Celsius crisis exposes low liquidity issues in bear markets

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After a week of suspending user withdrawals, trades and transfers, the company said it is maintaining an open dialogue with regulators and officials and plans to continue working with them regarding this pause. Celsius has yet to comment on when the company will stabilize operations. Celsius also suspended communications on Twitter spaces and AMA (ask me anything) sessions “to focus on navigating these unprecedented challenges.”

Although Celsius has refrained from communicating, the media and social networks have been buzzing with news and speculation about the company’s past, present and future. One of the most interesting developments is a community-driven Gamestop-style short compression.

The dust from the Terra debacle has yet to settle and another crisis is rocking the crypto markets. The multi-billion dollar crypto lending and staking platform Celsius is the latest crypto company to be embroiled in controversy.

Previous abnormalities

Celsius’ slogan is “An economy where financial freedom is priceless”. This marketing slogan, while unbelievable to some, has been really effective for quite some time. Since opening in 2017, the company had amassed more than $25 billion worth of crypto over five years until things got worse on June 12, 2022, when the company suspended user withdrawals.

However, signs of mishandling of funds by Celsius were visible prior to this instance. In December 2020, during the $120 million BadgerDAO hack, Celsius reportedly lost over $50 million worth of crypto, making them the biggest victim of the deed. To reward the victims of their losses, BadgerDAO implemented a restitution scheme by creating the remBADGER token.

Token holders were assured of a payout in remBADGER over the next two years that would cover the rest of the loss. This assurance came with a single requirement: the remBADGER must remain in the Badger vault. If the token were to be removed, all future refunds would be forfeited. However, on March 18, 2022, Celsius withdrew its entire allocated remBADGER, worth approximately $2.1 million at the time of the transaction.

When Celsius Network realized its mistake, it tried to convince the Badger team to allow it to refile in violation of the rules established by BIP-80. Unfortunately, for Celsius, the BadgerDAO took the law’s code and ethos seriously, and the proposal was rejected.

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Many users also expressed concern about the company’s leadership. Celsius chief financial officer Yaron Shalem and chief revenue officer Roni Cohen-Pavon were both arrested for money laundering in November 2021

On May 11, 2022, as the Terra debacle was just beginning to unfold, some started watching Celsius. TSWT then reported that the Celsius network had started denying rumors of major losses for the company. Celsius Chief Financial Officer Rod Bolger said: “Our front office teams […] think and act as risk managers to ensure that we are not significantly exposed to market fluctuations.

Investors had accused the Celsius team of sitting idly by as the token price plummeted following the Terra fiasco. On May 20, 2022, Celsius (CEL) had fallen from its all-time high of $8.05 to $0.82, a decline of 90%. Some Celsius users claimed the platform liquidated their holdings as CEL fell. They suggested that the trading was illiquid as the price fell, compounding their losses. When TSWT contacted the CEO of Celsius, Mashinsky attributed this to the “Wall Street shark”, stating:

“They shot down LUNA. They tried Tether, Maker and many other companies. It’s not just us. I don’t think they have a specific hate or focus on Celsius. They are all looking for a weakness to short out and destroy. The thing is, Wall Street sharks are now swimming in crypto waters.

The Problem with High Yield APY Projects

Celsius was one of the fastest growing institutions in the crypto market. Until the collapse, Celsius had 800 people working for them, with the number of employees increasing by more than 200% in the past year alone. The problem is that the crypto is currently in a bear market and in order to continue to operate normally, companies must continue to have liquidity. Now, with most retail investors and institutions withdrawing their crypto, liquidity is becoming a major concern for them.

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One of the main reasons for Terra’s collapse was also illiquid assets. However, most projects, when asked how their individual projects claim to be on a different business model than the project that is struggling at the time. TSWT had reached out to Synthetix to clarify why their lucrative high-yield Annual Percentage Yield (APY) business model had more merit than those that fell like Terra and Celsius. Their rep replied:

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“Several accounts have attempted to draw parallels between Synthetix and LUNA. And, while there may be surface-level similarity, ultimately Synthetix’s tokenomics and collateralization mechanisms are much more robust. and combat tested than LUNA.Also, while the higher APY seems high, that number comes from two separate sources.

“sUSD trading fees, which are trading revenue generated by our ecosystem partners like Kwenta, Lyra, 1Inch, Popcorn Finance and others, are a portion of and, based on volume in the previous week, have contributed between 5% and 25% of weekly staking rewards.Inflationary supply is the second largest source of weekly APY and contributes to the remaining APY amount, and is currently at an annual growth rate of around 50%. Inflation is hit weekly and is currently split between punters on the ETH mainnet and Optimism,” they added.

Liquidity crisis in crypto mirrors traditional markets

What we see now in the crypto ecosystem are all the lessons learned over the past 100 years in the traditional financial system. As the ecosystem matures, crypto markets will inevitably become cyclical, just like traditional markets. To overcome the recession, projects must learn from the past. This doesn’t mean that crypto is losing its edge, just that there are smart sustainability principles applicable to any emerging market. Loren Mahler, CEO of Jupiter Exchange, pointed out that most financial markets are fundamentally similar and likely to become illiquid during the inevitable run down. She told TSWT:

“One of the most important is the issue of liquidity. Focusing on rapid user growth at all costs is not a sustainable philosophy. Offering outrageous staking rewards on the most mundane of activities is naturally going to create a run on the system, whether in crypto or traditional banking. Projects that innovatively apply these traditional financial lessons will be in the best position to seize new growth opportunities when the cycle turns again.

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Giant projects like Terra and Celsius in progress tend to have a cascading effect on the wider market, which is evident in the falling prices of most cryptocurrencies. The sentiment of retail and institutional investors is bound to turn extremely negative. However, Lilly Zhang, chief financial officer of Huobi Global, saw a way out of the liquidation domino effect. She told TSWT:

“The market could experience further declines as further sell-offs occur and players are forced to sell, and companies and investors who made poor decisions will be hit the hardest. The problems at Celsius, in turn, also worried traders for Staked Ether. Fortunately, as the selling pressure on stETH continues to build, increased demand will seep into used markets and create cheaper stETH prices that could be attractive to new investors, increasing the demand and bring prices back to normal. ”

Not your keys, not your coins

“Not your keys, not your coins” is a popular phrase in the cryptocurrency world that refers to the need to own the private keys associated with your funds. The person with the private keys is the one who decides how the associated crypto assets are spent. Failure to do so means that we entrust a third party to keep our parts safe for us. Stories like Celsius’s are a strange reminder that these third parties often do not act in the interests of their customers.

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Although the popular lesson of this story was that people should hold the keys to their crypto, there were people like Sung Hun Kim, CEO of Metaverse World, who pointed out that the problem lies with centralized projects like Celsius. . In an interview with TSWT, Sung said:

“When talking about security issues, it’s less about knowing how and more about knowing why. Both centralized and decentralized structures are not impregnable, however, Celsius being inherently closed circuit affects the client’s right to assess the growing risk. It’s not about who stores the keys, but about the level of transparency a project is willing to provide. »