Celsius Crypto’s Timeline Shows Downfall Was Practically Inevitable

Bankruptcy proceedings are underway for Celsius Network. The troubled cryptocurrency lending firm claims to help users “unbank” themselves but has instead frozen withdrawals and left customers without access to $4.7 billion.

Here’s what’s going on with Celsius and how they ended up insolvent despite the company’s hope that it would all work out in the end.

Helmed by founder and CEO Alex Mashinsky, Celsius began day one of its bankruptcy proceedings on Tuesday, July 19. As Celsius touted its potential to earn revenue from Bitcoin mining, other, more sinister details emerged.

Celsius owes a collective $4.7 billion to hundreds of thousands of users and its total liabilities sit at $5.5 billion. Meanwhile, its assets — a reported $4.3 billion as of mid-July — are $1.2 billion short of liabilities. While Celsius held about $14.6 billion in assets at the end of March, those assets have dwindled.

According to Celsius employees, the crypto company has been walking a dangerous path for years. Former director of financial crimes compliance Timothy Cradle told reporters, “The biggest issue was a failure of risk management.” Cradle added, “They didn’t want to spend on compliance.”

Cradle noted the internal team was pumping up CEL, Celsius’ native token, stating, “They were absolutely trading the token to manipulate the price.”

By April, Celsius announced it will hold in custody the digital assets of all non-accredited investors. At the same time, the company limited capabilities for one of its products, Celsius Earn.

By May, Terra stablecoins UST and LUNA depegged from the U.S. dollar they were meant to track. The event caused $40 billion in losses and sparked a deeper crypto winter across the industry, creating a gap between Celsius’ assets and liabilities. Prior to this, Celsius’ liquidity issue was a major risk. The event merely directed light onto an existing shadow. Celsius was unprepared for the mass egress in the crypto market as investors feared further losses.

On June 12, Celsius made the move to freeze all withdrawals, swaps, and transfers, citing “extreme market conditions.” By the end of June, the company hired a restructuring firm to help it come up with a solution for escaping its liabilities.

In early July, layoffs hit Celsius, impacting nearly a quarter of its workforce. Days later, decentralized finance (DeFi) firm KeyFi sued Celsius over alleged market manipulation and accounting negligence. According to KeyFi CEO Jason Stone, “The entire company’s portfolio had naked exposure to the market."

In recent days, Celsius shored up debt with DeFi lending protocol Aave, filed for Chapter 11 bankruptcy, and acknowledged a hole in its balance sheet to the tune of about $1.2 billion. Prior to this, the company didn't admit to having a liquidity issue, but the data doesn’t lie.

As for potential outcomes, Celsius users may get the short end of the stick, falling below institutional investors in bankruptcy liquidation priority. This could be detrimental for the crypto banking industry, reversing trust it long worked to gain. While traditional financial institutions have threatened the trust of its customers many times over, users saw blockchain as a respite. Without protective regulation, those same users may be left in the dust.