What happened to Celsius? - All you need to know about the crash

- 5 minute read

Mike Hesp
Content Creator
Mike Hesp

Within an hour we saw the price of Celsius drop by more than 50%. According to Celsius, they have liquidity problems. In response, they have halted payouts on the network, hoping that this will allow the network to stabilise. What is the reason for the crash and how did it happen?   

Table of Content

  1. What is Celsius?  
  2. Uncertainty in the community  
  3. How did Celsius collapse?   
  4. Will investors get their money back from Celsius?  

What is Celsius?  

Celsius Network calls itself a bank replacement. This means that just like a bank, you can borrow money and get interest if you save crypto currency at Celsius. They are a CeFi (Centralised Financed) lending provider that works on a community-first mandate. 80% of the earnings go back to users in the form of interest. Users reportedly receive over 18% interest annually and the network has 1.7 million users. Also, users of the network can borrow crypto at low interest rates starting at 0.1% interest. This makes it possible to borrow money without high fees. The coin (CEL) linked to Celsius has grown rapidly since its launch to an ATH of $8.02 on 3 June 2021, but is currently worth more than 90% less.  

  

Uncertainty in the community  

Currently, the price of Celsius has fallen hard thanks to a collapse of the platform, which has caused Celsius to discontinue the ability to withdraw funds from the platform. The cryptocurrency community had already expressed its concerns several times in the months before the incident. For example, there were plenty of noises from people who thought that Celsius' network would not be able to pay out users when users wanted to withdraw assets from the network. This concern stemmed from the high interest Celsius pays out as a reward for storing crypto on the platform, leaving not enough liquidity to make payouts. To draw the comparison with a regular bank, at a bank you get a fraction of a percent, but at Celsius you get more than 9% for holding stablecoins.  

  

How did Celsius collapse?   

The Celsius network continues to function on the basis of lending money, for which they receive interest, and paying out savers. In addition, there must be liquidity left over to pay out users who withdraw money. Finding the right balance is important and complicated, because on the one hand you have to earn enough interest to pay out savers, but on the other hand you also have to have enough left over to pay people out when they make a withdrawal.    

For a long time, the network worked well because people trusted crypto. There was enough liquidity and relatively little money was withdrawn from the platform. But recently the market has been going downhill, making people insecure and slowly wanting to transfer their crypto to FIAT currency. On top of this comes the collapse of Terra Luna in May due to liquidity issues. This raises questions in the community because Terra Luna is very similar to Celsius. As a result, we are seeing Celsius fall in value. This is where Celsius goes wrong.   

Celsius cannot handle the pressure because, on the one hand, the value of the currency is falling, but also because they have locked in Ethereum in exchange for stETH to generate additional income. Celsius owns so many stETH tokens that it is almost impossible to exchange them with a counterparty, which creates liquidity problems. As a result, they have had to borrow crypto. Celsius borrowed crypto currencies such as Ethereum and USDC from major exchanges such as FTX and Bitfinex. The money they had to borrow caused the debt to rise so high that Celsius chose to stop paying out. As a result, the collapse caused Celsius to drop in value by more than 50% within an hour. 

Will investors get their money back from Celsius?  

Whether investors will get their money back if Celsius is declared bankrupt or is unable to repay bonds, is questionable. In the general terms and conditions, investors have been able to read that when Celsius is unable to repay digital assets used in the earn service or loan service, it does not have to repay them.