Celsius filing for bankruptcy this week surprised virtually no one. Once a platform freezes
customer assets, it’s typically all over. But even though it was expected, it remains a really big deal for the industry.
In October 2021, CEO Alex Mashinsky said the crypto lender had $25 billion in assets under management. Even as recently as May — despite crashing cryptocurrency prices — the lender was managing about $11.8 billion in assets, according to its website. The firm had another $8 billion in client loans, making it one of the world’s biggest names in crypto lending.
Now, Celsius is down to $167 million “in cash on hand,” which it says will provide “ample liquidity” to support operations during the restructuring process.
Meanwhile, Celsius owes its users around $4.7 billion, according to its bankruptcy filing — and there’s an approximate $1.2 billion hole in its balance sheet.
It goes to show that leverage is one hell of a drug, but the moment you suck out all that liquidity, it’s a whole lot harder to keep the party going.
The fall of Celsius marks the third major bankruptcy in the crypto ecosystem in two weeks, and it is being billed as crypto’s Lehman Brothers moment — comparing the contagion effect of a failed crypto lender to the fall of a major Wall Street bank that ultimately foretold the 2008 mortgage debt and financial crisis.
Regardless of whether the Celsius implosion portends a larger collapse of the greater crypto ecosystem, the days of customers collecting double-digit annual returns are over. For Celsius, promising those big yields as a means to onboard new users is a big part of what led to its ultimate downfall.
“They were subsidizing it and taking losses to get clients in the door,” said Castle Island Venture’s Nic Carter. “The yields on the other end were fake and subsidized. Basically, they were pulling through returns from [Ponzi schemes].”
Who will get their money back?
Three weeks after Celsius halted all withdrawals due to “extreme market conditions” — and a few days before the crypto lender ultimately filed for bankruptcy protection — the platform was still advertising in big bold text on its website annual returns of nearly 19%, which paid out weekly.
“Transfer your crypto to Celsius and you could be earning up to 18.63% APY in minutes,” read the website on July 3.
Promises such as these helped to rapidly lure in new users. Celsius said it had 1.7 million customers, as of June.
The company’s bankruptcy filing shows that Celsius also has more than 100,000 creditors, some of whom lent the platform cash without any collateral to back up the arrangement. The list of its top 50 unsecured creditors, includes Sam Bankman-Fried’s trading firm Alameda Research, as well as an investment firm based in the Cayman Islands.
Those creditors are likely first in line to get their money back, should there be anything for the taking — with mom and pop, investors are left holding the bag.
After filing its bankruptcy petition, Celsius clarified that “most account activity will be paused until further notice” and that it was “not requesting authority to allow customer withdrawals at this time.”
The FAQ goes on to say that reward accruals are also halted through the Chapter 11 bankruptcy process, and customers will not be receiving reward distributions at this time.
That means customers trying to access their crypto cash are out of luck for now. It is also unclear whether bankruptcy proceedings will ultimately enable customers to ever recoup their losses. If there is some sort of payout at the end of what could be a multi-year process, there is also the question of who would be first in line to get it.