Celsius Network Meltdown – High Risk No Reward?

Celsius CEO

On June 13, 2022 users of the Celsius Network were reminded of one of the most used expressions in Bitcoin, “not your keys, not your coins.” According to a company statement, “due to extreme market conditions” Celsius paused all withdrawals from their platform and have been radio silent since. 

The silence from Celsius has prompted speculation around the timing of the incident, with the fall of LUNA and UST Celsius’s exposure to both coins became clear. 

The attraction to Celsius stemmed from the high yields offered on bitcoin and stablecoins however, to maintain the high yield they had to make risky investments. 

As the dust slowly settles, users begin to fear whether Celsius will go bankrupt or if this is a temporary liquidity issue. Someone who is experienced with these situations and has even proposed solutions is Simon Dixon from BNK To The Future.

Who is Simon Dixon and Can He Save Celsius?

Simon Dixon has a master’s degree in economics as well as over two decades working in monetary reform. He got involved in Bitcoin in 2011 and even published a book that year which was the first book ever to mention Bitcoin. 

Since then Simon has been heavily involved in Bitcoin startups with early investments into companies such as BitPay, Kraken, Bitstamp and Coinbase to name a few.

When Celsius founder Alex Mashinsky was looking for funding to start Celsius, it was Simon Dixon and his company BNK To The Future who initially helped raise $10 million as lead investor to get the company moving.

In a recent interview Simon stated that he himself has “tens of millions of dollars” currently locked on Celsius. Furthermore, he also mentioned that he was one of the largest depositors on the network and that BNK To The Future have a 5% stake in Celsius. 

Simon and his team do have the unique knowledge and experience with these situations, a recent post from popular Bitcoin maxi Max Keiser was somewhat satirical however.

Why has Celsius frozen withdrawals?

There have been question marks around what caused Celsius to pause all withdrawals and not allow users access to their funds, the two common reasons posed being liquidity issues or a potential insolvency.

The liquidity issue seems credible; in simpler terms Celsius does not have enough funds available to meet the demands if all customers were to withdraw their funds from the platform. If the issue is with liquidity then users will simply have to play the waiting game, this could be a number of years but there is a high chance that they get their funds back.

The second possibility is insolvency whereby Celsius will have to start selling users’ funds to keep the business going, this usually starts with restructuring and staff layoffs but ultimately ends with bankruptcy. 

According to Simon the situation is leaning towards insolvency, this is not good for Celsius users as it will likely lead to bankruptcy and their funds being sold.

There is some hope though, because of the current vulnerability of Celsius there is an opportunity for potential buyers to effectively bail them out, this would be done by purchasing Celsius’s debt and securing users’ funds from being sold.

There would be no lack of buyers with the likes of FTX and Binance around; FTX recently announced their interest in purchasing BlockFI, while traditional investment firms like Citi Group and Morgan Stanley seem to also have shown some interest as well. 

Considering Satoshi’s message in the Bitcoin genesis block was aimed at traditional banks and bailouts, the situation is extremely embarrassing for Celsius and counterintuitive to the Bitcoin ethos.

Recovery Plan

Whilst the easiest recovery plan would involve financial aid from a predatory third party, Simon believes the best option for Celsius is to look at the innovative solution Bitfinex adopted in 2016. 

Bitfinex was hacked on August 2, 2016: approximately 120,000 bitcoin were stolen, which were then valued around $72 million. Only two weeks after the hack Bitfinex reopened and issued users with BFX token, this token was a promise from Bitfinex that they would eventually buy back each token for $1. 

When they opened the price of the token initially fell to as low as $0.36. Users who believed in Bitfinex held strong, eventually the exchange recovered and purchased all BFX tokens a year later recovering the losses. 

Unlike Bitfinex, Celsius already have their own CEL token which makes creating another token look unprofessional to say the least. 

Despite the question marks around the sustainability of the yield, Celsius did have an extremely loyal customer base. With around 1.7 million users, they were one of the larger businesses that offered yield. 

There is no doubt Celsius built up quite a high level of trust before this crisis however as Simon states, every day that goes by which Celsius remains silent gives less confidence to a positive outcome.


Was the writing on the wall?

Regardless of any proposed ‘recovery plan’ for Celsius, it’s hard to ignore the many alarm bells that were ringing. The highly respected founder of exchange Swan Bitcoin Cory Klippsten has been very active on Twitter, most notably his views on Luna, UST and Celsius before their collapse.

In an interview on 23rd May 2022, Cory referred to Celsius as a “slow moving trainwreck” and explained that depositors are unsecured creditors, meaning Celsius can use customers’ funds and engage in high risk trading with little to no consequences.

Regardless of the outcome, Bitcoiners are not affected by third party blackouts as long as they keep their private keys under self-custody.

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