Ep 52. The Celsius Bankruptcy Crypto IRL

Preamble
My wife and I recently packed our bags and relocated to New Jersey! Texas was good for us but now we are on to our next adventure in Greater New York City. Would love to meet up if you are in the area.
It’s been fascinating observing people’s reactions when I say I work in crypto. Some acquaintances immediately start walking me through their crypto portfolio while others clutch their pearls and flee for dear life. Jokes aside, I am often the first person they have met who works in the space. Sometimes, I get the sense they don’t quite know what to make of me. Crypto’s unsettling reputation has not been helped by the recent market downturn, hacks, and bankruptcies. My singular refrain has been that “the underlying technology could solve real-world problems, focus on that”.
But you can’t bury your head in the sand and ignore the world around you. If you fail to study history, then you are bound to repeat the same mistakes. We are living through the early days of Crypto’s history. Let’s learn from this moment lest we fall prey to the same dragons.
Heartache 💔
Celsius - a prominent centralized crypto lending company - filed for bankruptcy on July 13, 2022. Customers had been unable to withdraw their funds since June 12, 2022. It now looks unlikely that they will ever reclaim all their funds. Some devastated customers have written letters to the judge presiding over the bankruptcy proceedings. These letters are gut-wrenching. Here are excerpts from two of them:


But how did we get here?
Celsius: Background🔎
Celsius was founded in 2017 by Alex Mashinsky (CEO), Daniel Leon (former COO, now Chief Strategy Officer), and Nuke Goldstein (CTO) in Hoboken NJ. Celsius provides customers with high interest-bearing accounts for cryptocurrencies and crypto-collateral-backed loans.
High interest-bearing crypto accounts
Example 1: Johnny cashed out some of his cash savings and stock investments to buy 1 bitcoin on Coinbase. He then sees an ad from Celsius offering 17% interest rates for customers who deposit bitcoin with the company. He looks at his regular bank account and is reminded that Bank of America is only offering 0.1% interest. It’s a no-brainer! Johnny moves his 1 bitcoin from Coinbase to Celsius to earn high interest.
Crypto-collateral-backed loans
Example 2: The price of bitcoin has more than doubled. Johnny is feeling good about his investment. Time to finally buy that engagement ring he has been eyeing. The price of bitcoin is $50k but he only needs $10k. However, Johnny doesn’t want to sell his bitcoin because he believes the price will be much higher in the future.
Step 1: He transfers 0.3BTC valued at $15k as collateral for a $10k cash loan.
Note: (a) There are no interest payments on the loan but he has 1-year to pay it back. (b) There are no credit checks because the loan is overcollateralized with a loan to value (LTV) ratio of 67% => $10k loan / $15k crypto collateral.
Step 2: Celsius will monitor the LTV ratio as the price of bitcoin continues to fluctuate. If the price of bitcoin drops deeply, Johnny will have 24 hours to add more collateral or pay down the loan if the LTV hits the predetermined threshold ex 90%. If Johnny fails to bring the LTV back to an acceptable range say ~67% within the prescribed time then Celsius has the right to sell his collateral for cash.
Besides lending, Celsius generated revenue from token sales, bitcoin mining, and discretionary trading of cryptocurrencies. As of June 2022, Celsius had lent out $8 billion to customers and had $12 billion in assets under management. The company had 450 employees and reportedly 1.7 million account holders.
How did it go wrong?⚡
TLDR: Celsius CEO said the company went bankrupt due to “..certain poor asset deployment decisions”. Basically, weak risk management. Unfortunately, this does not appear to be an isolated incident, rather, tales of poor decision-making and under-resourcing are emerging fro