Crypto Lender Celsius Was In Hot Water Since 2020 Actually

BluShark Media
4 min readJan 31, 2023

TL:DR

  • The final examiner’s report on Celsius Network sheds light on the crypto lender’s mismanagement and unsustainable operations.
  • The problems at Celsius can be traced back to at least 2020, when the company started using customer assets to fund its expenses and rewards.
  • Celsius was never profitable and was using customer-deposited BTC and ETH as collateral to borrow stablecoins to fund its operations.
  • In 2021, Celsius realized it would not be able to recover the collateral used to take out two loans from Equities First, resulting in a loss of approximately $288 million on a $129 million loan.
  • The reason for Celsius’ persistent deficit was due to the company’s interest rate not being correlated with the yield from investing customer assets.

Celsius Network was once a leading crypto lending company, but its downfall is a cautionary tale for anyone entering the volatile world of cryptocurrency. In a 467-page examiner’s report, the now-bankrupt crypto lender’s troubles are detailed, with allegations that problems dated back to at least 2020, after Celsius started using customer assets to fund operational expenses and rewards.

The 467-page final examiner’s report on Celsius Network sheds light on the crypto lender’s finances and actions leading up to its insolvency. According to the report, the problems at Celsius can be traced back to at least 2020, when the company started using customer assets to fund its operational expenses and rewards.

The report paints a picture of a company with massive holes in its balance sheet, as early as 2020, losing money even during the bull market of the crypto space. The report alleges that Celsius was never a profitable company, with a $600 million deficit by the time it started tracking its assets and liabilities on a coin-by-coin basis in May 2021.

According to the report, Celsius was allegedly using customer-deposited BTC and ETH as collateral to borrow stablecoins during the peak of the bull market to fund its operations, investments, and rewards. The report also alleges that employees could cover shortfalls using loans collateralized by customer assets. This practice ultimately led to the company losing approximately $288 million on a roughly $129 million loan from an institutional investment firm, Equities First, in 2019 and 2020.

Throughout 2020 and 2021, Celsius took out several loans using the BTC and ETH that its customers deposited, which resulted in the company having to purchase BTC and ETH at significantly higher prices to cover the shortfall when the crypto market was declining.

The report states that Celsius offered interest rates to users that were not correlated with the yield from investing those assets, leading to a deficit in the company’s balance sheet. The interest rates were set based on what was necessary to beat the competition and not based on the yield from investing customer assets.

Celsius filed for Chapter 11 bankruptcy protection in July 2022 after it froze customer withdrawals and swaps due to the collapse of Terra, which caused “extreme market conditions”. However, the report alleges that by 2020, Celsius had already created massive holes in its balance sheet, losing money even during the market’s “up only” cycle.

Celsius held a deficit due to setting reward rates based on competition instead of yield from investing customer assets, leading to riskier investments. Celsius was never profitable and by May 2021, it was already $600 million in the red. The company was allegedly using customer-deposited BTC and ETH as collateral to borrow stablecoins to fund its operations, investments, and rewards. In 2021, Celsius realized that it would not be able to recover the collateral used to take out two loans from Equities First, resulting in a loss of approximately $288 million on a $129 million loan.

To cover the shortfall, Celsius purchased BTC and ETH with the stablecoins it borrowed at significantly higher prices. When the crypto market declined in 2022, Celsius used customer assets to repay outstanding stablecoin loans and obtain more BTC and ETH to deliver to withdrawing customers.

Simply put, the reason for Celsius’ persistent deficit was due to the company’s interest rate not being correlated with the yield from investing customer assets. Celsius set its reward rates based on what it perceived was necessary to beat the competition, rather than based on the yield it was earning from investing customer assets. To Pay back customers the company is currently mulling over the idea of a new token, though community sentiment, unsurprisingly, is not so friendly.

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