Why Celsius’ Withdrawal Freeze is Crashing Bitcoin, Crypto Market

Celsius Gets Into Trouble Acting Like a Bank in the Crypto Wild West

There are a variety of short-term reasons as to why Celsius is suffering right now, yet they can all be boiled down to one simple one: the market is falling and investors/users want out.

As it transpired with Terra and LUNA, it seems that Celsius’ model is far too reliant on the market constantly rising and prices going up. Conversely, it isn’t robust against a downturn.

One big source of Celsius’ troubles is that customers have been leaving it since the start of 2022. As of May 20, it had suffered a 50% drop in the value of the assets it managed, with around $750 million in outflows being recorded for the week between May 6 and May 13 alone.

This $750 million came from Celsius’ own weekly updates, and it’s interesting to note that the platform stopped tweeting these from May 13. That said, the info was available via Celsius’ app/website for those who cared to fish around (recording a loss of $300 million), although data for the week ending May 20 had never been shared in any form.

Basically, the available data showed that Celsius’ was hemorrhaging customers and deposits, which it needed to fund its own speculation. This is ultimately how it made money, with funds deposited by customers then used by Celsius to provide loans to other customers.

Celsius also made investments with deposits, acting much like a bank. This includes investing around $500 million in bitcoin mining in 2021, as well as another $500m in Terra’s Anchor protocol (which Celsius was apparently able to withdraw when TerraUSD collapsed). Notoriously, Celsius lost around $54 million it had invested in BadgerDAO, which suffered a hack worth $120 million at the end of 2021.

It also deposited its customers’ ethereum with Lido, in return receiving staked ethereum (stETH) from the staking platform, which it then used for other purposes. However, the thing with stETH is that, while it can be traded for ETH (and should be nominally worth 1 ETH), it cannot be redeemed for ETH.

So with the cryptocurrency market suffering declines and traders desperate to cash out/flee to safety, the price of stETH dipped below that of ETH ($1,188 vs $1,118, as of writing). Needless to say, a growing number of Celsius’ clients now want to get theory money out of the platform, yet Celsius can’t honor their requests simultaneously.

How Dangerous is Celsius’ Position?

A large part of the problem is that Celsius’ stETH holdings are too large to sell for its customers at once. It has approx. 445,000 stETH (worth around $500 million), but there just isn’t the kind of liquidity out there sufficient to sell this position.

Source: Twitter

Celsius is, more or less, insolvent. It has a variety of positions opened on behalf of its clients, yet many of these can’t be closed, since the ongoing bear market means that the liquidity just isn’t there. As a result, the platform cannot meet the mounting withdrawal demands of customers, which is why it announced on June 13 that it’s freezing withdrawals.

“Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts. We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations,” the Celsius team wrote on Medium.

Celsius has promised “to share information with the community as it becomes available,” yet so far nothing new has emerged since June 13. As such, it has left observers to speculate just how bad the situation really is, and whether the platform can survive.

Well, it seems that Celsius’ rivals think it is indeed insolvent and facing collapse, with fellow lender Nexo offering to buy out Celsius’ remaining assets.

This is arguably an offer Celsius should probably accept, since with cryptocurrency prices falling even further in response to its withdrawal freeze, the platform will now find it even harder to meet its obligations. For instance, it also has nearly 24,000 wrapped bitcoin (wBTC) deposited as collateral for a loan it has taken out with MakerDAO, with a liquidation price of $16,800.

Source: Twitter

What this means is that, if the price of wBTC (i.e. bitcoin) falls to $16,800, Celsius’ position will be liquidated. In other words, it will lose its (or rather, its customers’) money, and potentially go bankrupt.

So what are the chances of bitcoin falling to $16,800? If you’d asked this question at the start of the year, most analysts would have probably said: very low. But now, with BTC at $22,123 (as of writing), it has fallen by 6.5% in 24 hours, 29.5% in a week and 68% since November.

The macroeconomic situation isn’t helping with this either, with the Federal Reserve likely to boost its funding rate by 0.75% this week, and possibly all the way to 3.5% by the end of the year. So yes, bitcoin could sink below $17,000. And not only would it take down Celsius, but Celsius’ may end up bringing several other platforms and companies with it.