Crypto Investors Warn of False Yield Promises After Celsius Freeze

Crypto Investors Warn of False Yield Promises After Celsius Freeze

Crypto Investors Warn of False Yield Promises After Celsius Freeze

  • Crypto lending platform Celsius has frozen client accounts after liquidity challenges.
  • The dilemma shows the risks of platforms promising high returns, industry experts told Insider.
  • Celsius owned much of the illiquid ether and had also suffered losses from the Terra meltdown.

Celsius offered investors returns of up to 14% on a range of cryptocurrencies such as ether, synthetix and polkadot. With the crypto lending platform temporarily barring its customers from moving funds, Web3 founders and investors say those promises of hefty revenue were probably too good to be true.

Celsius recently announced that it was pausing all withdrawals, swaps and transfers on its platform to “stabilize”.


liquidity

and operations” in light of the “extreme market conditions”.

It is one of several Web3 platforms and financial companies that have come under pressure as cryptocurrencies have fallen. Companies such as Coinbase and BlockFi have reduced their workforces in response to the challenging market environment.

Regulators have previously taken a critical look at crypto lending platforms. Gary Gensler, the chairman of the US Securities and Exchange Commission, has suggested that such services should fall under the agency’s remit. In February, BlockFi, which also offers a lending platform, paid a $100 million settlement after the SEC said the company had not properly registered its lending service.

One risk with companies like Celsius and BlockFi is that their investment and risk management strategies are not completely transparent, Joey Krug, Pantera Capital’s co-chief investment officer, told Insider.

Decentralized platforms and protocols that provide crypto returns, such as Compound and MakerDAO, are open source, but Celsius and BlockFi are not. Krug said he believed BlockFi’s risk protocols were “robust” based on his interactions with the company several years ago, but Celsius “had a bit of a perception as a riskier store.”

In general, “most of these methods work well in environments that are less volatile and optimistic,” Vijay Ayyar, the vice president of business development and international at crypto investment firm Luno, wrote in an email to Insider. “But when things get ugly and people want to get their money out of it, this essentially becomes a bank run.”

Celsius’s liquidity problems stemmed largely from its holdings in ether, several people told Insider. Customers can “bet” ether, the second-largest cryptocurrency by market capitalization, to earn returns, similar to how savings account owners deposit money to earn interest. And like savings account owners, Celsius customers could withdraw the tokens they had staked at any time.

But expanded ether is linked to the yet-to-be-launched upgrade of the Ethereum blockchain, Ethereum 2.0. As a result, that token is not fully liquid, Krug said.

Ether staked is supposed to trade at the same value as ether, but if too many people try to withdraw staked ether, the token could end up trading at a significantly lower price. That’s what happened when crypto prices fell, and the discrepancy put pressure on Celsius’ assets, several people said. Celsius had 600,000 ether, roughly equivalent to $729 million, locked up due to strike action, according to data from fintech firm Nexo.

Celsius’s challenges were compounded by about $500 million exposure to the stablecoins terraUSD and luna, which collapsed in May, Ayyar said.

Celsius did not respond to a request for comment.

Crypto lending platforms typically exchange customer tokens for other cryptocurrencies as part of their return strategies, but some of those tokens can be very risky, as the collapse of terraUSD showed. Crypto platform Stablegains closed its doors after investing customers’ money in the ill-fated stablecoin, causing some to lose almost all of their savings.

According to Ayyar, Celsius’s misery shows that the effects of the collapse of terraUSD and luna are not quite over.

“The Luna/Terra debacle may have a lot of hidden skeletons in the closet, which we may see coming out now,” he wrote.