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Disclaimer: Opinions expressed below belong solely to the author.
Last month, Celsius halted withdrawals from its platform, citing extreme market conditions.
They were not the first casualty of the crypto winter, but they were a huge company — as of May, the company had lent out over US$8 billion to clients, and managed almost US$12 billion in assets. They boasted publicly that they had over 1.7 million customers, and offered yields of as high as 17 per cent per year on deposits.
They were not the only company to encounter a crisis. The prices of Terraform Labs’ Luna and Terra UST tokens collapsed almost overnight the month before, and companies were slashing head counts.
As the crisis deepened, Celsius finally bowed to the inevitable and filed for bankruptcy earlier this month.
Along with this, Celsius CEO Alex Mashinsky reported a deficit of US$1.2 billion on the company’s balance sheet, and listed around US$5.5 billion in total liabilities, of which US$4.7 billion were owed to Celsius users, which Mashinsky and Celsius’ legal team have referred to as unsecured creditors.
Despite this, Celsius has announced plans to restructure the company’s debt, and a plan for the company’s future.
Mashinsky’s master plan, in a nutshell, revolves around Celsius investing into cryptocurrency mining rigs, and selling Bitcoin to pay off its debts. Company documents claim that the company will generate around 15,000 Bitcoins through 2023.
This saga, as expected, has triggered quite the outcry — by Mashinsky’s own admission, the company has received hate mail and threats from customers after the platform halted withdrawals.
Is the plan going to work?
To begin, the plan looks nice on paper. It outlines exactly how the company intends to pay its debts, and assures us that with time, everything will be fine: customers will get their money back, the company will once again be on solid ground with better foundations, and Celsius’ creditors will be repaid.
This looks superb — who would have thought that it would be this easy? But that is exactly the point. It looks nice, but it covers nothing important and it’s not as solid as it might sound.
For one, Celsius is assuming that their investment into mining rigs will work. While it may be difficult to verify exactly how much Bitcoin Celsius is able to mint with its new mining rigs, we can afford to be generous here and take them at their word — even though they have repeatedly demonstrated their untrustworthiness.
Even then, their plan to mine Bitcoin would only yield around US$225 million, not nearly enough to cover their US$1.2 billion in liabilities.
Not only that, cryptocurrency asset prices, including Bitcoin, have seen a sustained slide over the past nine months, from around a high US$70,000 to around a third of the price now.
Unless the prices of Bitcoin and its other assets increase dramatically, it looks like Celsius and its creditors have a bit of waiting to do before they can get their money back, and judging from the trends, this could mean several years.
On top of this, Celsius already has a subsidiary that focuses on cryptocurrency mining called Celsius Mining, though the company is not exactly making healthy profits. On the contrary, Celsius Mining has actually joined its parent company in filing for bankruptcy.
Mashinsky’s plan, if anything, sounds grossly irresponsible — Celsius is throwing money that they do not really have into a plan without a high chance of success.
What happens if the investment does not pay off? Are customers expected to pay for the additional costs that the company is incurring?
The plan essentially boils down to investing in inventory for a loss-making subsidiary, using money that Celsius is unwilling to use to repay creditors, and hoping that the price of Bitcoin will go to the moon.
Mashinsky’s new clothes
When Celsius first began, they marketed themselves as a better alternative to the banks, with slogans such as “unbank yourself” and “banking is broke”, but it seems that the shoe is very much on the other foot now.
One particular argument that Celsius used was that if users do not have free and unlimited access to their funds, the funds were not really theirs.
Yet, Celsius is now saying that their users are unsecured creditors, and that the company can do whatever they want with user deposits. Even if this is true from a legal standpoint, it sends a terrible message to users and players in the crypto space.
Celsius is showing that companies like them cannot be trusted to keep to their word, and that when push comes to shove, they may take an attitude of ‘Celsius first, to hell with the customers’.
What will this mean for the future of the crypto ecosystem?
For one, it exposes a high level of power imbalance between companies and consumers. Celsius is able to do as it pleases precisely because of a lack of consumer protection, even at a time where they are so desperate for cash and fearful of liquidation that they are willing to take a desperate gamble and use money that they hold but don’t own.
Admittedly, however, it is costing them in reputation. When the crypto winter eventually blows over, Celsius will be left with a reputation for bullying customers, irresponsible behaviour, and being full of hot air without substance.
Is Celsius even worth saving?
So far, Celsius has demonstrated its complete lack of regard for customer interests and for the lengths that Mashinsky is willing to go in order to protect his business, as hopeless as it may be.
But is the company going to be worth saving in the end?
Celsius’ lawyers have argued that many customers are interested in riding out the crypto winter, and that may very well be true. The current bear market possibly means that it is a poor time to sell assets, and many crypto investors may still have hope for the eventual recovery of cryptocurrency asset prices.
But this is not a decision that Celsius can make for its depositors — some may need the cash now, in order to pay for their own expenses, and others may have lost faith in the company and wish to liquidate their positions.
However, what Celsius is doing is protecting themselves only in the short term.
If and when the crypto winter blows over, Celsius’ reputation will nonetheless be in shambles. Who then, will still trust Celsius with their funds, especially when it seems that Mashinsky is only a fair-weather friend?
Customers may have held out hope after Celsius first froze transactions. But now, Celsius has made it abundantly clear that their customers are quite far down on their priority list.
First, there was Celsius’ demand that its debtors top up their collateral or be liquidated. And now, with this fait accompli that customers would be further down the priority list than Celsius, there seems to be little reason that customers would continue to choose Celsius as their lender of choice after the storm blows over.
But the tragedy is that Celsius could have been so much more. After all, crypto and decentralised finance are part of the cutting edge of tech.
It could have set a good example for other smaller firms by investing in tokens that advanced the crypto ecosystem, it could have done more to advance the legal frameworks around crypto by setting good precedents for other crypto lenders.
But instead, the story of Celsius is one defined by tragedy — what was once a giant of the crypto space, defined by its strong ability to attract customers and provide a platform for decentralised finance, is now an out of control monster, guarding jealously what little treasure it has left, clinging on not to legitimacy, but authority.
It really is true what they say: you either die a hero, or live long enough to see yourself become a villain.
Featured Image Credit: Financial Times
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