As Celsius files for Chapter 11 bankruptcy protection, novice crypto investors should take heed of these three hard-won lessons.
Crypto winter. Crypto collapse. And now, in the words of Celsius’ bankruptcy filing, a ‘cryptopocalyse.’
These words matter because negative sentiment can infect the crypto space like cancer. At just over $22,000, Bitcoin is worth less than a third of its record $69,044 as recently as November.
But for investors who believe the bottom is now here, the collapse of Celsius offers some hard-learned investment lessons as the recovery gets under way.
A brief precis of Celsius’ collapse
Over the past month, Voyager Digital, hedge fund Three Arrows Capital, and lender Celsius have all filed for Chapter 11 bankruptcy protection. It seems unlikely they will be the last.
And after freezing customer withdrawals last month, Celsius now has just $4.3 billion in assets set against $5.5 billion of liabilities. Worryingly, it owes $4.7 billion to its 1.7 million users.
CEO Alex Mashinsky accepts Celsius made ‘what, in hindsight, proved to be certain poor asset deployment decisions.’ First, it loaned out 35,000 Ethereum to StakeHound, which subsequently lost them, allegedly because of third-party negligence.
Then it borrowed hundreds of millions of dollars from a ‘private lending platform,’ later identified as EquitiesFirst, putting up collateral against the loan. According to Mashinsky, Celsius had gone to the lender because there was a ‘lack of institutional lending available to cryptocurrency companies’ at the time.
However, when Celsius attempted to repay the loan and have its collateral returned in July 2021, it was informed that EquitiesFirst no longer possessed it, and the lender instead became Celsius’ debtor to the tune of $509 million. And despite paying down this debt to $439 million, ($361 million in cash, and 3,765 Bitcoin), the repayment rate has slowed to $5 million a month.
EquitiesFirst notes it ‘is in ongoing conversation with our client and both parties have agreed to extend our obligations.’
Then in late 2021, Celsius raised $600 million in equity funding from WestCap and Canadian pension fund Caisse de dépôt et placement du Québec. At the time, the deal valued Celsius at just $3 billion.
These poor decisions left Celsius in a weakened market position as the value of its digital assets collapsed under the ‘cryptopocalypse’ caused by ‘unanticipated’ global events including covid-19 and the Ukraine war.
The tipping point appears to be the broader sell-off in the wake of the collapse of Terra stablecoin, which panicked investors into an ‘unexpected and rapid run-on-the-bank,’’ exacerbated by ‘misleading’ information in social and traditional media.
And Celsius argues its Chapter 11 filing will ‘provide a breathing spell for the debtors to negotiate and implement a plan that will maximise the value of its business and generate meaningful recoveries to our stakeholders as quickly as possible.’
3 lessons to consider
But Crypto economist Frances Coppola has warned Celsius depositors allegedly ‘do not have any legal right to return of their funds. Even if the terms of the account say funds can be withdrawn whenever the customer chooses, the bank can refuse to allow customers to withdraw their funds.’
Moreover, Celsius has included $600 million of CEL tokens as a constituent of its $4.3 billion of assets. But according to CoinGecko data, CEL’s market cap is now only $321 million.
Further, Mashinsky told investors that the company could ‘generate sufficient assets’ to repay at least one loan and provide future revenue from its Bitcoin mining operation, and expects to mine 15,000 BTC through 2023. But CoinDesk reports it sold 7,000 mining machines in June, and Bloomberg suggests it plans to sell more.
This leaves three lessons for the aspiring crypto investor.
First, investing on a crypto platform is risky, regardless of its size or stature. Coinbase, the largest platform in the US, recently had to defend itself over the lack of protection of retail accounts. And no lender is completely impervious to bankruptcy. Moreover, unlike bank or share-dealing accounts, there is rarely any regulatory protection.
Second, the inherent risk of crypto means it should constitute a minority of an investor’s portfolio. While crypto offers exceptional rewards, the trade-off is the chance of losing everything.
Third, and most crucial, is that all investing is based on imperfect information; Celsius users thought the platform unsinkable as little as six months ago.
Therefore, investors should split their crypto investments both across different coins, and across different platforms for maximum possible protection.