Celsius Made All the Wrong Moves, and Now It's Dying

Celsius, a centralized crypto lending platform with $12B under management, has frozen customer withdrawals. Investors fear Celsius may be insolvent in the wake of a delayed Ethereum Merge and the bear market killing its DeFi investments.

Centralized “DeFi” Investing

Celsius is a centralized crypto finance lending and borrowing platform. In early 2021, Celsius adopted risky DeFi investment strategies and increased the yields it offered to customers. Celsius invested customer funds in several DeFi projects, including Stakehound, Badger DAO, and Anchor Protocol.

In June 2021, Ethereum staking service Stakehound misplaced private keys for over 38k ETH. At least 35k of those ETH tokens belonged to Celsius and its customers. Celsius CEO Alex Mashinsky didn't inform its customers of the loss. Instead, Mashinsky did a livestream holding a skateboard that said "hodl."

Following the Badger DAO hack, Celsius accidentally forfeited its restitution payments, losing $22M in the process. After Celsius realized its mistake, the company tried to convince Badger DAO to fix its error, but 89% of Badger DAO voted no. Mashinsky claimed that Celsius would be fully reimbursed, and if they didn't screw up a simple restitution claims process that could've happened. Instead, no one read the Badger docs and Celsius lost over 80% of its BTC and Badger DAO tokens.

Like Stablegains, Celsius was using Anchor Protocol to drive its high yields. Anchor offered 19.5% yield to Celsius, which in turn gave its customers up to 17% yields. Surprisingly, it seems like Celsius didn't directly lose money in the Terra/UST collapse. Blockchain analysis suggests Celsius had about 261k ETH staked on Anchor Protocol, and Celsius managed to get 225k ETH back out before UST fully de-pegged. Celsius says the last 36k ETH was also withdrawn, but it's unclear if this is true. Given its track record, getting 86% of its tokens back is an excellent result for Celsius.

Ethereum Merge Delays: The Final Blow

Lido is the largest Ethereum liquid staking protocol. Investors stake their ETH with Lido and receive "liquid ETH," called stETH, in return. The ETH they stake is locked up until The Merge. stETH can be traded 1:1 for ETH following The Merge, but right now stETH is just a digital IOU for ETH.

Following news of the Ethereum Difficulty Bomb delay last week, ETH crashed and stETH de-pegged from ETH. Celsius was offering its customers yield on their ETH using Lido, but it didn't have access to the actual ETH in case the customer wanted to cash out, because that ETH is locked up until The Merge.

To me, it seems like Celsius bet big on The Merge happening before a bear market caused a bank run. Unfortunately, Russia, the US Fed, and Terra crashed crypto before Ethereum released The Merge.

Looking back at Celsius' history of degenerate investing and truth bending, it's not surprising to see it collapse early in a bear market. Since Celsius still has a lot of its customers' ETH locked up until The Merge, it's possible that Celsius customers could recover some of what they lost following The Merge. Nexo has offered to buy Celsius' remaining assets, but it's unclear if that will happen or how much that would help Celsius customers.