In case you didn’t notice, the crypto market has been remarkably red since June 11. The sharks are smelling blood and circling around it. My dad is convinced that the market will not recover. I think most dads are. Once again, crypto looks like Dutch tulip bulbs in the mid-1600s.
Today, I will tackle a very present and difficult topic, Celsius Network – the centralized crypto exchange that suspended all withdrawals from its platform two weeks ago. Mine and 1.7 million other users’ deposits are now frozen and possibly at stake. Exactly such a situation that Bitcoin was designed to provide assurance against by eliminating the need to trust in banks and other third parties.
Personally, I’ll admit that I have placed a large portion of my crypto savings in Celsius. Not enough to ruin my financial future if I lose it, but it will surely hurt for a long time to come. However, I remain cautiously optimistic about seeing my funds again. If not, an expensive lesson has been learned. I turn the deaf ear to a loud minority of trolls and bots that spread toxicity, invented information, and FUD (fear, uncertainty, and doubt) on social media. Many actual stakeholders in Celsius seem to be defaulting to emotionalism and doomerism at every turn and keep saying “that it’s all over”.
In this post, I will give a comprehensive and factual account of “the Celsius freeze”. I will look into how the freeze happened, and what caused it, include some personal reflections on a possible outcome, and on what I have learned from my mistakes. Everything I say is with reservation to the fact that information at the current time is limited. Be prepared for a lot of information and no financial advice.
Celsius is a large company that employs more than 650 people. Last year, Celsius raised $750 million in funding and was valued at more than $3 billion. The people behind Celsius are for the most part competent individuals with good track records. One exception would be the former CFO, Yaron Shalem, who was arrested for charges of money laundering, fraud, and sexual assaults in November last year. Or the former Head of Institutional Lending, Jessica Kharter, who starred in an amateur adult movie 1-2 years prior to her high-level role at Celsius.
On the other hand, CEO Alex Mashinsky has founded 4 Unicorns (companies with a + $1 Billion valuation) and authored more than 50 patents. Chief Risk Officer Rodney Sunada-Wong has more than ten years of experience as a risk executive from Morgan Stanley. Current CFO, Rod Bolger, has more than ten years of experience as a finance executive from the largest bank in Canada, RBC.
Celsius works much like a traditional bank but is used for borrowing and lending out crypto assets instead of fiat. Unlike a traditional bank, users can earn high yields by depositing their crypto on Celsius. For example, I am earning an APY (Annual Percentage Yield) of 2.5% on Bitcoin, 6% on Ethereum, 7.10% on Tether, 9.02 % on Polkadot, and 3.82% on Solana. That is possible because Celsius lend out mine and other “yield farmers” assets on a short-term basis to actors that can generate profit for themselves by arbitrating, market making, or short selling. According to CEO Alex Mashinsky, Celsius is doing the equivalent of lending out securities in the digital world.
Frozen Customer Funds
Celsius suspended withdrawals about two weeks ago. They posted a memo to “the community” shortly after all assets were frozen on Sunday 12 June that reads:
“Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts. We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations.”
Following the announcement, on the night of Monday June 13, Celsius’ native token $CEL–used as rewards for users on the platform – took a TerraLUNA-looking nosedive. $CEL plunged more than 55% in an hour, while speculations that Celsius was on the brink of bankruptcy circulated on social media.
“In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.”
Or in plain, non-legalistic English: “If Celsius goes bankrupt, you will probably not see your funds again.” However, as we shall see later, evidence seems to indicate that Celsius is suffering more from a liquidity problem, than an insolvency problem.
That being said, there is not much information about what really is going on behind the curtains. The Celsius team has more or less remained radio silent, except for a few formal announcements in legalese (not revealing much). They cancelled their weekly AMA session (Ask Mashinsky Anything) on June 17 where the community of anxious and enraged customers hoped to get some answers.
The only reasonable sub-conclusion we can draw for now is that Celsius was unable to meet its obligations as the withdrawal requests piled up and users mass-migrated from the platform. Analysts have accused Celsius of gambling with users’ crypto funds to earn the high yields. “The gambles” have sometimes proven to be unsuccessful.
For example, Celsius was the largest holder of Stakehound Staked Ether, a staking solution for Ethereum 2.0 (more on staking solutions in the next section). On June 22, 2021, Stakehound announced that it had lost the keys to over 38.000 ETH deposited on behalf of clients. According to Dirty Bubble Media, Celsius’s loss amounted to at least 35.000 ETH, around $50 Million in today’s bear market conditions. Celsius did not reveal any information about their loss to the public.
Another incident came from Celsius’s involvement with BadgerDAO which fell victim to a phishing attack at the end of last year. Celsius lost 896 BTC corresponding to $20 Million in today’s bear market.
