We are in the midst of an intriguing cryptocurrency bear market, to say the least. Recent months have seen high-profile collapses like algorithmic stablecoin TerraUSD, crypto hedge fund Three Arrows Capital, and more recently crypto lender Celsius Network. While general macro events take some responsibility for the failure of these organizations, there is more to it.
Celsius, in particular, left a gaping hole in the crypto lending industry due to its unsustainable business model and risky, cross-platform practices. Now, as Celsius participates in its bankruptcy proceedings, analysts are gathering to see what went wrong and how crypto lenders can improve sustainability going forward.
Why did Celsius Network collapse?
This week, crypto lending platform Celsius filed for bankruptcy. A move that came as no surprise. Ever since Celsius froze its users’ assets a few weeks ago, it was only a matter of time before the once-powerful lending platform collapsed. But how did they get to this point in the first place?
Last year, CEO Alex Mashinsky announced that Celsius had total assets under management of $25 billion. Now that number has dropped to just $156 million. Celsius still owes its customers around $4.7 billion plus a mysterious $1.2 billion hole found in its balance sheet. The source of this implosion is attributed to leverage.
Blockchain researchers used on-chain data to theorize that Celsius was allegedly using DeFi protocols for yield farming strategies with its customers’ funds. Celsius was famous for offering high returns to its clients holding crypto on its platforms. Now we learn that this yield comes from these cross-platform DeFi yield farming strategies.
Adding to the case, Nic Carter of venture capital firm Castle Island Ventures suggested to CNBC that Celsius would “subsidize it [the yields] and taking losses to get customers in the door. The returns on the other end were fake and subsidized. They moved out through returns [Ponzi schemes].
Lending to DeFi protocols comes with a variety of risks. For one thing, there’s general protocol risk, the risk of smart contracts failing, and of course, the risk of volatile markets. Multiple macro events led to market volatility, plummeting crypto prices, and the liquidation of Celsius’s risky loans. This resulted in a permanent loss of customer funds.
How did the market react?
Financial markets are partly driven by emotions. Typically, prices drop when there is a lot of fear in the market. When there is excess greed, prices go up. The Celsius event is a classic example of how mass fear is created. When the crypto market bull run came to an abrupt end in 2022, many investors (including Celsius) were caught off guard.
Investors were fearful and began withdrawing liquidity from Celsius faster than other users deposited it. As a result, Celsius was forced to freeze withdrawals to maintain remaining liquidity. When the market fell even further, their leveraged long positions were liquidated.
The Celsius name is now tarnished and its CEL token is now trading at around 70 cents compared to nearly $8 a year ago. Fear and lack of trust within the crypto market are at high levels. A large part of this is due to poor business practices by companies like Celsius, in addition to the global economy at large. It’s a perfect storm for a long, cold bear market. One we are in right now.
However, as we all know, prices move in waves. The market will recover and brighter days are ahead. Bear markets are the perfect opportunity for crypto lenders to look inside and create a more sustainable business model. This way, they can avoid such catastrophic failures in the future.
How crypto lending may improve in the future
Using client funds for risky investment maneuvers is not a new concept. We have seen this many times in both traditional financial markets and the cryptocurrency industry. However, when the strategy fails, the results are disastrous. Within the crypto lending niche, there is always some risk. However, with a sustainable business model, this risk is mitigated more effectively. Take European FinTech platform YouHodler, for example.
YouHodler started out as a simple crypto lending platform in 2018 and has since grown into a multi-faceted crypto wallet, exchange, revenue generation tool and crypto trading solution. Like Celsius, YouHodler offers a return on crypto deposits, but the similarities stop there.
YouHodler CEO Ilya Volkov spoke to CoinTelegraph in a live “Ask Me Anything” session.
Volkov explains that Youhodler is a “self-sufficient” platform that is not backed by an initial coin offering (ICO) or venture capital. Customer funds are never placed under the administration of anyone other than YouHodler.
“We keep all client operations within the platform and have no ties to other DeFi protocols,” Volkov said. “We know this results in more conservative returns for our clients, but ultimately it is a safer and more sustainable approach to generating returns. Protecting our customers’ funds is one of our main goals.”
YouHodler is also very careful never to “overpromise and underdeliver”. The company is realistic about expectations. For example, the current market environment has prompted YouHodler to lower the maximum amount each customer can earn from $100,000 to $25,000. While this is an inconvenience for some customers, it is a necessary step to keep operations running efficiently. When the market recovers, these amounts will increase again.
Bear markets are never easy, but they have a formula. As we now see, there is a lot of panic in the market. Celsius did not help this panic, nor did high inflation, central bank rate hikes and constant rumors of a global recession. However, companies like YouHodler were born in previous bear markets and have continued to thrive.
Without a doubt, this current “crypto winter” will bring new innovative solutions to our key financial problems. We can only hope that they will be approached with a renewed focus on sustainability rather than pure profitability. Only then will this market reach its peak and realize its maximum potential.
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