Celsius Freezes Withdrawals

To crypto enthusiasts' surprise, Bitcoin plunged again. Bitcoin and Ethereum dropped to 18-month lows on Monday, sinking around 15%. This took the total value of crypto markets to below 1 trillion dollars for the first time since January last year. Additionally, Bitcoin fell below $23,000, and Ethereum dropped under $1,200. This turmoil came once the crypto lender Celsius announced that it was freezing withdrawals due to extreme market volatility.

Last month, TerraUSD and its sister currency Luna collapsed and shook the crypto market. As reported in Euronews, TerraUSD has been pegged almost precisely to the dollar since its release. But on May 9, it crashed and has now become worthless. Its sister coin, LUNA, was worth more than $80 (€76) a coin at the start of May, and as of May 18, it was worth a fraction of a cent. Luna promised 20% interest on USD-pegged stablecoins, but when the market began to shake, it failed to keep its promise. Celsius, who promised strong interest rates on stablecoins, was exposed to the collapse by holding (speculated up to $500m) in $UST.?

Recently, the world of cryptocurrencies has been in depression as the second most traded cryptocurrency ETH, started to drop. Furthermore, Financial Express stated that the price of Lido Staked Ethereum (stETH) had diverged sharply from Ethereum (ETH) in the last 48 hours. And now, Celsius has frozen its withdrawals. So, what happened to Celsius? Let's dig deep into it to understand it better.

What is Celsius??

Celsius Network is one of the largest cryptocurrency lenders. It is a centralized fintech (financial technology) platform that offers interest-bearing savings accounts, borrowing, and payments with digital and fiat assets. In addition, it provides yields on various cryptocurrencies, including Ethereum, Bitcoin, and many stablecoins.?

How does Celsius work?

As stated by Cryptopotato, Celsius has positioned itself as a platform that reminds that of a bank, but it seems to operate more like a hedge fund. Then how do they make money? They make all of their money on yield, on earning from institutions, as said by Celsius CEO Alex Mashinsky. Further, he has shared that "Celsius makes all its money in lending, so all other services we give (are) for free, we give customers all the services for free: on-ramps, swaps, loans – everything is pretty much for free. That's why no one can beat Celsius."

Users can earn interest in their cryptocurrency on the Celsius platform. If you have deposited your crypto in Celsius, then you are promised an interest up to 18.63% APY yearly return, as they mentioned. Also, users can borrow funds by using their crypto as collateral. In case of a situation where you need USDT or USDC, but you don't want to sell your BTC or ETH, you can use it as collateral and be loaned by Celsius at a specific interest rate. And there are a lot more services that the platform offers.?

Is Celsius, the next Luna?

So, what happened to Celsius? In short, Celsius is currently facing a liquidity crisis and is insolvent. There are about $10b in customer assets in Celsius and about $1.5b in Celsius' various wallets. So, customer funds and liquid assets cannot be matched.?

To understand the case better, let's see what's insolvency. Insolvency is defined as 'inability to pay debts as they become due. There are two types of insolvency. The first is 'cash flow insolvency,' implying you have more outflows than you can support. Over the last few years, Celsius has seen millions of dollars leaving the platform and sometimes much higher. So Basically, there's not enough crypto to support the outflows.?

Celsius Network has locked the assets until they come into a position where they can have these assets in their possession. Networks sometimes need time to move these assets around and unstake them so that users can withdraw them. So this indicates that Celsius might be in a cash flow insolvency situation.?

The second one is 'balance sheet insolvent, 'which means you do not have enough assets to cover your liabilities. Celsius has more liabilities than assets; that is, they have more customer assets in their platform than they have assets that they can liquidate and give back to customers. The problem is that it's illiquid.?

How can Celsius solve this problem?

As discussed earlier, there are chances that they can become solvent again as they have enough assets but are illiquid. If their assets don't match their liabilities, then we are screwed. The Network might require external funding, loan, or can be acquired by some other firms. Nexo has already proposed to acquire Celsius. If nothing works, then they will go bankrupt.?

Many brands like Apple, General Motors, and Marvel Entertainment have bounced back from being insolvent or bankrupt to rulers of their respective industries. So, bankruptcy is not the end of any firm. Also, this is the first time in history that Celsius has paused its withdrawals. This is just a black swan event where the Network faced too much crypto withdrawing demand and didn't have enough liquid assets. Celsius has thanked their community for the support and said they would share the information once it becomes available. So, it's better to wait till the official news comes.?