The crypto winter of 2022 has come on stronger than anyone anticipated and nowhere has that been more apparent than the total meltdown that happened at the crypto lending platform called Celsius.
Celsius was started in 2017 by Ukrainian immigrant, Alex Maschinsky, a famous tech entrepreneur and developer of Voice-Over IP or VOIP telecom systems. The goal of Celsius was to be the “Unbank” and give people a way to start using cryptocurrency as a financial tool by way of crypto backed loans and high yield savings accounts. It was a success right from the offset. And up until June of 2022, had over 1.7 million customers and boasted over $5 billion in assets under management or AUM.
This explosive growth was fueled by an insane EIGHTEEN PERCENT annual percentage yield offered on certain cryptocurrencies and stablecoins. These returns were available not only for high net worth clients and corporate accounts, but any Joe Schmoe with a bank account could get in on the action. And who wouldn’t? A savings account yield from a Tradfi bank averages less than 1% so when you factor the current rate of inflation popping off over 8%, you’re getting fleeced.
High yields in crypto wasn’t new but what made Celsius different was the credentials they carried and Celsius had loads of them. It even had a page on their website dedicated to all the ways it was being up front , transparent and playing ball with government regulations. This gave Celsius a lot of credibility in the crypto industry and made Alex Maschinsky a maverick in the financial services sector.
But the ice running through the veins of Celsius started to warm up when Terra blockchain and its UST stablecoin imploded in May of 2022. What happened next has been a slow motion unraveling of major crypto lenders and investment firms. Celsius was the first to drop. It was found out that Celsius had been heavily involved in risky decentralized finance (Defi) lending schemes across many Defi platforms and was heavily leveraged into UST. Having exposure to Defi can reap impressive rewards but with it come higher risks. But in the case of Celsius, the disclosure of high risk investing was limited if not omitted to many of their lending customers. “putting customer assets in DeFi markets is significantly riskier than lending on a secured basis to institutional counter-parties.” that’s according to Alex Thorn, head of firmwide research at Galaxy Digital. The value of Celsius assetswere crumbling and a capital flight was happening. They ran out of money to service the loans they had taken out and insolvency was looming. On June 13th Celsius halted all withdrawals from their platform. All of their 1.7 million customers had their access to their crypto revoked while Celsius used it’s customers funds to pay off it’s bad debts. The outrage was swift and heated. Celsius was melting.
It’s important to note that all of the crypto exchanges being discussed are holding custody of their users crypto assets. The user agrees to this up front in the terms and conditions of the service. This is not the same as someone who has their assets in a non-custodial wallet, they not been affected by this crypto meltdown and are still in possession of their assets. Suffice to say hot wallet downloads and cold wallet sales have increased significantly over the past few weeks.
That brings us to now. The crypto winter is raging and crypto platforms are freezing to death left and right. Blockfi, 3 Arrows Capital (3AC), Voyager and Vauld are all facing bankruptcy and a wave of lawsuits. This is leaving a chill in the industry and has broken trust for millions. But does this mean crypto is over? Will any retail investor, let alone an institution trust their funds to an “Unbank” like Celsius or 3AC? According to experts the pain is a necessary part of the maturation process for crypto. Notice how all of these lenders have gone under and none have gotten a bailout from any government. The wheat is being separated from the chaff, true to the School of Austrian Economics mindset that the cypherpunks who started crypto had believed in. After it’s all said and done the foundation of crypto is self custody. “Not your keys, not your crypto” is the saying and it embodies the ethos of crypto assets, which is self sovereignty. Crypto will survive this mess and be stronger for it because the underlying technology hasn’t skipped a beat, the only thing that is taking these exchanges to their boiling points? Greed.