Michaël van de Poppe - 13 June 2022
Celsius freezes withdrawals because of liquidity concerns
In centralized finance (aka CeFi) your money is held by a central entity like a bank or in our case a corporation, whose goal is to make money. The CeFi lending service called Celsius has been a hot topic for the past weeks with rumors of insolvency. Assets under management have shrunk from $28.4B in November 2021 to $3.5B as of today. Celsius has decided to pause customer withdrawals, swaps and transfers because of “extreme market conditions” according to their latest blogpost. Additionally the Celsius team has stated that their ultimate, current objective is to stabilize liquidity and restore functionality.
We investigated the events leading up to the event and compiled them for you.
There have been several causes leading up to the alleged insolvency of Celsius’ user funds. Following an exploit of the BadgerDAO protocol Celsius lost 896 BTC. In order to partly compensate its users the BadgerDAO reimbursed Bitcoin from their multisig to the victims and also created the remBadger token to cover the remainder of the losses. Following this hack an error was made by one of Celcius’ employees where they accidentally withdrew all of their remBadger from the BadgerDAO protocol resulting in a realized loss of $22M. That’s a loss of about 80% of their original position. Another instance of bad luck for Celsius resulted in a loss of $71M after the Eth2 staking firm Stakehound lost its private keys to over 38k ETH they had deposited on behalf of their clients. The total losses from the multiple instances are estimated to be in the hundreds of millions.
The loss of such a significant amount of capital has put Celsius in a position where they are unable to guarantee solvency. In order to avoid a liquidity crisis, Celsius has disabled withdrawals, swaps and transfers. Since disabling withdrawals, Celsius’ main and hot wallet have been sending assets to FTX, for example this transaction containing 50,000 ETH. It is not entirely clear whether they are selling their tokens, but judging from the fact that they have been sending assets like ETH and BTC to FTX, receiving USDC back and repaying their Aave and Maker loans, one could assume they are liquidating part of their holdings in order to avoid liquidation on their loans.
Thanks to the wonderful work done by Twitter user @MikeBurgersburg we are easily able to track Celsius’ debt positions. For example; at the time of writing Celsius has a leveraged position of 21,960 BTC on Maker protocol. The position will be liquidated if the price of BTC were to dip below $18,387 which means they will lose the BTC provided as collateral. If the price of BTC and ETH keeps dipping they will be forced to sell off more and more assets in order to avoid liquidation and keep the assets they provided as collateral. It would not be a good outcome for the crypto market as a whole if Celsius is forced to sell all of their token holdings.
The drama surrounding Celsius has not been great for the $CEL token. It has suffered a drop of -75% in the last 2 weeks because of the bad news combined with an overall risk off environment.
Celsius is one of the biggest holders of $stETH with 409k $stETH deposited into Aave. The recent ‘depeg’ (technically not a depeg) of the $stETH - ETH pool on Curve has caused some concerns, but primarily it has provided an arbitrage opportunity to long term believers of ETH. $stETH is not pegged to ETH but rather has an exchange rate set by supply and demand. Because Celsius is being forced to partly sell their $stETH holdings to be able to avoid liquidation, the price of $stETH is going down. An abundant supply of $stETH on the market results in a discounted price and swap rate for $stETH.
Currently the exchange rate is imbalanced due to a lack of demand, causing a swap rate of 1:1.06 ETH:stETH. This means you can swap 1 ETH for 1.06 $stETH. $stETH can be redeemed for ETH 1:1 after ETH2.0 has been launched fully, which could take at least half a year. It could be argued that market makers are looking to force Celsius into liquidating their $stETH (and other assets) so they can scoop it up for cheap. It is safe to assume that as we get closer to the release of ETH2.0, the swap rate of ETH:stETH will return closer to 1:1 as demand for $stETH will increase.
More information about the arbitrage opportunity has been compiled by our analysts and is available in this Medium article.
One of Celsius’ largest competitors, Nexo, has been following the news regarding Celsius’ insolvency issues and has published a letter of intent detailing their offer to acquire Celsius’ assets. Nexo wants to take over custody of the assets that Celsius controls. It is basically offering Celsius a way out of deep waters, but it will come at the cost of giving up their whole business to Nexo. It might be the only option left for Celsius if the market conditions worsen and they get closer and closer to getting liquidated. The $NEXO token has seen an increase of 10% following the news of Celsius’ insolvency and the letter of intent. Please note that even though the price of $NEXO has increased today, it has still been in a downtrend overall just like the cryptomarket as a whole and might see more downside in the short to medium term if the current market conditions worsen. It is arguable that the AUM and marketshare of Nexo will increase over the short to medium turn as trust in Celsius falters and Celsius users go looking for alternatives. If the AUM of Nexo increased it would be logical for the $NEXO token to accrue value from the increase of AUM.
It will be interesting to see how the situation plays out. If the whole market keeps correcting and we approach the liquidation prices of the loans that Celsius took out on Aave and Maker they will be forced to take serious measures. One of the possible outcomes is that Nexo bails Celsius out by taking over their assets. This first outcome might be one of the best outcomes as it will minimize the damage done to the ecosystem as a whole. If the Celsius team is not satisfied with this outcome they might resort to other options such as taking out more loans to keep the health factor of their loans safe, or liquidating more of their holdings to safeguard the loans. In the worst case scenario Celsius as a whole fails and they will be forced to liquidate all of their assets. This outcome will not be pleasant for the ecosystem as it will drive prices down even more and possibly result in a negative spiral taking the whole market down with it. It is hard to predict what is to come based on the information we have at the moment.
We will have to wait and see how the situation plays out. Of course we will be following the action and provide you with the latest news as soon as it is available!