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The offer seemed too good to pass up: Deposit your cryptocurrency, and receive a yield as high as 18 percent.
That was the promise of Celsius Network, an experimental cryptocurrency bank with more than one million customers that emerged as a leader in the murky world of decentralized finance, or DeFi. Last year, DeFi exploded into a $ 100 billion industry, attracting both venture capital firms and regular investors with the prospect of lightning-fast gains. Celsius was managing more than $ 20 billion in assets.
But on Sunday night, as cryptocurrency prices slid, Celsius became the latest crypto venture to spiral into a crisis, announcing that it was freezing withdrawals “due to extreme market conditions.”
The announcement sent the market into a meltdown, as Celsius customers wondered whether they would be able to get their deposits back. Bitcoin is down 15 percent over the last 24 hours, falling to about $ 23,000, its lowest value 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 dire period for cryptocurrencies, illustrating in graphic terms the risks of these experimental investments. Just a month ago, the implosion of a popular coin helped trigger a crypto meltdown that erased $ 300 billion in value across the market. The back-to-back crashes have fueled criticism that many of the complex crypto banking and lending projects known as DeFi are teetering high-risk schemes on the brink of ruin.
“DeFi is a house of cards,” said Cory Klippsten, chief executive of Swan Bitcoin, a financial services firm focused on Bitcoin. “It’s speculation on speculation, and there’s no real-world use case for any of this stuff.”
DeFi exploded into the mainstream in 2021, as the prices of Bitcoin and Ether surged and crypto became a cultural phenomenon. Many customers were drawn to the potential for astronomical gains from complex crypto lending projects.
Celsius has emerged as one of the best-funded and most popular investment options for DeFi speculators. Founded in 2017 by the businessmen Alex Mashinsky and Daniel Leon, Celsius accepts deposits of Bitcoin, Ether and other cryptocurrencies, and then invests them, generating returns that are paid back to the depositors.
Celsius says it has attracted 1.7 million customers. Last year, the company held more than 20 billion in assets, though that figure has sunk over recent months as the market has declined. In the fall, Celsius announced it had raised $ 750 million from investors, giving it a valuation of more than $ 3 billion.
But the company also encountered its share of problems. For months, critics have wondered how it could sustain such dramatic yields without putting its depositors’ funds in jeopardy through risky investments. The company has drawn scrutiny from several state regulators, and its chief financial officer was arrested in Israel as part of a fraud investigation unrelated to Celsius.
“For Celsius, like the rest of the crypto marketplace, there exists no regulatory oversight, no consumer protections, 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 rejected the criticism. In regular live streams, he aggressively marketed Celsius, talking up the huge yields. “That’s like going to the Olympics and getting 15 medals in 15 different fields,” he declared in December.
As recently as this weekend, just a day before the company stopped withdrawals, he accused a critic of spreading misinformation about the company. “Do you know even one person who has a problem withdrawing from Celsius?” he wrote on Twitter.
In the end, a drop in crypto prices appeared to put the company under more pressure than it could withstand. Prices fell late last week, after a report showed a surge in inflation in the United States, rattling markets.
“Our ultimate objective is stabilizing liquidity and restoring withdrawals,” the statement said. “There is a lot of work ahead as we consider various options, this process will take time, and there may be delays.”
On a Reddit forum for Celsius customers, investors lamented the potential loss of their savings; one user posted a link to a suicide hotline.
“Basically, this is 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 is what appears to be a failure of risk management.”
Celsius is one of a number of DeFi start-ups that are coming under intense scrutiny as crypto prices drop.
The crash in May was accelerated by the collapse of TerraUSD, a so-called stablecoin with a fixed price pegged to the US dollar. The coin’s $ 1 peg was underpinned by complex financial engineering that linked it to a sister cryptocurrency called Luna. When the price of Luna plummeted in May, TerraUSD fell in tandem – a “death spiral” that destabilized the broader market.
TerraUSD became popular for much the same reason as Celsius. It was marketed by an aggressive entrepreneur, Do Kwon, who offered a DeFi service called Anchor Protocol, in which customers could deposit TerraUSD and receive interest as high as 19.5 percent. Now TerraUSD is worth virtually 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 hinge on the management choices of individual founders.
“Investors have relied on comforting tweets from founders like Terra’s Do Kwon and Celsius’s Mashinsky while things were heading south,” she said. Allen said, “but then found themselves trapped in increasingly worthless positions once the founders make the decision to shut down.”