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Business

Celsius crashes, and crypto investors are intimidated




A few months ago, Mike Washburn’s cryptocurrency investment looked like a winner.

Now he just hopes to get his money back.

Mr. Washburn, a 35-year-old plumber in Otsego, Minn., Had $ 100,000 in an account with Celsius Network LLC, one of the largest lenders in the cryptocurrency world. Mr Washburn, who recently became a widow, said he and his two children moved in with their parents and planned to buy a house with their savings. The Celsius account offered him a higher return than a traditional bank account, and the company was well known in the crypto environment.

On Sunday night, however, Celsius said it no longer allowed customers to withdraw money from their accounts. On Tuesday night, The Wall Street Journal reported that Celsius had hired restructuring lawyers to help deal with the growing financial problems.

Now Mr. Washburn is eagerly waiting to hear what happens to his account.

“If I never see that money again, it will set me and my kids back with years,”[ads1]; Mr. Washburn said.

“Deep down, I do not think it will be a good result, but I hope I am wrong,” he said.

The prices of bitcoin and other cryptocurrencies have fallen as interest rates rise and risky assets become unpopular. The difficult market is once forcing high-flying digital currency companies to cut jobs, stop mergers and prevent customers from pulling digital investments, which shocks investors.

Individual investors may not have realized when they put money in Celsius that they gave the company an unsecured loan with little legal protection. Cryptocompanies like Celsius look like banks in some ways, but they lack investor oversight and legal protection built into banks and brokerages.

In a blog post on Sunday night, Celsius said that they put all withdrawals, exchanges and transfers between accounts on pause, referring to “extreme market conditions”. The move froze $ 11.8 billion in customer funds, based on the company’s May report. On Wednesday afternoon, the assets were still frozen, and Celsius’ founder and CEO Alex Mashinsky tweeted that the company is “working non-stop” with the case.

It is one of dozens of unregulated lenders that have emerged in recent years and promises high returns to investors who are willing to lend their digital assets. Celsius, which requires around 1.7 million customers, paid customers an annual percentage return of up to 18.6% on cryptocurrency deposits. Higher interest rates were available for those who were willing to accept payment in Celsius’ own CEL token.

Mr. Mashinsky launched the company in 2017, and marketed Celsius as a safe alternative to banks. The Ukrainian-born Mr. Mashinsky criticized the banks for paying small interest rates to customers, favoring T-shirts that emphasized his message, including one that said: “Banks are not your friends.”

Like other lenders, Celsius accepted customer deposits of cryptocurrencies and lent them to other users, including market makers and stock exchanges, to make money. Celsius also invests customer deposits in high-yield, high-risk decentralized financial investments.

How Celsius’s crypto-lending process works:

Celsius crashes, and crypto investors are intimidated

Celsius sets customer deposits in decentralized financial investments and lends funds to other users (including stock exchanges and market makers).

Customers borrow money to Celsius in exchange for dividend. (This is essentially an unsecured loan).

Celsius earns one return from borrowers and investments.

Celsius sets customer deposits in decentralized financial investments and lends funds to other users (including stock exchanges and market makers).

Customers borrow money to Celsius in exchange for dividend. (This is essentially an unsecured loan).

Celsius earns one return from borrowers and investments.

However, Celsius faced a challenge in earning a return on the return promised to customers, while still allowing them to recoup their crypto investments. Celsius invested at least $ 470 million in an investment that had plummeted, according to blockchain data and a person familiar with the matter. The terms of the investment product, administered by Lido Finance, prohibit Celsius from rapidly disposing of its assets, which exacerbates the difficulties.

Vasiliy Shapovalov, a Lido developer, said he did not think the token was very risky.

Celsius accepted ether from clients and used it to buy at least 409,000 “Lido staked ether” tokens, according to the person familiar with matter and blockchain data, which it in turn lent out to earn high returns. Historically, such tokens have had approximately the same value as ether because they represent the ether used on the Ethereum platform to process transactions and maintain chain security. Celsius cannot exchange its staked ether stocks for ether until Ethereum switches to its “proof of stake” model, but a deadline for this move has been consistently pushed back.

Lately, however, Lido-inserted ether has traded at a discount of around 5%, according to the analysis company Dune Analytics. The disconnect began when the cryptocurrency TerraUSD recently collapsed, motivating investors to pull out of the most speculative assets.

The fall in the value of these tokens has been a problem for Celsius. If customers were to withdraw bulk deposits in large quantities, the company would have to sell its ether stocks with a significant loss.

Celsius’ fortunes seemed to change rapidly. On Friday, the company said it had had no problems meeting withdrawal requests and that it had “more than enough” ether to meet its obligations.

