We’re in the midst of an intriguing cryptocurrency bear market, to say the least. The past several months provided high-profile collapses such as algorithmic stablecoin TerraUSD, crypto hedge fund Three Arrows Capital and more recently, crypto lender Celsius Network. While overall macro events take some responsibility for the failure of these organizations, there’s more to it than that.
Celsius, in particular, left a gaping hole in the crypto lending industry due to their unsustainable business model and risky, off-platform practices. Now, as Celsius attends its bankruptcy trial, analysts are gathering around to see just 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 with no surprise. Ever since Celsius froze its user’s assets a few weeks ago, it was just a matter of time before the once powerful lending platform collapsed. But how did they get to that point, to begin with?
Last year, CEO Alex Mashinsky announced that Celsius has a total of $25 billion in assets under management. Now, that number is down to just $156 million. Celsius still owes around $4.7 billion to its customers plus a mysterious $1.2 billion hole found on its balance sheet. The source of this implosion is traced to leverage.
Blockchain researchers used on-chain data to theorize Celsius allegedly used DeFi protocols for yield farming strategies with its client’s funds. Celsius was famous for offering a high yield to its clients that held crypto on its platforms. Now, we’re learning this yield came from these off-platform, DeFi yield farming strategies.
Adding to the case, Nic Carter from venture capital firm Castle Island Ventures went on CNBC to suggest Celsius were “subsidizing it [the yields] and taking losses to get clients in the door. The yields on the other end were fake and subsidized. They were pulling through returns from [Ponzi schemes].
Lending funds to DeFi protocols comes with a variety of risks. For one, there is an overall protocol risk, smart contract failure risk, and of course, exposure to volatile markets. Several macroeconomic events resulted in market volatility, crashing crypto prices, and liquidating Celsius’s risky loans in the process. This resulted in a permanent loss of client funds.
How did the market react?
Financial markets are partially driven by emotion. Typically, when there is a lot of fear in the market, prices decrease. If there is an excess of greed, prices increase. The Celsius event is a classic example of how mass fear is induced. When the crypto market bull run came to an abrupt end in 2022, many investors (including Celsius) were unprepared.
Investors were fearful and began withdrawing liquidity from Celsius faster than other users were depositing it. Hence, Celsius were forced to lock withdrawals to maintain whatever liquidity it had left. When the market tanked 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, down from 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 from companies like Celsius, in addition to the overall global economy. It’s a perfect storm for a long, cold bear market. One we are in the midst of right now.
As we all know, however, prices move in waves. The market will recover and brighter days are ahead. Bear markets are the perfect opportunity for crypto lenders to look within themselves and develop a more sustainable business model. That way, they can avoid such disastrous failures in the future.
How crypto lending can improve in the future
Using client funds for risk investment maneuvers is not a new concept. We’ve seen this many times in both traditional financial markets and within the cryptocurrency industry. Yet, when the strategy fails, the results are disastrous. Within the niche of crypto lending, there is always some element of risk. Yet, with a sustainable business model, this risk is mitigated more effectively. Take European FinTech platform YouHodler for example.
Starting in 2018 as a simple crypto lending platform, YouHodler has since evolved to become a multifaceted crypto wallet, exchange, yield generation tool, and crypto trading solution. Like Celsius, YouHodler offers yield on crypto deposits but the similarities stop there.
Speaking with CoinTelegraph in a live “ask me anything” session, YouHodler CEO Ilya Volkov revealed key aspects of YouHodler’s business model that other crypto lenders can use for inspiration.
Volkov states that Youhodler is a “self-sufficient” platform that is not backed by an initial coin offering (ICO) or venture capitalization. Client funds are never placed under anyone’s management besides YouHodler.
“We keep all client operations within the platform and have zero connections to other DeFi protocols,” said Volkov. “We realize this results in more conservative returns for our clients but ultimately, it is a more secure and sustainable approach to yield generation. Protecting our client’s funds is a primary goal of ours.”
YouHodler is also big on never “over-promising and under-delivering.” The company takes a realistic approach to expectations. For example, the current market environment caused YouHodler to decrease the maximum amount that each client can earn a yield – from $100,000 to $25,000. While it’s an inconvenience to some clients, it’s a necessary move to keep operations working efficiently. When the market recovers, these amounts will rise again.
Bear markets are never easy but there is a formula to them. Just as we are seeing now, there is a lot of panic in the market. Celsius didn’t help that panic nor did the high inflation, key rate hikes from central banks, and the constant talks of a global recession. However, companies like YouHodler were born in previous bear markets and went on to thrive.
Without a doubt, this current “crypto winter” will produce new innovative solutions to our most important financial problems. We can only hope they are approached with a new focus on sustainability instead of pure profitability. Only then will this market reach peak maturity and achieve its maximum potential.