The panic that gripped the cryptocurrency market on Monday appeared to have eased by Tuesday morning as coin prices halted their dramatic decline. But serious concerns remain over one of the triggers for yesterday’s crash, the Celsius Network platform, where withdrawals still remain suspended.
As of 10:00 a.m. BST, Bitcoin was up 0.45% at US$22,563. Ethereum was up less than 1% at US$1,219, and Tether, which is pegged to the US dollar, was flat at US$1. Most coins are taking heavy losses this year amid a series of issues that have upended the bull market narrative. Terra’s implosion in May was the trigger for recent volatility, and now Celsius issues have followed quickly, spurring another decline for the major coins.
On Monday, the platform announced it was suspending withdrawals, trades and transfers between accounts, blaming “extreme market conditions”.
On the same day, the American platform Binance, a rival of its listed counterpart Coinbase (COIN), also announced that technical problems forced it to suspend withdrawals. For those with a conspiratorial mind, it seemed like the platforms were closing doors to stop an exodus.
Online skeptics think something is wrong
As usual, the debate online is very polarized: crypto-skeptics think this is when the bubble bursts and relish the daily lurches to the bottom, while true believers urge (less convincingly) other fanatics to keep the faith, overcome this swing and even add to their holdings.
One Twitter commenter, “@concodanomics” tweeted, provocatively, “Celsius is Bear Stearns, Tether is Lehman Brothers(The collapse of Bear Stearns preceded that of Lehman Brothers in the 2008-2009 financial crisis, and the latter was the “big one” that tested the global financial system).
While Bitcoin was meant to reshape finance, the psychology of investors here is as old as time: the rush of late adopters to exit (a digital bank), the disbelief of heavily invested people, and the optimism of “buyers in drop” opportunists are all at stake.
Binance has since confirmed that people can opt out of its platform, calming some nerves on Tuesday. Unfounded rumors swirled on Monday that Coinbase had also suspended withdrawals and the stock price shed 11% on Monday to close at $52 – a sign of the new crypto frontier crossing into listed securities.
Coinbase at Ax 18% of employees
In what seems like an eternity ago in terms of sentiment, Coinbase shares opened at US$381 in April 2021 and hit nearly US$430 in early trading. Morningstar assigns Coinbase shares a fair value of US$131, implying a substantial increase from current levels, but its uncertainty rating is “very high.” And for good reason.
On Tuesday afternoon, Coinbase Chief Executive Brian Armstrong announced that the company was cutting its workforce by 18%, citing the likelihood of a recession and “crypto winter.”
“We appear to be entering a recession after an economic boom of more than 10 years. A recession could lead to another crypto winter and could last for an extended period,” he told employees in a memo.
“As we operate in this very uncertain time […] we want to make sure we can weather a prolonged downturn successfully. Our team has grown very quickly (>4x in the last 18 months) and our personnel costs are too high to effectively manage this uncertain market. The actions we are taking today will allow us to manage this period, even if it is very prolonged, with more confidence.” The personnel concerned were immediately barred from the company’s internal systems.
Why the Celsius Saga Matters
What is happening within the American-Israeli society Celsius and why is it important for the crypto debate?
Celsius is a decentralized finance (DeFi) platform where people can buy and sell coins, like with Coinbase, but it also has its own “native token”, CEL, which also plunged into turmoil yesterday. Unlike, for example, a stock exchange or a traditional investment platform, Celsius users can borrow and lend money to other members of the network – lenders are paid for this in the form of rates interest of up to 7% and borrowers can be part of the crypto roller coaster and take advantage of their returns.
This business model is making regulators nervous: Celsius has ceased operations in the UK citing regulatory uncertainty, while four US states have effectively banned the network. The Securities and Exchange Commission is scrutinizing platforms that offer loans, forcing strategic shifts from big names like Coinbase, which had planned a similar product.
Celsius is also offering sign-up offers worth $2,000 worth of free Bitcoin, promising “military-grade security”, “next-level transparency” and the ability “to access your coins at any time, to keep them forever”, with loans starting at 1% and rates up to 17% for lenders.
With interest rates at historic lows, an interest rate of up to 17% might have been too tempting for some – although sane people might have worried about how this high yield is reached.
What worries investors now is who owns what – if you put money into a platform, is it theirs or yours? Coinbase recently stated that in the event of bankruptcy, customers could lose their coins – which was seen as heresy by crypto purists.
A similar problem is at play with Celsius. Banking expert Francis Coppola tweeted that investors make the mistake of thinking platforms are repositories of your money the same way Vanguard, BlackRock are in the world of regulated consumer finance.
“It’s an unregulated bank. Celsius says in its terms and conditions that any coins you deposit with it or pledge to it become its property to do as it pleases. It’s a banking model, not an asset management model,” she tweeted. only by an opaque stack of risky loans.”
Ben Hunt (@Epsilon theory) says that the Celsius debacle (again) raises the question of “rehypothecation”:
“Every generation of investors learns about counterparty risk the hard way. Today would be a good day to read the fine print of your margin account at COIN or HOOD. Also, if you don’t know what the ” rehypothecation”, it would behoove you to learn.”
Who owns what?
As the International Monetary Fund explained in its article on shadow banking, rehypothecation is “the practice of allowing collateral posted by, say, a hedge fund with its prime broker to be used again as collateral by this prime broker for its own financing”.
Simply put, businesses can use customer money to cover their loan obligations. It’s not new to the world of stockbroking and it’s certainly not illegal, but it fell out of favor after the financial crisis when investors started to take a keen interest in how and where their money was used.
In the financial industry, most customers expect their money to be held in segregated accounts, and this is a regulatory requirement in many cases.
In the crypto gold rush, where prices were skyrocketing, investors probably didn’t ask the questions that are at the heart of the contract between individual and institution: how do you manage my money and if things go wrong, can i get it back? ?