Where will the cryptocurrency slide stop?

Performance – editing: George D. Pavlopoulos

Celsius Network raised more than $20 billion in assets in a move that seemed to defy the basic laws of finance. The motto was “deposit cryptocurrencies and get up to 18% interest”, dozens of times the interest rate of traditional savings accounts.

More than a million people have entrusted their savings to Celsius, according to the company. Even as skepticism grew over whether its interest rates were sustainable and customers began withdrawing hundreds of millions of dollars amid a deepening cryptocurrency crash, the company’s co-founder Alex Mashinsky maintained that Celsius was “safe.”

On the evening of June 12, Celsius announced that it was temporarily prohibiting its customers from withdrawing deposits due to “extreme market conditions”. It was like a bank locking depositors out of its branches to preserve cash in the midst of a panic. “We work with a single focus: to protect and preserve our assets so we can meet our obligations,” Celsius said in a statement.

Celsius’ apparent attempt to fend off the digital equivalent of a bank run comes just a month after the $60 billion collapse of TerraUSD-Luna, two cryptocurrencies that were part of a complex scheme that lured investors with 20% interest rates.

The recurring ripples have spooked investors who are already worried about the value of crypto assets. Bitcoin fell to $20,102 on June 15 – about 70% below its 2021 high. Ether, the second most popular cryptocurrency, is down 75% from its 2021 high, while many lesser-known cryptocurrencies have suffered larger declines. The total capitalization of all cryptocurrencies, which exceeded $3 trillion. in November, it has fallen below $1 trillion.

Those who bet on cryptocurrencies are wondering where the bottom of the well is and how systemically important Celsius and other projects can be to the digital asset market. A bank run on Celsius could end up having a bigger impact on the broader market than the collapse of the Terra ecosystem – which hurt a lot, but was relatively isolated. Celsius maintains a number of assets that are leveraged across multiple platforms.

Risks

The idea that investors can make high returns without taking correspondingly large risks may now sound silly. But Celsius and Terra have become associated with what has been called decentralized finance, or DeFi – a constellation of companies, developers and apps that purport to build a new financial system around crypto and blockchain technology.

For more than a year, the regimen seemed to work. By November, more than $100 billion was lent, borrowed, or deposited through DeFi protocols. This activity gave a huge boost to the prices of all cryptocurrencies. “DeFi is a financial revolution, cutting out all the middlemen,” Cathie Wood said in March.

Bank runs on traditional banks have been uncommon in the US since the creation of the Federal Deposit Insurance Company in 1933. However, Celsius is not considered a bank and its deposits are not guaranteed by the FDIC.

In 2021, Celsius capitalized on its growth and raised $750 million from investors, including a Canadian pension fund. Its valuation of around $3 billion made Mashinsky a billionaire on paper, with dreams of doubling or tripling the company’s value. But skeptics had already started raising questions online about Celsius’ investments.

The company had invested client funds in Terra as well. He said he had retired just before the collapse last month, but did not inspire confidence.

“This is a failure of risk management,” says Professor Campbell Harvey, author of DeFi and the Future of Finance. “Given the volatility of this space, some rudimentary stress tests should be conducted.”

Confidence

Now crypto investors are wondering whose turn it is. On June 14, with rumors about Three Arrows Capital, one of the largest crypto hedge funds, running rampant, one of its founders succinctly noted that “we are in contact with the relevant parties and are fully committed to resolving any issues.”

Among the companies that have invested in Celsius is Tether, the issuer of a stablecoin that is supposed to always be worth $1 and one of the biggest players in the crypto markets. Tether claims to have $71.5 billion in assets backing its tokens, but has been fined in the past for making false claims about its reserves.

Celsius has hired restructuring lawyers to advise on its path forward, whether it involves raising capital from new investors or financial restructuring, according to the Dow Jones network. Even if Celsius has enough money to repay all depositors in full – something it did not confirm in its statement – ​​it looks unlikely to regain public confidence anytime soon. The US Securities and Exchange Commission (SEC) has been investigating Celsius since at least the beginning of the year.

Its head, Gary Gensler, notes: “There are companies that say: give us your hard-earned money and you’ll get a 17% return. One has to wonder where those returns come from.”