crypto’s total market value below $1 trillion for the first time since January 2021. Bitcoin’s price fell 13 .7% in the last 24 hours to around $23,500, according to CoinMarketCap. com, while Ether’s price fell 15.5% to $1,220.

Some crypto investors fear that if Celsius cannot reopen and deal with drawdowns, the ripple effects will be felt throughout the market. Their fears are well placed.

Celsius is one of many companies that pays a return on crypto deposits. It does this by reinvesting client assets, and securities regulators have said the company places client funds in loans to institutional investors, proprietary trades and a crypto-mining operation. , among other activities. Additionally, Celsius CEO Alex Mashinsky has stated that he is an investor in just about every major “decentralized finance” protocol.

In effect, this means that if Celsius were to cancel its operations, dozens of DeFi projects, crypto tokens and other digital assets would be affected by the fallout.

It’s unclear what caused Celsius’ liquidity issues, but some analysts have pointed to investments the company has made in “Lido Staked Ethereum.” This investment allows investors to lock Ethereum into a so-called smart contract in exchange for yield, but in recent days the price of staked Ethereum has diverged significantly from that of the underlying token.

Celsius had a roughly $1.5 billion position in Staked Ethereum, which “raises concerns that if clients try to buy positions, Celsius will run out of cash to repay them,” wrote analyst Marcus Sotiriou. UK based digital asset. broker GlobalBlock in a note on Monday. Sotiriou wrote that Celsius could run out of funds within five weeks.

A spokesperson for Celsius did not immediately respond to a request for comment.

US regulators have long targeted Celsius for allegedly selling unregistered securities to investors. Last year, states including New Jersey, Kentucky and Texas filed lawsuits against the company over the violations, although the company said in court documents that it was trying to negotiate a settlement. BlockFi, a competitor, earlier this year paid $100 million to the Securities and Exchange Commission and states to settle similar allegations.

Celsius says users will earn interest on deposits even if they can’t move their funds. On Monday, the company still announced yields of up to 18.63%. Facing regulatory scrutiny, Celsius two months ago banned U.S. investors from earning yield on new crypto deposits.

The main issue for investors, not just in Celsius, but in the crypto market in general, is that it’s nearly impossible to tell which assets might be vulnerable if Celsius is unable to recover. Because Celsius does not publicly disclose its investments or under what circumstances it would lose money, blockchain sleuths tried to piece together how Celsius invested the deposits themselves.

And unlike a bank’s assets, crypto deposits are not federally insured. So when and if customer withdrawals are permitted again, nothing can appease depositors and prevent a run on the business. Rapid withdrawals would force Celsius to liquidate assets, putting pressure on everything the company has invested in.

Mashinsky, in lengthy “ask me anything” sessions with clients, often derided the traditional financial system, saying banks paid so little interest to depositors because they wanted to keep profits. for themselves. Indeed, until recent weeks, the company used the slogan “Unbank Yourself” on its homepage.

Now Celsius – and the entire crypto market – could find out what a run on a “bank” looks like with no failsafes to cushion the fall.

Email Joe Light at [email protected]