The Celsius network was created amid the cryptocurrency movement by founder and CEO Alex Mahinsky, who made it the largest centralized platform on the market; Celsius offered returns on various cryptocurrencies and primarily acted as a hedge fund.
However, the platform has been in the spotlight for the wrong reasons over the past few weeks. Most recently, Celsius filed for Chapter 11 bankruptcy last week. The decision came as no surprise to many who saw it coming.
Before the bankruptcy filing
Celsius had established himself as one of the biggest names in cryptocurrency lending, reaching great heights in October 2021 when Mahinsky claimed to have $25 billion in assets under management.
Despite the cryptocurrency’s drop in value in May, Celsius still had $11.8 billion in assets under management. The company also had an additional $8 billion in customer loans.
Today
Celsius currently has $167 million “in cash on hand,” which will provide “adequate liquidity” during the restructuring process as the business continues to operate.
According to its bankruptcy filing, Celsius owes users $4.7 billion on top of its balance sheet’s $1.2 billion hole. Additionally, Celsius’ filing for bankruptcy is the third major bankruptcy within the crypto ecosystem in a short span.
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The company’s situation could also portend a major meltdown in the broader crypto ecosystem and signal the end of clients collecting double-digit annual returns. Either way, Celsius’ promise to onboard new users contributed to its downfall.
Factors to the bankruptcy
One of the company’s biggest problems is that its promise of a 20% annual return was not real, leading to allegations that Celsius was operating a Ponzi scheme, wherein the company used money from new users to pay new depositors, allegedly a lawsuit.
Celsius also invested funds in other platforms that offered similarly high returns to keep its business model alive.
Media outlet The Block noted that Celsius had invested at least half a billion dollars in Anchor, the flagship lending platform of the now-defunct stablecoin project TerraUSD.
Celsius previously promised a 20% annual return on users’ UST assets.
Moreover, the company was one of the platforms to park its money in Anchor, which caused a series of major bankruptcies after the UST implosion in May.
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“They always have to source yield,” noted Nik Bhatia, founder of The Bitcoin Layer and part-time professor of finance at the University of Southern California. “So they move the assets around into risky instruments that are impossible to hedge.”
Regarding the $1.2 billion hole in Celsius’ balance sheet, Bhatia alluded to fragile risk models and bottom-up collateral selling by institutional lenders.
“They probably lost customer deposits in UST,” Bhatia suggested. “When the assets go down in price, that’s how you get a ‘hole.’ The liability remains, so again, poor risk models.”
Who is entitled to a refund?
Although Celsius halted all withdrawals due to “extreme market conditions,” the platform continued to tout an annual return of almost 19% for three weeks (and a few days before the company filed for protection against failure).
“Transfer your crypto Celsius and you could be earning up to 18.63% APY in minutes,” the site wrote in bold on July 3.
Engagements helped attract new users, with 1.7 million customers in June.
According to the bankruptcy filing, Celsius has more than 100,000 creditors, some of whom have lent money to the platform without collateral to support their business.
The list of unsecured creditors includes Sam Bankman-Fried’s Alameda Research and a Cayman Islands-based investment firm; creditors will likely be the first to get their money (assuming there’s money to be refunded).
During the bankruptcy filing, Celsius said account operations would be suspended until further notice and would not seek approval for customer withdrawals, which would cause a massive headache for customers wishing to access their accounts and withdraw their cryptocurrency.
It is also unclear whether the bankruptcy process will allow customers to recoup their losses.
Compared to traditional banking systems that ensure customer deposits, Celsius does not offer consumer protection to safeguard user funds in times of crisis.
Additionally, Celsius has clarified in its Terms of Service that any digital assets transferred represent a loan from the user to Celsius – without any collateral from the company; Client funds were essentially unsecured loans.
The company also warned in its terms of service that in the event of bankruptcy, “any eligible digital asset used in the Earn Service or as collateral under the Borrow Service may be non-refundable,” leaving customers without legal or legal rights related to the firm.
The disclosure was placed to give Celsius immunity from any illegal activity if something goes wrong.
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