There could easily be other incidents or examples of poor risk management which led to Celsius’ liquidity problems, but are not yet publicized or documented. There is no way of knowing…
Data shows that Celsius among other factors became illiquid because of its large holding in Lido Staked Ethereum (stETH). Quickly summarized, stETH is an Ethereum derivative that is irredeemable until Ethereum switches consensus model from proof-of-work (PoW) to proof-of-stake (PoS). This long-awaited transition is referred to as “the Merge“. The event was scheduled to happen in August this year but is delayed indefinitely.
Currently, all transactions on the Ethereum network are validated on two blockchains, the Ethereum Mainnet (Ethereum 1.0) which uses PoW, and the Beacon Chain (Ethereum 2.0) which uses PoS. All transactions on Ethereum are still processed on the Mainnet, while the Beacon Chain is running for the sake of testing, syncing, and providing early security to the upcoming Ethereum 2.0 update.
The biggest incentive for participating as a miner or a validator is the payout of block rewards. Right now, the rewards paid for validators on the Beacon Chain are only fractional compared to that of the miners on the Mainnet. Besides, there are two major drawbacks to staking on Ethereum 2.0:
- Users need a minimum of 32 Ether (ETH) to participate in staking on the Beacon Chain.
- The 32 ETH are locked until the Merge happens.
The hefty entry requirement of 32 ETH is a stop block for most everyday crypto users. And even for larger players with deep pockets, yields come with the price of illiquidity as their staked ETH cannot be touched perhaps for 1-2 years, or even longer.
This is where Lido Finance and stETH come into the picture. stETH is a tokenized version of staked ETH that can be used for trading and lending. Lido Finance currently offers a yield of 4% paid out in daily rewards for users to stake on the Beacon Chain. There is no entry requirement which means that anyone can participate without 32 ETH. The stETH tokens are also fully redeemable for ETH after the merge is complete.
Staked Ethereum is supposed to have the exact same value as ETH. But coinciding with the larger sell-off in the crypto market, stEth was trading at 0.9413 per ETH on June 10 and went even further down to 0.9341 on June 13. The loss of its 1:1 peg to ETH echoes the fall of USTs’ peg to the dollar which led to the TerraLuna crash. However, unlike TerraUST, there is no strict requirement for stETH to maintain its peg. Lido has no choice but to honor stETH redemptions after the Merge regardless of its peg. The problematic part about stETH trading lower than ETH is a matter of liquidity.
Celsius holds a huge amount of stETH. As of right now (25-06-2022), there are 409.706 stETH in Celsius’ Aave vault. The entire business model of Celsius evolves around staking large amounts of crypto from users’ funds, earning yields, and paying rewards back to the users. But now that stETH can no longer be redeemed in 1:1 value to ETH the tokens are effectively locked. If Celsius did decide to sell off stETH in large quantities, the price would likely tank even further. What caused this stETH’s de-pegging?
Blockchain data shows that Celsius pulled out 225,000 ETH from Terra’s Anchor Protocol right before UST lost its peg to the dollar and TerraLUNA crashed. A common theory is that Celsius fell victim to a coordinated short-selling attack from “the crypto mafia”. The attack is rumored to be a vendetta for Celsius’s front-run in the UST sell-off.
Market analyst and Twitter user PlanC has posted a two-part thread where he dissects namely how the exchange FTX and the trading firm Alameda Research worked together to bring down Celsius. They dumped large shares of stETH simultaneously, while other actors were deliberately spreading FUD on social media causing the “bank run”. On-chain analysis indeed shows that Alameda dumped 50,615 stETH onto the market in 2 hours on June 8, two days prior to stETH losing its peg. Besides, the $CEL token was heavily shorted (image from June 10) on the FTX exchange before the withdrawal freeze.
Celsius supporters (or “Celsians”) in the Reddit group r/CelsiusNetwork and under the trending Twitter hashtag #CELShortSqueeze, have been buying up large amounts of $CEL tokens over the past days. The plan is simple: buy $CEL on FTX at a low price, send the tokens to a private wallet like MetaMask, and set a high sell limit order for example on a $100.
The Celsius short squeeze purports to give traders who speculated in the downfall of Celsius a taste of their own medicine. The token is low in liquidity. According to estimates 87% of $CEL is locked up in the withdrawal freeze. By buying up $CEL, the supply decreases, the demand increases, and so does the price in theory. In resemblance to the Gamestop vs. r/wallstreetbets dynamic, the short sellers could eventually be forced to close their shorting positions with large losses which will spike the price of $CEL further upwards.
So far, the #CELShortSqueeze-plan seems to be working. $CEL spiked 50% on June 21 reaching $1.56 compared to 0.17$ on June 13.
Heading Towards Bankruptcy or Temporary Liquidity Squeeze?