Matt Novak, 35, from Sacramento, California, was first worried this weekend when he had trouble logging in to his Celsius account. He tried again a few hours later without success.

WSJ’s Dion Rabouin explains why Wall Street is now investing heavily in crypto and what it means for the new asset class and its future. Photo composition: Elizabeth Smelov

Mr. Novak said that his crypto investments in his Celsius account, about 5% in bitcoin and the rest in the cryptocurrency Polygon, represented about 60% of his pension funds. They were worth around $ 93,000 early last week, but were down to around $ 28,000 earlier this week, he said.

Mr. Novak, who runs a mortgage marketing company, said he was attracted to the 17.5% return offered on his polygon deposits at Celsius at the time. Before this week’s crypto-meltdown, he estimated that he had received at least 50% on his original investment.

“When I look back, it seems too good to be true,” he said.

Celsius’ decision to freeze accounts sparked nervousness throughout the cryptocurrency world, helping to send bitcoin and ether down around 15% on Monday. Digital assets are down 53% and 68% in the last year to date.

“Stopping customer withdrawals is a big deal,” said Matthew Sigel, head of digital asset research at Van Eck Associates, which manages three crypto funds. “It tests the market.”

Individual investors in other cryptocurrencies feel their own pressure when prices fall, with some receiving margin calls to provide more security for their mortgaged digital currency traders. On Tuesday, data provider CoinGlass said about $ 690 million of collateral provided by about 160,223 retailers had been liquidated in the past 24 hours.

On Tuesday, Celsius’ CEL token had fallen 81% this year so far, according to crypto-analytics firm Messari. When the token fell on Friday, Celsius said “the price of CEL is very often affected by market factors unrelated to the company’s performance.”

Later that day, the news came that Celsius had hired restructuring lawyers from the law firm Akin Gump Strauss Hauer & Feld LLP to look for possible financing options from investors and other strategic alternatives, including a financial restructuring.

Securities held for clients by a registered brokerage house, such as Fidelity Investments, cannot be affected by bankruptcy proceedings. However, Celsius is not a registered brokerage house.

Gary Gensler, Chairman of the Board of the Securities and Exchange Commission, has warned that investors who own cryptocurrencies through trading platforms such as the largest US cryptocurrency exchange, Coinbase Global Inc.,

are not protected in the same way as they would be if they invested through a registered brokerage. In March, the SEC issued guidelines instructing listed crypto firms to register the digital tokens they have for customers as assets and their liabilities to customers as liabilities.

In April, Celsius stopped offering the products to “non-accredited” investors, or those who do not meet a certain wealth threshold, after being pressured by regulators.

In May, Coinbase said that customers could lose access to their digital assets on the stock exchange if the company ever goes bankrupt. The biggest uncertainty facing the crypto industry is whether digital tokens are securities such as stocks and bonds. The question is fought in court.

Some of the larger, high-profile investors and crypto-entrepreneurs had sold their investments over the past year, locking in profits well before the recent sale. Billionaire Mike Novogratz Galaxy Digital Holdings Ltd.

, has been a seller of various cryptocurrencies, according to company registrations and people close to the case. Earlier this year, Mr. Novogratz took a tattoo on the biceps of the cryptocurrency Luna and spoke positively about various cryptocurrencies at industry events.

Mr. Novogratz had told the Journal that although he had been publicly optimistic about the future of Luna and other cryptocurrencies, he made sure to include warning words.

In recent days, digital currency and blockchain companies have laid off employees. On Monday, crypto lender BlockFi said it reduced the number of employees by around 20%. On Tuesday, Coinbase said it cut nearly one-fifth of employees because the company had grown too fast and a potential recession “could lead to a new crypto winter.” A total of four top Coinbase officials have raised more than $ 1 billion by selling shares since the cryptocurrency exchange’s public listing in the spring of 2021. So far this year, the company’s shares have fallen 78%.

“These Coinbase executives maintain large positions in the company, reflecting their commitment to our long-term opportunities,” a Coinbase spokesman said last month.

The Texas State Securities Board opened an investigation into Celsius due to its decision to freeze customer accounts, Joseph Rotunda, the board’s director of enforcement, said Thursday. The board works with New Jersey, Kentucky, Alabama and Washington. Reuters previously reported on the opening of the investigation.

Falling cryptocurrency prices also complicate the plans of companies that operate bitcoin and related areas. So far this year, there have been 42 announced acquisitions of crypto-related companies, according to Dealogic. However, it has been about two months since the last agreement was announced, which indicates that some companies may find it difficult to obtain or complete mergers before the markets are ready.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

Copyright © 2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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