Good news: a crisis in one of the largest crypto lenders Celsius Network did not pull crypto markets under. One week later, as the access to customer funds is still limited, we return to see how the situation at the crypto lending platform develops.
What Extreme Market Conditions Caused This?
Celsius Network is a popular gateway to digital assets. Customers flocked to it thanks to its extraordinary high rates on lending, up to 17% APY. Thanks to it, it managed to amass billions of user funds under management.
Think of the crypto lending platform as a bank on steroids: the company used eccentric financial strategies to generate high return for customers. Experts warned Celsius customers of the financial risks time and time again, only for it to be dismissed as FUD (fear, uncertainty, doubt).
If you have read our coverage last week, you already know that in mid-June the company encountered a severe liquidity shortage after the value of cryptocurrencies started to decline. A particularly vulnerable position was in stETH, a Lido product that is a tokenized stake on the Ethereum Beacon (PoS) chain.
Citing extreme market conditions, they stopped all swap, withdraw and transfers between Celsius accounts. This has caused panic on the market, as traders became increasingly wary of contagion risk and a bank run.
Is the Crisis in Decentralized Finance under Control?
Stabilizing the Crypto Platform
Since then, quite a lot has already happened, warranting an update to the recap. To begin with, the Celsius team urged the users to beware of impostors. However, instead of maintaining open dialogue with the Celsius community, they chose to pause all Twitter spaces and AMAs altogether.
Meanwhile, “CEL short squeeze” entered the trending topics on Monday. The community managed to make the CEL token value rally 300% and outplay the short sellers.
Trouble Spilling All Over
This liquidity and operations ordeal inevitably drew the attention of traditional finance regulators to DeFi and lending in particular. Shortly after pausing withdrawals, Celsius started a restructuring process and ramping up their legal defense team. This is not unwarranted, as not only Texas State Securities Board but four more states’ Securities Commissions started an investigation into the business operations of the crypto lender.
To make things worse, rumors of contagion risks around other crypto companies and markets were unrelenting. Speculation is, 3 Arrows Capital, which dabbled in even riskier assets, is also on the verge of insolvency. Sam Bankman-Fried of Alameda Research and FTX had to go on record to deny any involvement in the crash and bailouts. The CEO Alex Mashinsky went further and blamed “Wall Street sharks” for the recent industry events.
What Impact Did It Have on the Market?
We reached out to more industry and crypto market experts for insights into the situation. The first comment we received was from the founder of the BoxMining media Michael Gu:
Celsius is rumored to be insolvent. The two main pillars behind their present predicament could be attributed to the use of on-chain leverage & stETH. There is insufficient liquidity for Celsius to swap out of $stETH for $ETH — even at a loss.
But with the current market scenarios and the amount of loss due to hacks (e.g. BadgerDAO), there is a lot of unwarranted FUD. Even with withdrawals on pause, we shouldn’t forget — Celsius raised $864 million in venture capital and at a certain point was the custodian of over US$3 billion of digital tokens for more than 1 million customers.
The situation surrounding Celsius is not analogous to what happened to UST-LUNA, and the huge fear surrounding the market is overblown.”
Find a more detailed recap in his video about the events — check it out!
Another guest who was kind enough to share his point of view with us is Connor Kenny. We asked him what will expect the markets in the light of these events in the near future:
“The situation with Celsius is worrying for the market as people believed their funds belonged to them and were easily accessible. But now that Celsius has stopped withdrawals leaving their platform, people are stuck with no choice other than to 'wait and see'.
This brings into focus the true nature of some of these platforms and will make people question how decentralized crypto really is. The important thing for everyone to remember is that if you do not hold the private keys to your crypto it technically is not yours and all you hold is an 'IOU'. The best thing to do is move any long-term holds into non-custodial wallets and cold storage devices.
I do not think this is the end for crypto but it does shine a light on some of the issues we face going forward.”
If you would like to have a more elaborate look into his opinion, we highly recommend watching a video he dedicated to the news and its analysis:
This Sunday evening will mark two weeks since Celsius paused withdrawals and transfers between accounts, so it’s understandable users are getting increasingly worried about their digital assets. The company maintains it will meet its withdrawal obligations in due time, and it seems by now they are in a marginally better position to do so.
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