A company is “cash flow insolvent” when it lacks the liquidity right now to meet its obligations. A company is “balance sheet insolvent“ when it actually does not possess the assets at all to cover its obligations.
The 20-billion-dollar question is (ten months ago, Celsius reported to manage $20B+ in total asset holdings) if Celsius is cash flow insolvent (illiquid) or balance sheet insolvent. Current blockchain data points to the former, while stories in the media and general online FUD point to the latter.
As a private unregulated company, the public is not able to see what Celsius’ balance sheet looks like. Celsius reported their financial figures and audit reports for 2019 and 2020. Suspiciously enough, nothing was released in 2022 despite multiple calls from investors on social media platforms.
As of June 25, Celsius’ loan on the DeFi Protocol MakerDAO (see the vault here) corresponds to $225 Million. Loans on the Maker protocol are paid out in DAI, a stablecoin pegged 1:1 to USD. The borrower is required to provide collateral. Further, the collateral has to exceed the value of the loan, called overcollateralizing. For example, borrowers can put in $150 worth of volatile crypto assets and get a loan for $100 worth of DAI stablecoin.
As it appears from the screenshot of Celsius’ wallet below, they have collateralized 23,963 as a security for the loan in DAI. The unit is Wrapped Bitcoin (wBTC). wBTC are Ethereum tokens based on the fungible ERC-20 standard with a value pegged 1:1 to Bitcoin. Simply put, wBTCs are Ethereum tokens that equal the value of Bitcoin.
Over the last two weeks, Celsius users have paid close attention to the liquidation price of currently $13.609. If Bitcoin falls below that price level, the loan in DAI is automatically repaid with Celsius’ collateral in wBTC via the smart contract. This will likely make Celsius balance sheet insolvent.
On Monday 13 June, Celsius came dangerously close to liquidation while Bitcoin’s price plummeted. Only 17,919 wBTC was stored as collateral in the wallet by that time with a liquidation price of $22,584.
Luckily, as the activity in the vault shows below, Celsius managed to repay part of its DAI loan and add collateral to bring down the liquidation price, before it was too late.
On June 20, Celsius paid off more than $10 Million DAI in debt to Compound. On June 24, they paid off +$10 Million DAI in debt to Notional Finance. Another loan that Celsius took on Chainlink of $34 Million was also fully paid off last week (see vault here).
Celsius is evidently paying off loans to not have them liquidated. Their overall financial situation also seems to have improved a lot during the last two weeks when we look at their combined wallet portfolio. As of June 26, their net worth is $1,942,068,006.62, an improvement of +$650 Million from June 13 as screenshotted below.
To inject even more hopium in the veins of frozen Celsians, stETH seems to be slowly regaining its peg to ETH, exceeding 0.965 on June 25.
Everything I have mentioned in this section seems to indicate that Celsius is suffering from a temporary liquidity squeeze and that they are not likely to file for bankruptcy anytime soon. In my personal view, a buy-out from another exchange such as Nexo seems like a more likely and (obviously) much better outcome for the users. Another interesting development is Simon Dixon, CEO of the crypto investment company Bnktofuture who offered to help Celsius with a recovery plan.
In spite of all these positive signs, The Wall Street Journal reported on June 24 that Goldman Sachs was seeking $2 Billion in commitment from investors to buy Celsius if they filed for bankruptcy. Celsius’ advisors from Citigroup Bank and restructuring attorneys from the law firm Akin Gump Strauss Hauer & Feld LLP have allegedly recommended this outcome. That is the worst-case scenario for reasons I will omit to discuss here. However, according to Simon Dixon’s insider sources from Goldmann Sachs, the story is fake news.
Again, no one can publicly say what is going on for sure. There seems to be about an equal amount of FUD and hopium in the online space. Speculations, rumors, and theories, but the few people with real insight into the matters have signed NDA’s. Until an official announcement has been made, stakeholders are unfortunately left in the dark for an indefinite time. We are reminded of Terra co-founder, Do Kwon’s infamous, confident tweet that appeared when TerraLUNA was in free fall to near zero.
My Closing Thoughts
Now there is a hollow ring to Celsius’ slogan “Unbank yourself”. As I saw one YouTube commenter point out they delivered on their promise. However, if Celsius wounds up and pay out dividends to expensive bankruptcy lawyers and trustees before their users, many “Celsians” will inevitably “uncrypto themselves” by keeping their savings in the bank from now on.
If Celsius gets margin called and liquidated on their DAI loans, analysts foresee a cascading effect on the rest of the crypto market. Other companies could be liquidated as well, perhaps even fall like domino pieces, while the price of Bitcoin and crypto would tank further. Therefore, it should be in everyone’s interest that Celsius pulls out of this, or at least are able to pay back customers’ deposits.
