What was once a beacon of hope for cryptocurrency investors spiraled into a major financial fiasco. The crypto lender Celsius Network (CEL) that promised a new dawn in the decentralized finance (DeFi) movement collapsed in June 2022, sparking a wave of skepticism about the future of digital currency. A year later, we look back at the events that unfolded and assess what lies ahead for the crypto market.
Thank you for reading this post, don’t forget to subscribe!
Born with the ambition to mimic traditional banking but with a crypto flavor, Celsius Network enjoyed a brief moment of success before facing insurmountable challenges.
At its peak, the company claimed to have 1.7 million users, managed assets worth $11.7 billion, and made loans exceeding $8 billion.
Then came June 13, 2022. Citing “extreme market conditions,” Celsius Network decided to freeze all customer accounts. This unexpected move sent the price of bitcoin (BTC) and other cryptos into a tailspin, causing a ripple effect in the market.
Celsius’ financial health appeared grim. According to court filings, the company was $1.2 billion in the red, with a staggering $5.5 billion in liabilities and assets worth just $4.3 billion.
Most of the liabilities, $4.7 billion, represented customer holdings. To make matters worse, Celsius had a mere $170 million in cash to support its operations during its restructuring process.
What happened, and how is Celsius Network doing now? Let’s find out.
What is Celsius Network
Celsius Network LLC was a global cryptocurrency lending company headquartered in Hoboken, New Jersey, and branches in four countries.
As a prominent player in the digital finance arena, the company aimed to revolutionize the financial industry by promoting decentralization and offering high-yield opportunities to cryptocurrency holders.
At the heart of its operations, Celsius provided a platform where users could deposit cryptocurrencies into a Celsius wallet such as BTC and ETH. This innovative model allowed users to earn a percentage yield on their digital assets, leveraging the growth and potential of the cryptocurrency market.
Moreover, Celsius Network offered a unique service where customers could secure loans using their cryptocurrencies as collateral. This means users could borrow funds while pledging their digital assets as security, creating a crypto-backed lending system that became popular among investors in the volatile crypto market.
Prime Trust and re-hypothecation in Celsius’s downfall
In March 2020, Celsius utilized the services of Prime Trust, a crypto custodian, to house some of its client’s assets.
However, this association ceased in June 2021 due to concerns raised by Prime Trust’s risk team regarding Celsius’s re-hypothecation strategy.
This practice involved repeatedly lending the same assets to augment yields, a business model Prime Trust’s founder, Scott Purcell, deemed highly vulnerable to sharp market fluctuations and potentially catastrophic for the company.
By August 2022, Celsius had launched legal proceedings against Prime Trust, claiming the custodian had withheld assets worth $17 million following the dissolution of their partnership.
Denying the crisis and public perception
In the second quarter of 2022, Celsius was a significant force in the crypto lending landscape, with nearly $12 billion in assets under management and a client base of 1.7 million.
However, rumors circulated about possible mismanaged investments and a looming liquidity crisis, which the company vehemently dismissed as misinformation.
To mitigate these rumors, CEO Alex Mashinsky publicly reassured customers of their funds’ accessibility during his weekly YouTube sessions.
The domino effect: market impact and internal changes
On June 13, 2022, Celsius took a drastic step, freezing all customer withdrawals due to ‘extreme market conditions’ to stabilize operations.
The announcement triggered a substantial fall in bitcoin and ethereum prices, along with Celsius’s own CEL token, which lost a third of its value.
This incident marked the first time since January 2021 that the total value of the cryptocurrency market fell below $1 trillion.
The crisis also led to significant internal changes at Celsius. The CFO, Rod Bolger, resigned and was succeeded by Chris Ferraro, with the company laying off 25% of its workforce shortly after.
The bankruptcy filing and CEO resignation
A month after freezing customer withdrawals, Celsius filed for Chapter 11 bankruptcy on July 13, reporting a $1.2 billion shortfall on the balance sheet.
The road ahead
From its rise to its fall, the Celsius Network story is a cautionary tale of how quickly fortunes can change in the volatile world of cryptocurrencies. A year on, Fahrenheit’s acquisition offers hope for the embattled company.
However, only time will tell whether the new company can avoid its predecessor’s mistakes and truly deliver on the promise of DeFi.