The offer seemed too good to pass up: deposit your cryptocurrency and receive a return of up to 18%.
That was the promise of Celsius Network, an experimental cryptocurrency bank with over a million customers that has established itself as a leader in the murky world of decentralized finance, or DeFi. Last year, DeFi exploded into a $100 billion industry, attracting both venture capitalists and regular investors with the prospect of lightning-fast gains. Celsius managed over $20 billion in assets.
But on Sunday evening, as cryptocurrency prices plummeted, Celsius became the latest crypto firm to descend into a slump, announcing it was freezing withdrawals “due to extreme market conditions.”
The announcement sent the market into a slump, with Celsius customers wondering if they would be able to get their deposits back. Bitcoin is down 15% in the past 24 hours, falling to around $23,000, its lowest value since December 2020, according to CoinMarketCap, an industry price tracker. Ether, the second most valuable cryptocurrency, is down around 16%.
The crash prolongs a disastrous period for cryptocurrencies, illustrating in graphic terms the risks of these experimental investments. Just a month ago, the implosion of a popular coin helped spark a crypto meltdown that wiped $300 billion of market value. The back-to-back crashes have fueled criticism that many of the complex crypto-banking and lending projects known as DeFi are high-risk schemes on the brink of ruin.
“DeFi is a house of cards,” said Cory Klippsten, managing director of Swan Bitcoin, a bitcoin-focused financial services company. “It’s speculation upon speculation, and there’s no real-world use case for any of this stuff.”
DeFi exploded into the mainstream in 2021 as Bitcoin and Ether prices surged and crypto became a cultural phenomenon. Many clients have been attracted by the astronomical earning potential of complex crypto lending projects.
Celsius has become one of the best-funded and popular investment options for DeFi speculators. Founded in 2017 by businessmen Alex Mashinsky and Daniel Leon, Celsius accepts deposits of Bitcoin, Ether, and other cryptocurrencies and then invests them, generating returns that are returned to depositors.
Celsius claims to have attracted 1.7 million customers. Last year, the company held more than $20 billion in assets, although that figure has fallen in recent months as the market has fallen. In the fall, Celsius announced that it had raised $750 million from investors, giving it a valuation of over $3 billion.
But the company also encountered its share of problems. For months, critics wondered how it could maintain such spectacular returns without jeopardizing its depositors’ funds with risky investments. The company has come under scrutiny from multiple state regulators, and its chief financial officer has been arrested in Israel as part of a fraud investigation unrelated to Celsius.
“For Celsius, like the rest of the crypto market, there is no regulatory oversight, no consumer protections, no net capital requirements,” said John Reed Stark, former Securities and Exchange Commission official and critic. industry virulent. “It’s not just the Wild West – it’s global financial anarchy.”
But Mr. Mashinsky dismissed the criticism. In regular live streams, he aggressively marketed Celsius, talking about the huge returns. “It’s like going to the Olympics and winning 15 medals in 15 different areas,” he said in December.
As recently as this weekend, just a day before the company stops withdrawals, it accused a critic of spreading false information about the company. “Do you even know anyone who has trouble withdrawing from Celsius?” he wrote on Twitter.
Ultimately, a drop in crypto prices seemed to put the company under more pressure than it could handle. Prices fell late last week after a report showed a spike in inflation in the United States, shaking markets.
With Bitcoin and Ether prices already falling, Celsius announced on Sunday that it is freezing withdrawals. The company declined to comment. But he said in the statement on his website that he had activated a clause in his terms of service that allowed him to take this step.
“Our ultimate goal is to stabilize liquidity and restore withdrawals,” the statement said. “There is a lot of work to do as we look at various options, this process will take time and there could be delays.”
On a Reddit forum for Celsius customers, investors lamented the potential loss of their life savings; a user posted a link to a suicide hotline.
“Basically, it’s like a bank run,” said Campbell Harvey, a Duke University professor and author of the book “DeFi and the Future of Finance.” “What I see is what appears to be a risk management failure.”
Celsius is one of many DeFi startups that are coming under scrutiny as crypto prices drop.
The May crash was accelerated by the collapse of TerraUSD, a so-called stablecoin with a fixed price pegged to the US dollar. The coin’s $1 peg was backed by complex financial engineering that tied it to a sister cryptocurrency called Luna. When Luna’s price fell in May, TerraUSD fell in tandem – a “death spiral” that destabilized the broader market.
TerraUSD became popular for the same reason Celsius did. It was marketed by an aggressive entrepreneur, Do Kwon, who offered a DeFi service called Anchor Protocol, where customers could deposit TerraUSD and receive interest of up to 19.5%. Now TerraUSD is practically worthless.
American University finance expert Hilary Allen says the Terra and Celsius crises have shown that the fate of crypto investments – long hailed as part of a decentralized market – actually hinges on the management choices of individual founders. .
“Investors relied on heartwarming tweets from founders like Terra’s Do Kwon and Celsius’s Mashinsky as things headed south,” Ms. Allen said, “but then found themselves trapped in increasingly uncertain positions. value once the founders make the decision to close.”