A Review of the Celsius Network Halt — and How to Research Using CoinMarketCap
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A Review of the Celsius Network Halt — and How to Research Using CoinMarketCap

3 months ago

CoinMarketCap Research's first piece examines what's happening in the ongoing Celsius Network crisis — and how to use CoinMarketCap to do your own due diligence before investing.

A Review of the Celsius Network Halt — and How to Research Using CoinMarketCap

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In CoinMarketCap Research's first piece, we aim to examine the Celsius business model and platform to understand what went wrong leading up to the lending provider's suspension of user withdrawals. Will the platform potentially run the risk of liquidation that is set to send shockwaves in the entire crypto ecosystem? This is what the article will cover:

  1. Review of the Celsius platform - breakdown its business model and ecosystem to understand what went wrong.
  2. Assess the red flags happened over the past few weeks regarding Celsius’ liquidity and yield generating issue, re-assess how this will further impact the crypto market.
  3. What have we learned from this experience - review some basics on how to properly “Do Your Own Research” (DYOR) on any projects, and link it back to the tools and resources available on CoinMarketCap.

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What Happened Leading up to Celsius' Suspension of User Funds

Before jumping into the analysis, here’s a primer on what happened in the still-unfolding Celsius crisis.  On June 11, 2022, users were reportedly unable to login to the Celsius platform, adding on to rumors of a potential Celsius implosion and liquidity crisis that has been making circles over the past week.

Celsius’s CEO Alex Mashinsky was of course quick to rebut, calling it “FUD and misinformation” spread by people shorting CEL — Celsius’ native token. That did not stop the token from suffering a drawdown of over 50%.
On June 13, Celsius announced a halt of all withdrawals, swaps and transfers on their platform, blaming “extreme market conditions” as Bitcoin and other cryptocurrencies plunged over the weekend.
Before we move on, it is important to note that to offer the attractive yields on the Celsius platform, Celsius essentially used on-chain leverage. Celsius took loans on platforms like MakerDAO and Lido, and used users’ deposits, in WBTC and ETH, as collateral. The ongoing crypto market meltdown puts them at risk of a margin call, unless they top-up their collateral — which is what they did.

In short, as Bitcoin and Ethereum continue to suffer drawdowns, it becomes harder for Celsius to remain solvent, as collateral value decreases.

Update: As of June 14, Celsius has topped up its colleteral across their loan positions. In their MarkerDAO WBTC vault, liquidation price has been lowered from $20,272 to $14,000. They have also added ETH collateral to their stETH position on Aave, although the falling stETH price has lowered the collateral ratio. However, its sizeable position on Compound, worth $420M, was largely untouched except for a repayment in $6.2M in DAI.

Part 1: Examining Celsius Business Model

Dylan LeClair has produced an analysis on this topic, where we summarized some of his ideas to show a few red flags from reading the White Paper.

1. Project team Preserves Its Own Self-Interest

One example of this is naming itself Celsius “network” with limited content on describing the network setup while having an entire section dedicated to showing an “executive team”. Celsius has a few founders, a CEO, a COO, a CTO, together with Marketing and Development departments. However, when deepdive on the key personnel’s background and experiences, there seems to be very little demonstrable track record.

2. Celsius Tokenomics Analysis

A deeper look at its tokenomics shows that 40% of the total CEL tokens were issued in the presale phase in Q4 2017 at $0.20 per token, and later Celsius performed a crowdsale of 10% of the total CEL tokens at $0.30 per token in March 2018.

Part 2: Key Missteps Made by Celsius

  • June 12, 2022: Announcement: halting all withdrawals, transfers, and swaps on platform.
  • 2021 market saw a few arbitrage opportunities between spot bitcoin and its futures and derivatives, i.e. GBTC trading at discount/premium and the bitcoin futures market in contango. This has allowed investors like Celsius to profit from these price differentials, and this arbitrage profit acted as the funding source for their yield products These opportunities then dried up as the market moved into 2022.
  • To obtain additional yield to support its products, Celsius invested in a few risky assets (details). Following the Terra crash, the investors have become more cautious on the liquidity and solvency of these risky assets. Some started to question the Celsius setup, especially on its investment in Anchor’s yield farming and in Lido’s staked ETH (stETH).
  • This series of events have led to a few bad outcomes for Celsius:
    • it’s running out of liquidity;
    • the staked ETH saw its value dropping 4.5% below ETH (supposed to be pegged with 1:1 ratio);
    • Celsius was also on the verge of a margin call on 17,900 wrapped BTC

With all these challenges, Celsius has limited options but to gate the funds and halt withdrawals, swaps and transfers to prevent facing a “bank run” situation.

Crypto and Traditional Market Impact

This event, together with Friday's CPI release, has sent shock waves across the crypto market. Global markets have also experienced material price falls with major equities, fixed income, gold and other commodities all trending downwards.

We are still cautious as we see the crypto market not yet priced in the risk of contagion, meaning when the Celsius resumes its services, we are likely to see users rushing out to redeem. Other projects with similar lines of business like BlockFi, NEOX and so on, are also put under additional pressure and scrutiny.

This could further trigger the sell of other sectors within crypto. For Bitcoin and Ethereum, there’s the added implication of short squeeze, where derivatives positions get margin called as the price falls below a certain level.
For this, it is imperative to monitor the derivatives positions and funding rates across the major platforms. Technical analysis can also be useful in the current environment to provide some indications on the support levels - example.

Part 3: How To Utilise CMC Resources for “Doing Your Own Research”

CoinMarketCap already hosts a vast amount of content related to each project directly on our website. In addition to checking the prices and league tables, users can also:

  • Check the Overview tab to gain a better understanding of the project, with links directly to its White Paper and official website, etc.
  • Read the Analysis tab and Ratings tab, for trading signals and in-depth report;
  • Visit the Socials tab and News tab to review project announcements, discuss with other project fans, read related news and tech deep-dive articles.
  • Head over to Alexandria to search for the technical articles and use learn-and-earn section to test your understanding.
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