Explained: Five things to know about US-based crypto lender Celsius’s crash

Explained: Five things to know about US-based crypto lender Celsius’s crash
Celsius had raised over $500 million last October and promised yields over 17%. Today, it does not have sufficient funds to run its operations.
  • US based crypto lender Celsius filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.

  • Fall of ethereum, collapse of Celsius native token and crash of Terra Luna triggered Celsius collapse.

  • Celsius had repaid over $350 million debt before filing for bankruptcy protection.

Crypto lender Celsius filed for bankruptcy protection under Chapter 11 on Thursday. The US-based lender suspended all withdrawals on June 12 and laid off over 500 employees. Despite crypto winter, Celsius had managed to pay off over $350 million of its debt and has $167 million in cash to support the company’s restructuring. Celsius also owes $4.7 billion to its users.

The lender had raised over $500 million last October and promised yields over 17%. Today, it does not have sufficient funds to run its operations. What triggered Celsius’s downfall?

1. Collateral used for Celsius loans crashes after Ethereum dip


Celsius is a decentralised platform specialising in lending and borrowing crypto. DeFi platforms like Celsius lend ethereum to clients after taking Staked ethereum (stETH) as collateral.

The value of stETH mimics the value of Ethereum and customer funds were locked in it. When Ethereum crashed as part of the larger market crash, the value of stETH came crashing down, collapsing the lending ecosystem of Celsius. Currently, Ethereum price stands at $1,101 each.

2. Celsius native token loses value

At the time of writing this report, the Celsius native token CEL has dropped 48 percent since the bankruptcy protection announcement. In June 2021, the price of one CEL token was $8.1, with a valuation of $3.4 billion.

Currently, the market cap of Celsius Network stands at less than $90 million. In total, there were over 423 million CEL in circulation and were run on Ethereum blockchain.

The crypto market crash, which brought the market value from $3 trillion in 2021 to less than $1 trillion in 2022 also impacted Celsius. The tokens lost their value subsequently.

3. Celsius has already cleared over $350 million debt, but a lot remains

The defaulting crypto lender has already cleared loans to decentralised platform Aave, to which they transferred $103 million. The lender still owns $8.5 million to Aave. On Wednesday, Celsius paid $50 million to DeFi lending protocol Compound. Celsius also fully repaid its liabilities to MakerDAO which amounted to $223 million.

Celsius still owes money to its employees, has to clear bills for restructuring of the company and tackle the volatile market conditions to keep the company intact.


4. US court says Celsius 'deeply insolvent'

In its statement on Thursday, Celsius says it will continue to operate. However, a US state Vermont court called it 'deeply insolvent'. The Department of Financial Regulation in Vermont said Celsius doesn’t have enough assets and liquidity to be able to honour its obligations to creditors and customers.

The Vermont regulator pointed out that some of Celsius's assets were ‘illiquid’, meaning they could be difficult to sell. A former employee of Celsius also sued the company, stating that the company had artificially inflated the price of its token and used customer funds. After the U.S Federal reserve raised interest rates by 75 basis points in June, the crypto market also took a nosedive, mirroring the U.S stocks sell-off.

5. Collapse of Terra Luna and centralised finance companies


The belief that crypto was too unstable to invest in was challenged by stablecoin Terra Luna, which mimicked the value of a dollar. In May 2022, this stablecoin crashed, wiping out $500 million from the cryptocurrency market. Soon, centralised finance firms like Three Arrows Capital and Voyager filed for bankruptcy.

Celsius followed suit. All of them cited market volatility as the reason.

“This is the right decision for our community and company,” said Alex Mashinsky, co-founder & CEO, Celsius. “I am confident …we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”