Crypto lending platform Celsius filed for bankruptcy yesterday. The New York-based company went bankrupt under US insolvency law. The assets and liabilities of the company are said to be between 1 and 10 billion US dollars. What does bankruptcy mean for investors in the crypto market? Why did Celsius Crypto file for bankruptcy?
What is Celsius Crypto?
Celsius has risen to become one of the largest crypto lending platforms in the market in recent years. As a lending platform, Celsius accepts cryptocurrencies from investors and offers them attractive interest rates. The company, which was founded in 2017, then lends these cryptocurrencies to investors and thus makes capital available to them.
Lending platforms are doing the job of lenders and banks in the cryptocurrency space. Crypto lending has become increasingly popular in recent years. The business of lending cryptocurrencies became more and more attractive, mainly due to the increasing interest of institutional investors in Bitcoin in 2020 and 2021. Celsius, which is based in New York, was one of the market leaders among crypto lending platforms.
Why did Celsius Crypto file for Bankruptcy?
The Celsius company has taken a big risk in its quest to become a leader in crypto lending over the past few months. Celsius wanted to offer its customers extremely high returns, which ultimately paved the way for bankruptcy. The company relied on the rising prices of cryptocurrencies during the bull market.
During the bull market, Celsius was able to offer its customers extremely high returns because borrowers were massively interested in borrowing cryptocurrencies. However, the high yields meant that profit margins for the company were extremely low. This strategy relied on gaining a high market share in a short period of time. However, this strategy also brought with it a high level of risk, as it speculated that cryptocurrency prices would continue to rise.
What were the reasons for Celsius’ bankruptcy?
The reasons for the bankruptcy of the Celsius company can be easily summarized:
- The collapse of the cryptocurrency market and the poor performance of financial markets, in general, caused the investment climate to deteriorate massively. This hurt Celsius sales massively.
- By promising high returns for its customers, Celsius was only able to generate extremely small profit margins. As a result, Celsius had no buffer for a poor market situation and had to file for bankruptcy more quickly.
- The company’s business partners also got into difficulties as a result of the market slump. The hedge fund Three Arrows Capital also had to file for bankruptcy. Celsius lent $650 million in crypto assets to Three Arrows. The company did not get these values back as a result of the bankruptcy of Three Arrows.
Is Celsius Bankrupt?
The insolvency of Celsius comes as no surprise after the events of the last few months. The collapse of the market caused many companies in the crypto space to file for bankruptcy in recent weeks. In addition to Three Arrows Capital, this also affected Celsius’s competitor, Voyager Digital, which filed for bankruptcy a week ago.
Celsius had already frozen payments to investors in the last few weeks. The Berlin startup Nuri, which was formerly known as Bitwala, was also affected. Millions of dollars from Nuri customers are currently frozen at Celsius. The partner’s insolvency exacerbates the situation at the German startup, which recently even had to lay off 25% of its employees. There is currently uncertainty about the future of Nuri’s deposits.
As of last October, Celsius managed $15 billion in crypto assets. That figure has fallen to $11.8 billion by May this year.
What are the implications of Celsius’ bankruptcy?
With the filing of bankruptcy in New York, Celsius at least has a chance to save and restructure itself. However, the event shows the shaky footing of cryptocurrency trading and lending companies. Due to their extreme volatility, cryptocurrencies as a means of lending increase the likelihood of bankruptcy or at least financial difficulties for the respective lending platforms.
The situation is now extremely delicate for Celsius customers, especially lenders. At the moment, it is not certain that customers will get their crypto assets back in a timely manner after filing for bankruptcy. In principle, the borrowed cryptocurrencies are legally the property of the company. Creditors should have a hard time recovering their borrowed assets over the coming months and years.