On June 13th, the week after Bitcoin dipped from $30,000 to around $22,000, crypto broker and lending-platform Celsius halted clients’ withdrawals.
Eleven days later, a rumor started to spread that investors whose funds are managed by Goldman Sachs were interested in purchasing Celsius’ assets with a price tag mentioned of $2 billion.
At the same time, the Wall Street Journal (WSJ) reported that Celsius was preparing to file for bankruptcy, and on July 13th it did just that. Specifically, the company filed for Chapter 11, a process of voluntary bankruptcy where the debtor remains in control of its own assets but needs permission from the court on its financial decisions.
Last week, it was also reported that Ripple Labs, the issuer of the XRP token, is also interested in buying Celsius’ holdings. Indeed, Celsius does seem to be looking for a buyer, as it uploaded a presentation online intended for prospective suitors. The presentation is a graphical recap of its filing and lists Celsius as having a total of $5.5 billion in liabilities and $4.3 billion in assets.
Celsius claims to have more than 1.7 million users and up to $4.72 billion of its debt is made up of assets that it owes to these clients, all of whom have their funds locked. The massive gap between its crypto holdings and the clients’ holdings is evident.
Celsius currently holds only $1.75 billion in crypto assets excluding its CEL token holdings which it valued at $600 million at the time of filing. Its mining assets are worth around $720 million and other assets include loans it’s owed, cash, and custody assets.
Celsius needs to settle with its creditors first
Excerpts of letters by Celsius’ clients sent to the judge presiding over the bankruptcy proceedings are heartbreaking. Ordinary people, some who even put in their life savings in Celsius, were duped by attractive interest payments of up to 17% and CEO Alex Mashinsky’s claims that Celsius was much better than banks.
Celsius has admitted that clients will lose some of their funds in any conclusive outcome, but its main institutional creditors will probably be paid first. According to bankruptcy proceedings Celsius is first obliged to pay its 50 biggest creditors, to which the company owes at least a total of $570 million. Its biggest institutional creditor is Pharos USD fund to which it owes up to $81 million.
So, all is not lost for Celsius’ clients given that after paying off institutional lenders, the company would still have enough assets to redeem some of their funds. The prospect that Celsius’s holdings are bought by a buyer could be a silver lining but this doesn’t guarantee that clients would get their funds back.
Anyone buying Celsius’ holdings would probably be doing so for its large user base, which is mostly based in the US. Celsius also tried to sell its mining operations but was stopped from doing so by its creditors. Celsius subsidiary Celsius Mining LLC operates over 43,000 rigs and claims to plan to operate 112,000 rigs by Q2 2023.
Celsius made a total of $3,937,273 in net profit in 2021 and $8,523,849 in 2020. Its business model was based on adding more new users through an extensive marketing drive that basically exceeded more than half of its gross profits in expenses. The company then used clients’ funds for risky and over-leveraged bets often lending the money to other entities.
Celsius losses for 2022 are estimated to go way above the one billion dollar mark having had to liquidate at least $1 billion of its crypto holdings, of which $900 million was a loan from Tether. Recently, Celsius fans pushed the idea that the company could be saved with a soaring price of its Cel token through a short-squeeze. However, even the marking of the $600 million value of its CEL holdings is dubious at best given that all previous incentives for new buyers to buy the token are no longer there.
With newly-proposed EU regulations, risky activities where an exchange plays with clients’ funds will not be allowed in Europe. In the US, both the White House and legislators in the country are also prioritizing consumer rights in the current legislative debate on crypto.
The Celsius fiasco may have given regulators a textbook case of what to make sure to avoid in the future, meanwhile Celsius retail clients are bearing the brunt of the recklessness and irresponsibility of its owners.