By Dominic Klopsch – Co-Founder TIVAN Consulting
Winter is approaching fast with Celsius dropping to icy conditions
Wait, what? We’re in the middle of June…
Yeah, you guessed it, I’m not talking about the weather but about the potentially upcoming Crypto-Winter and the current meltdown that the crypto-platform Celsius is in. But let’s start at the beginning. And get a coffee, this will be a longer one…
As you might have heard, we’re in a bit of a downward trend at the moment (coughs) with ETH potentially dropping below $1,000 today or in the next days. Besides from a variety of macro-economic and global developments, there are some specific events that fuelled the tumble of Crypto and brought Celsius close to collapse. These, I will lay out in the following.
Part 1 – The collapse of Terra (LUNA) and UST:
The Terra-protocol aimed to create an algorithmic Stablecoin. Also they had their own native token called LUNA. Luna was once within the Top 10 cryptocurrencies and lost nearly all its value and the stablecoin UST does not look much better.
A stablecoin is a crypto-token that is pegged (in other words „fixed“) to a currency, in this case the USD. The biggest that was created on the Terra-protocol was the TerraUSD (UST). So 1 UST = 1 USD. Always. In theory… Why in theory? Well, because it didn’t work out. The idea is, that that an algorithmic stablecoin maintains its price equilibrium to the USD via „burning“ or „minting“. So, for each UST that is minted, 1$ of LUNA is burned and vice versa for burning. If UST threatens to go below 1 USD, investors will either sell their UST or burn it for 1$ of LUNA and thereby make a slight profit. Aaaaand the other way round.
Beginning of May due to several reasons, huge amounts of UST were dumped which caused UST to depeg from the USD. So 1 UST ≠ 1 USD. Whoopsie. This created a chain-reaction as more and more investors started to sell their UST, thereby minting more LUNA and increasing the LUNA-supply and thereby further driving UST away from its peg of 1USD. Wait, that sounds like a vicious cycle… Yep, you’re right. On May 12th, around 3,5 billion LUNA existed. On May 13th, there was suddenly 6.5 trillion (yes, with a t) LUNA. Whoopsie again.
So what did the Luna Foundation Guard (LFG) do? Well, they had to sell quite a lot of Bitcoin (around 80k BTC) to try and save UST from further depegging from 1 USD. And that’s where the ripple effect to the overall Crypto-market started to show it’s nasty face. 80k Bitcoin being sold drove the price below the $30,000 mark.
Part 2 – Celsius and it’s risky positions:
Celsius is a company that hates banks. Well, that’s not all about them. They are a fintech-company that provides crypto services like Trading, Lending and High-Yield deposits. Waaaait a second, that sounds like a bank. Yep, it actually does. But Celsius hates banks. Basically, Celsius is an asset-manager for Decentralized Finance (DeFi) opportunities. You can give them your money / crypto, earn a fixed rate and be happy about it. At the same time, they take your crypto, swap it to other crypto, put it on-chain and receive higher interest than 5%. That’s their margin. They did a good job for the longest part. They reached a valuation of $10bn and were able to raise around $400m not too long ago.
But then came the collapse of Terra (LUNA).
The issue was, that Celsius had quite a bit of money sitting in UST. And with UST becoming worthless, Celsius lost that „quite a bit of money“. Customers money… So that’s bad. But luckily, they have other big positions.
Enter the stage: Lido staked ETH or $stETH.
You see, when you gave Celsius your money in ETH, they would give you 6-8% in interest. But how can they have such high rates? Well, because Celsius earned much more, mainly by staking their position on the Ethereum Beacon chain. But the issue here is, that once you stake on the Ethereum Beacon chain you can not unstake at the current time. Only with „the merge“ or Ethereum 2.0, this will be possible, and although finally this year it’s supposed to take place, this has been announced for such a long time, it became a meme itself.
So your funds are basically locked. But people are creative, so the crypto-protocol Lido solved this problem by creating $stETH which is supposed to trade at a 1:1-ratio with ETH. It’s not pegged however, so it does not HAVE to trade at 1:1. While the crypto-world was still a happy place, this worked out. But once the economy started to tumble and crypto-prices dropped, this looked a bit different and $stETH did not trade at a 1:1-ratio with ETH anymore. Further, there is only around 143k of $ETH liquidity in the $stETH Curve pool but Celsius has around 445k of $stETH. So even if they where able to payout (which they’re not), the liquidity wouldn’t even be available…
So what happened to Celsius?
- They had a very big position in $UST which suddenly became more or less worthless.
- They had a very big position in $stETH which started to not reflect the actual amount of $ETH they once had put in.
- Their own native token $CEL did not react well to all of these news and subsequently also dropped causing the value that Celsius holds to drop further.
- And even more unfortunate, the macro-economic situation is forcing more and more private investors had to dissolve their crypto-positions and turn them into cash. And that’s where it gets really bad.
Part 3 – „Inflation is transitory“. Or maybe it isn’t?
For the longest time, the fed and other central banks said that the rising inflation was only transitory and would go away. Well, it didn’t. The war in Ukraine, COVID still impacting supply chains and other reasons caused inflation to further rise. So much that the Fed had to increase the interest rates. So suddenly, money isn’t cheap anymore. This impacts the economy heavily and all sorts of investors will start to liquidate their positions and move into other „save havens“. Same goes for private investors who had provided crypto to Celsius to earn interest rates.
With Celsius being under pressure due to the crash of LUNA and the falling price of their $stETH-position, this is not really helping them. Investors withdrawing their funds from Celsius, either to move it somewhere else or because they fear that Celsius might collapse is pushing Celsius into a liquidity crisis. So they had to react. And they reacted drastically by shutting down withdrawals and pausing all swaps and transfers between accounts.
Now, Celsius manages around $10bn in customer assets. But their wallets only contain around $1.5bn in assets. There’s a bit of a lack of equilibrium… But even worse, the $1.5bn of assets are not liquid. Around $400m are staked on the Ethereum Beacon chain. Another $500m is leveraged in the Maker protocol.
For this position, Celsius tries to avoid liquidation by topping up. Many are pissed off by this because instead of paying out customers, Celsius is borrowing even more. So basically, the casino equivalent of this is putting it all on black to make up for the previous losses. But if $BTC reaches $14,000, Celsius will be forced to liquidate this position which will then further put massive sell pressure onto the market.
Part 4 – What could happen?
There are some options now. Potentially, they could receive further external funding or maybe a loan. n acquisition might also be possible and Nexo, one of their biggest competitors, has already proposed a takeover.
If nothing of that happens and crypto keeps on tumbling, they will potentially go bankrupt, in which case, ALL of the assets of their customers are gone. Just gone with no way of getting them to pay back the initial positions.
If this will happen, we can expect regulators and legislators around the world to see this as a major opportunity to tighten restriction towards the crypto-world.
For the general space around Crypto, NFT, Web3 and Metaverse this is certainly not good news and it seems like we are moving towards Winter. Oh the irony – a company called Celsius pushing a tumbling market towards Winter.
What do you think? Will this have a happy ending after all and a big learning for the whole crypto-space or will it implode and send us into a dark, lonely and frustrating stagnant period until the next Bull-Run emerges?
And please, if you think I’ve stated nonsense, provided wrong facts, or not mention something important, hit me up! It’s a big and complex situation and I’ve tried to explain it in an understandable but comprehensive way.
Obviously this is not financial advise and I cannot guarantee the content I present is correct. So, please do your own research.