The offer seemed too good to pass up: deposit your cryptocurrency and get a return of up to 18 percent.
That was the promise of Celsius Network, an experimental cryptocurrency bank with more than a million customers that has emerged as a leader in the murky world of decentralized finance, or DeFi. Over the past year, DeFi has exploded into a $100 billion industry, attracting both venture capital firms and regular investors with the prospect of lightning-quick profits. Celsius has more than $20 billion in assets under management.
But on Sunday night, as cryptocurrency prices tumbled, Celsius became the latest crypto company to hit the rocks, announcing it was freezing withdrawals “due to extreme market conditions.”
The announcement sent the market into a meltdown as Celsius customers wondered if they would get their deposits back. Bitcoin is down 15 percent in the past 24 hours, falling to around $23,000, its lowest since December 2020, according to CoinMarketCap, an industry price tracker. Ether, the second most valuable cryptocurrency, is down about 16 percent.
The crash extends a bad time for cryptocurrencies and vividly illustrates the risks of these experimental investments. Just a month ago, the implosion of a popular coin helped trigger a crypto meltdown that wiped out $300 billion in value from the entire market. The consecutive crashes have fueled criticism that many of the complex crypto banking and lending projects known as DeFi are high-risk systems teetering on the brink of collapse.
“DeFi is a house of cards,” said Cory Klippsten, the chief executive of Swan Bitcoin, a financial services firm focused on Bitcoin. “It’s speculation upon speculation, and there’s no real-world use case for any of it.”
DeFi exploded into the mainstream in 2021 as bitcoin and ether prices soared and crypto became a cultural phenomenon. Many clients were attracted by the potential for astronomical profits from complex crypto lending projects.
Celsius has become one of the best funded and most popular investment options for DeFi speculators. Founded in 2017 by businessmen Alex Mashinsky and Daniel Leon, Celsius accepts deposits from Bitcoin, Ether and other cryptocurrencies and then invests them, generating returns that are returned to depositors.
Celsius says it has attracted 1.7 million customers. Last year, the company had more than $20 billion in assets, although that number has fallen in recent months as the market has declined. In the fall, Celsius announced it had raised $750 million from investors, giving the company a valuation of more than $3 billion.
But the company also encountered problems. For months, critics have wondered how it can sustain such dramatic returns without jeopardizing its depositors’ funds by making risky investments. The company came under scrutiny from several government regulators, and its chief financial officer was arrested in Israel as part of a fraud investigation unrelated to Celsius.
“Celsius, like the rest of the crypto marketplace, has no regulatory oversight, no consumer protection, no net capital requirements,” said John Reed Stark, a former Securities and Exchange Commission official and a vocal critic of the industry. “It’s not just the Wild West — it’s global financial anarchy.”
But Mr. Mashinsky dismissed the criticism. In regular live streams, he aggressively marketed Celsius and addressed the huge yields. “It’s like going to the Olympics and winning 15 medals in 15 different areas,” he explained in December.
This weekend, just a day before the company stopped paying out, he accused a critic of spreading misinformation about the company. “Do you know anyone who has a problem retiring from Celsius?” he wrote on Twitter.
In the end, a drop in crypto prices seemed to put more pressure on the company than it could handle. Prices fell late last week after a report showing a rise in inflation in the United States rocked markets.
With bitcoin and ether prices already falling, Celsius announced on Sunday that it was freezing payouts. The company declined to comment. But it said in the statement on its website that it activated a clause in its terms of service allowing it to take that step.
“Our ultimate goal is to stabilize liquidity and restore withdrawals,” the statement said. “There is still a lot of work ahead of us as we consider different options. This process will take time and delays may occur.”
On a Reddit forum for Celsius customers, investors lamented the potential loss of their savings; A user posted a link to a suicide hotline.
“It’s basically like a bank run,” said Campbell Harvey, a Duke University professor and author of the book DeFi and the Future of Finance. “What I’m seeing appears to be a risk management failure.”
Celsius is one of several DeFi startups coming under intense scrutiny due to falling crypto prices.
Accelerating the May crash was the collapse of TerraUSD, a so-called fixed-rate stablecoin pegged to the US dollar. The coin’s $1 peg was underpinned by a complex financial technique that linked it to a sister cryptocurrency called Luna. When Luna’s price plummeted in May, TerraUSD fell with it – a “death spiral” that destabilized the broader market.
TerraUSD became popular for the same reason as Celsius. It was marketed by an aggressive entrepreneur, Do Kwon, who offered a DeFi service called Anchor Protocol, where customers could deposit TerraUSD and earn interest of up to 19.5 percent. Now TerraUSD is worth practically nothing.
Hilary Allen, a finance expert at American University, said the Terra and Celsius crises showed that the fate of crypto investments – long hailed as part of a decentralized marketplace – actually depends on the management decisions of individual founders.
“Investors have relied on comforting tweets from founders like Terra’s Do Kwon and Celsius’s Mashinsky as things plummeted,” Ms. Allen said, “but then found themselves in increasingly worthless positions as the founders made the decision to go ahead.” shut down.”