What happened with Celsius?

If you are reading this you survived Bloody Monday. It is important to note that we have been here before. There have been multiple cycles of boom and bust in crypto and this is just another one. Amazing talent is still building great products. If that stops then we worry.

Today's Topics:

• What happened with Celsius?

• 3 stages of a bear market

• Quick Links

What happened with Celsius?

Celsius is a centralized DeFi custodian which takes your fiat/crypto and guarantees you a fixed interest rate. They put your collateral on-chain and use DeFi to extract a yield.

You can look at this like a bank. However they acted more like an active fund manager since what they do needs constant monitoring.

How do they make $$$?

Lending to people and institutions as well as whatever crazy DeFi strategies they run on customer funds. If they advertise 3% on a deposit of ETH and using DeFi stake it to make 10% then they would keep the 7% difference.

The last few years they have made a killing as DeFi took off. They raised $400M at a 10B valuation not too long ago.

So what's the problem?

Well they took customer funds and went a bit too ape with their strategies. They lost an undisclosed amount in the Luna debacle. Yes that feels like a million years ago but was just a few weeks back.

Next Celsius promised 6-8% on ETH deposits. They most likely earned this rate for customers by staking ETH on the ETH Beacon chain. The problem with this is that anything held on ETH Beacon is locked up till, you know 'The Merge'.

To get around this the geniuses at Celsius partnered with the protocol Lido. Lido makes a liquid derivative asset named Lido Staked ETH, aka $stETH. Usually it trades 1-to-1 with ETH but does not always do so.

Celsius depends on this 1-to-1 however because it has to match liabilities. In a pumping market this was not an issue. But with a crashing market the ratio was not held.

This led to a massive liquidity event when with a dumping market people wanted to take their assets out. All at the same time of course. Facing a liquidation event and inability to return customer funds they decided to stop withdrawls. 

So the big question is do they have enough assets to pay people back who want to withdrawal? Based on the stoppage we are gonna say no.

Where do we go from here?

• Perhaps the company has enough money to pay people back and will do so slowly.

• They might be able to negotiate with their partners to off load some of their illiquid positions.

• Declare bankruptcy

• Take on additional funding - Highly unlikely.

• Sell themselves off to a competitor like Nexo.

Crazy times.

3 stages of a bear market

Stage 1: The Unwind

Stage 2: Forced Capitulation - Where we are now.

Stage 3: Bottomless Exhaustion

Click on the twitter thread to read the whole thing.

Further reading by Fred Wilson who wrote this great blog post on bear markets.

Quick Headlines

Tron deploys $2B from reserves to prevent a Luna like collapse - Justin Sun trying to dance around the bear market.

Binance temporarily pauses BTC withdrawls  - This lasted for a few hours.

Layoffs:

Crypto.com letting go of 5% of staff - 260 people are affected

BlockFi cutting 20% of staff - A competitor to Celsius.

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Disclosure: We are a newsletter for information only. We are not financial advisors nor do we claim to be. Consult your legal, investment or tax advisor. Crypto is risky. Do you own research.