Celsius’ crisis exposes problems of low liquidity in bear markets

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After one week of pausing user withdrawals, exchanges and transfers, the company said it maintains an open dialogue with regulators and officials and plans to continue working with them regarding this pause. Celsius has yet to comment on when the company will stabilize its operations. Celsius has also paused communications on Twitter Spaces and Ask-me-anything (AMA) sessions “to focus on overcoming these unprecedented challenges.”

Although Celsius refrained from communication, the media and social media were rife with news and speculation swirling around the company’s past, present, and future. One of the most interesting developments is the community-led Gamestop style short squeeze.

The dust from the Terra disaster has yet to be settled, but another crisis is shaking the cryptocurrency markets. Celsius, a crypto lending and amassing platform worth billions of dollars, is the latest crypto company to face controversy.

Previous anomalies
Celsius’ motto is “An economy in which financial freedom does not come with a price.” Although this marketing mantra has been unreasonable to some, it has been really effective for some time. Since opening its doors in 2017, the company has raised more than $25 billion in cryptocurrency over five years until things came to a head on June 12, 2022, when the company temporarily halted user withdrawals.

However, signs of Celsius’ mismanagement of funds were evident before this case. In December 2020, during the $120 million BadgerDAO hack, Celsius reportedly lost more than $50 million in cryptocurrency, making it the biggest victim of the act. To compensate victims for their losses, BadgerDAO enforced a recovery plan by creating a remBADGER token.

Token holders are assured of a payout in remBADGER over the next two years that will cover the remainder of the loss. This assertion came with only one requirement: remBADGER must remain inside the Badger vault. If the token is withdrawn, all future payments will be forfeited. However, on March 18, 2022, Celsius withdrew all remBADGER allotted to it, valued at approximately $2.1 million at the time of the transaction.

When Celsius Network realized its mistake, it tried to persuade Badger’s team to allow it to return the deposit in violation of the rules set out in the BIP-80 decision. Unfortunately, for Celsius, BadgerDAO took the Code of Ethics of Law seriously, and the proposal was voted on.

Many users also expressed concern about the company’s leadership. Celsius Chief Financial Officer Yaron Shalem and Chief Revenue Officer Ronnie Cohen Pavon were both arrested for money laundering in November 2021.

On May 11, 2022, when the Terra disaster was just beginning to unfold, some began to look at the degree Celsius. Cointelegraph then reported that Celsius Network had begun to deny rumors of significant losses to the company. Celsius Chief Financial Officer Rod Bolger said, “Our front office teams are thinking […] and act as risk managers to ensure that we are not in any way exposed to market volatility.”

Investors accused the Celsius team of sitting on its hands while the price of the token plummeted as a result of the Terra fiasco. On May 20, 2022, the Celsius degree (CEL) dropped from an all-time high of $8.05 to $0.82, a drop of 90%. Some Celsius users claimed that the platform liquidated their properties with a lower CEL. They noted that trading was illiquid as the price fell, exacerbating their losses. When Cointelegraph contacted Celsius CEO, Mashinsky attributed this to the “Shark of Wall Street,” saying:

They’ve dropped the LUNA. They’ve tried Tether, Maker, and a lot of other companies. We’re just not. I don’t think they have a specific dislike or focus on the Celsius. They are all looking for any weakness to shorten and destroy. The point is, the sharks in Wall Street is now swimming in cryptic waters.”
The problem with high-yield APY projects
Celsius has been one of the fastest growing organizations in the crypto market. Until the collapse, Celsius had 800 people working for them, with staff increasing more than 200% in the last year alone. The problem is that cryptocurrencies are in a bear market now, and to keep operating normally, businesses need to continue to have liquidity. Now, when most retail and institutional investors withdraw their cryptocurrency, liquidity becomes a major concern for them.

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One of the biggest reasons for Terra’s collapse was illiquid assets as well. However, most projects, when asked how their individual projects are, claim to follow a different business model than the one that has a problem in that case. Cointelegraph had reached out to Synthetix to explain why their profitable high annual return (APY) business model was more fundamental than those that fell like Terra and Celsius. Their representative replied:

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