Warren Buffet is not the most popular figure in crypto circles four years after he referred to Bitcoin as rat poison. Nonetheless, the crypto community – myself included – could without a doubt learn a lot from his thorough, value-based investment strategy (The Intelligent Investor by Benjamin Graham is high on my reading list).
Like many others, I admit that I was blinded by Celsius’ promise of high yields, their gigantic backing from traditional finance players, their weekly AMAs, and whatnot. Simultaneously, I did not perform a sufficient due diligence on the company or pay enough attention to Crypto Twitter leading up to the crash. I also neglected some basic rules of investing that say don’t be greedy and diversify among exchanges. Or as the old, commonplace Bitcoin saying goes: Not your keys, not your coins.
Despair and angst are of course understandable on behalf of anyone who has money at stake in Celsius right now. However, a true entrepreneurial spirit can rise from ashes and come back stronger. No matter what, life goes on. In the end, good relationships, and good health is more important than cold assets. So better focus on that for a while.
 Vipal Monga and Angus Loten (June 2022), Celsius Investors Unlikely to Provide More Funds to Bail Out Crypto Lenderhttps://www.wsj.com/articles/celsius-networks-investors-unlikely-to-provide-more-funds-to-bail-out-crypto-lender-11655395113 (17-06-2022).
 Ian Allison (November 2021), Celsius CFO Arrested on Charges Tied to Former Job at Moshe Hogeg’s Firm -> https://www.coindesk.com/business/2021/11/26/celsius-cfo-arrested-on-charges-tied-to-former-job-at-moshe-hogegs-firm/ (16-06-2022).
 Reddit thread by MightyMihir -> https://www.reddit.com/r/WallStreetBetsCrypto/comments/vc8nif/the_celsius_blowup_exadult_star_to_chief_lending/ (19-06-2022).
 Price from Coingecko: https://www.coingecko.com/en/coins/celsius-network-token (15-06-2022).
 Dirty Bubble Media (June 2022), Celsius Network lost at least 35,000 Ether in Stakehound key blunder -> https://dirtybubblemedia.substack.com/p/celsius-network-lost-at-least-35000?utm_source=%2Fprofile%2F69647390-dirty-bubble-media&utm_medium=reader2 (26-06-2022).
 Dirty Bubble Media (June 2022), An inexplicable error cost Celsius Network $22 million in restitution from the BadgerDAO hack, https://dirtybubblemedia.substack.com/p/an-inexplicable-error-cost-celsius?s=w (20-06-2022).
 Conor Ryder, CFA (June 2022), Celsius Reaches Boiling Point -> https://blog.kaiko.com/celsius-reaches-boiling-point-c9b258f4474f (25-06-2022).
 Stacy Elliott (June 2022), How the Celsius Liquidity Crunch Is Linked to Lido’s Staked Ethereum -> https://decrypt.co/102812/celsius-liquidity-crunch-lido-staked-ethereum-steth (15-06-2022).
 Ryan Weeks (May 2022), Celsius pulled half a billion dollars out of Anchor Protocol amid Terra chaos -> https://www.theblock.co/post/146752/celsius-pulled-half-a-billion-dollars-out-of-anchor-protocol-amid-terra-chaos (20-06-2022).
 Twitter Thread by HsakaTrades 8th of June https://twitter.com/HsakaTrades/status/1534464723302891522 (25-06-2022).
 Jade (June 2022), The Case for the #CELShortSqueeze — $GME 2.0? -> https://medium.com/@cryptoismyjam/the-case-for-the-celshortsqueeze-gme-2-0-4587fcee13ba (26-06-2022).
 Decrypt Staf (June 2022), Celsius Up 50% Amid GameStop-Style Short Squeeze Attempt -> https://decrypt.co/103406/celsius-up-50-amid-gamestop-style-short-squeeze-attempt (26-06-2022).
 WassieLawyer Twitter Thread 13th of June -> https://twitter.com/wassielawyer/status/1536192639112183808 (17-06-2022).
 ShaharBrams Twitter Thread 14th of June -> https://twitter.com/ShaharAbrams/status/1536787774086471682 (17-06-2022).
 @Crypto_Joe10 Twitter Thread 10th of June -> https://twitter.com/Crypto_Joe10/status/1535291357996015618 (25-06-2022).
 Sam Andrew (June 2022) Freezing Celsius -> https://samuelandrew.substack.com/p/freezing-celsius (20-06-2022).).
 Twitter thread by @MikeBurgersburg -> https://twitter.com/MikeBurgersburg/status/1536277332826136576?s=20&t=Qs28SwN6KfmhrgrK7gB57g (21-06-2022).
 Tracy Wang (June 2022), Goldman Sachs Leading Investor Group to Buy Celsius Assets: Sources https://www.coindesk.com/business/2022/06/24/goldman-sachs-raising-funds-to-buy-celsius-assets-sources/ (25-06-2022).