Celsius has been a trending topic in the cryptocurrency space amid the massive market bloodbath that has sent the entire cryptocurrency market capitalization below $1 trillion as of the time of this writing.
This is because the crypto lending platform announced that it was halting withdrawals, its swap and transfer products, citing “extreme market conditions,” without giving a timeline as to when these features will be restored.
On the day the announcement was made, CEL, the native token of the Celsius platform, crashed by over 50% in 24 hours and over 70% in the last seven days. With the crash of its token, we have also seen many speculations flying around social media that the company is facing liquidation of its positions as a result of the market dip that has sent Bitcoin to fall below $21,000, a price point not traded since December 2020.
What is Celsius?
Celsius is an all-in-one banking and financial services platform for cryptocurrency users. It launched in June 2018, and the platform offers rewards for depositing cryptocurrency, along with services such as loans and wallet-style payments.
Users of the platform receive regular payouts and interest on their holdings. Celsius’ native token, CEL, performs a variety of internal functions, including boosting user payouts if used as the payment currency.
Celsius was created with the goal of outperforming banks at their own game by offering financial services on the kind of terms that traditional financial institutions no longer offer. These include much higher rates of returns on savings and deposits, much easier and fairer loan requirements and automated rewards computed for each user algorithmically. Penalties and bank-style fees are also waived.
The platform also functions as a wallet via its CelPay feature and hosts its own CEL token which users can leverage to increase payout value among other things. As a for-profit company, Celsius also takes a cut of profit margins on interest payments, still returning 80% to users themselves. The company also lends to institutional entities such as hedge funds. Payments are ensured because loans are asset-backed, and any borrower must supply more than 100% of what they borrow in the destination currency.
What happened?
As previously mentioned, Celsius announced that it was halting withdrawals, its swap and transfer products, citing “extreme market conditions,” without giving a timeline as to when these features will be restored. The blog post by Celsius stated, “Acting in the interest of our community is our top priority. In service of that commitment and to adhere to our risk management framework, we have activated a clause in our Terms of Use that will allow for this process to take place. Celsius has valuable assets and we are working diligently to meet our obligations.
They further explained that “We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets. Furthermore, customers will continue to accrue rewards during the pause in line with our commitment to our customers.”
Although the problem seemed to have started on Sunday, however, the company has been faced with regulatory issues, with law enforcement entities issuing cease-and-desist orders against the firm since April 2022. Also, the company recently replaced its Chief Financial Officer, after former CFO Yaron Shalem was arrested by Israeli police in 2021 and recently, the firm made an announcement stating that non-accredited investors could no longer transfer funds. These indications of a shaky background have caused worry in the space in regard to the ability of the firm to meet its obligations.
After the firm made the announcement, its competitor, another lending platform called Nexo, took the opportunity to make an open offer to express interest in buying certain assets from its rival. In a public letter to Celsius, Nexo said it was particularly interested in Celsius’ collateralized loan portfolio. Nexo publicized the letter, which didn’t mention a price, in a tweet.
Amid the withdrawal freeze, the firm took the initiative to unstaked around $247 million in Wrapped Bitcoin (wBTC) from liquidity protocol Aave and sent it to the FTX exchange. Apart from its wBTC, the firm has also sent $74.5 million in Ether (ETH) to FTX.
What you should know
- Although we saw the token lose over 50% of its value at the start of the week, however, on Tuesday, we saw a 756% rally in the price of CEL to an intraday high of $2.57 from 30 cents, according to data from FTX.
- However, in the hour after the spike, the price of CEL fell back and was trading at about 54 cents. According to data from CoinMarketCap, that price put the market capitalization of CEL at approximately $125 million.
- Celsius has been scrambling to cover a number of its debts and it is possible that some investor’s viewed this as a sign that the platform will be able to survive the current mayhem. This is why many are attributing the spike in the price to the repayments the firm had made.
- Twitter analyst Hsaka said that on-chain data shows that the $28 million in Dai (DAI) that was recently deposited into a wallet controlled by Celsius and has since been sent to a separate address, which he identified as a debt repayment address.
- Analysts also explained that Celsius’ strategy is to lower its liquidation price in the MakerDAO vaults where it holds funds and ultimately avoid insolvency.
- According to exchange data, it also revealed that the price jump can also be attributed to a big spot buyer on crypto exchange FTX. A trader explained that the price action was indicative of a short squeeze, as shorting Celsius’s token had become an “overcrowded trade.” A “short” position is when traders bet on a token’s price to fall.
- A short squeeze occurs when the price of a token moves sharply higher, prompting traders who bet against it, often with borrowed money or tokens, to buy it back or “cover” the position, to avoid greater losses.
To quench holder fears amid the situation at Celsius, stablecoin issuer Tether (USDT) quickly announced that the current events surrounding the lending platform have “no impact” on Tether’s reserves. According to Tether, while they do have an investment in Celsius, it doesn’t have an impact on the stability of its reserves. The announcement also highlighted that the situation at Celsius is a result of “market volatility.”
Although Celsius looks to be returning back to normalcy, questions surrounding Celsius’s financial health are still making waves in cryptocurrency markets as the selloff intensifies.
