After Terra Luna, Celsius crypto is the most talked about crypto disaster.The year 2022 wasn’t a good year for the cryptocurrency as the whole market witnessed a major down fall. Following this major downturn Celsius crypto did the unthinkable and paused all the withdrawals, swaps and transfer between accounts, essentially locking users out of their funds.
It was not ideal from one of the largest crypto lenders. Celsius filed for bankruptcy in July 2022. It had 600,000 accounts and the assets worth $4.2 billion at the time of filing bankruptcy. Let’s understand what the Celsius Network is and what actually happened with it? Read More
What is Celsius Network?
Celsius Network is a centralized platform founded in 2017. It allowed individuals to earn interest on their cryptocurrencies and borrow against them. The rate of interest was 15-18% p.a. It operated on the principles of decentralized finance (DeFi) and aimed to provide users with better financial opportunities and control over their assets.
In simple terms, Celsius Network allowed people to deposit their digital currencies, such as Bitcoin or Ethereum, into their platform. By doing so, people were able to earn interest on their holdings, similar to how we earn interest on money in a traditional bank account. The interest rates offered by Celsius Network were often higher than what we would get from a regular bank.
Additionally, Celsius crypto allowed people to borrow money against their cryptocurrency holdings. Instead of selling digital assets, people were able to use them as collateral for a loan. This way, people accessed funds without needing to sell their crypto investments and potentially miss out on future price increases.
Celsius crypto provided a user-friendly and secure platform for managing and growing digital assets. It leveraged blockchain technology and smart contracts to facilitate transactions and ensure transparency. The platform also provided various features and services, such as a mobile app, a digital wallet, and a loyalty program.
What actually happened with Celsius crypto?
Due to some rumors associated with the Celsius crypto people in mass started withdrawing their crypto from the platform. The Celsius network did not have the liquidity to meet all those requests so, the platform froze all the withdrawals, swaps and transactions which led to the chaos in crypt space. Later it filed for bankruptcy in July 2022.
How did this happen?
Over the last few years Celsius had grown so much and its size and popularity due to its high interest offers. Company raised $750 million in November 2021 led by Canada’s second largest pension plan CDPQ with valuation of over $3 billion.
Celsius had 1.7 million customers which were eligible to purchase Celsius token CEL, which gives them access to higher guaranteed returns and lower costs.
If you want to earn interest on your Ethereum, you can provide your Ethereum to Celsius to earn a yield. Celsius takes your Ethereum and does few things with it such as lending out the deposited crypto assets to institutional borrowers, such as hedge funds, exchanges, and market makers for a higher interest rate to generate revenue.This process was similar to how banks make money. These borrowers pay interest on the loans they take, which becomes a significant source of income for Celsius.
One of the things they did to generate revenue was to send some of the Ethereum to Lido Finance to stake it. When you stake your Ethereum on Lido they give you back stETH. StETH is a kind of voucher of assurity that you have given your Ethereum to Lido. Lido can invest Ethereum elsewhere to earn extra yield. So, when customers in mass requested for Ethereum withdrawals Celsius had to swap stETH for Ethereum which was a lengthy process and Lido also had liquidity issues with it.
It became impossible for Celsius to swap everystETH for Ethereum. StETH also lost its peg with Ethereum, so it was not possible for Celsius to swap stETH for Ethereum on Lido. Due to all this Celsius failed to fulfil its withdrawal demands and decided to shut down withdrawals demands and put a freeze on everyone’s account.
The growth of the platform was fueled by consistently being able to demand higher yields from their clients then they paid it out to investors. However when the market trembled, including Ethereum and Bitcoin taking a pounding, Celsius assets fell by 50% from $24 billion to $12 billion due to mass withdrawals. Celsius faced a liquidity crisis and people in mass started withdrawing their money from the platform. If every investor tried to withdraw their money they wouldn’t be able to fulfil the withdrawal so Celsius decided to suspend withdrawal. It was very alarming for the investors to lock them out of their accounts.
Lesson learned:
If a crypto platform goes through a downfall, there are some important things we can learn from the situation.
- Do Your Homework: Before you invest in or use a crypto platform, make sure you do your research. Look into the people running the platform and see if they have the right experience.
- Be Careful with Risks: Investing in cryptocurrencies can be risky, so it’s important to be cautious. Don’t put all your money into one platform or investment. Spread your investments across a few platforms to reduce the risk. Only invest the amount of money you can afford to lose. Think about the risks and rewards before you make any investment choices.
- Follow the Rules: Pay attention to the rules and regulations that apply to cryptocurrencies. Make sure the platform you choose follows these rules and is regulated properly. Platforms that follow the rules are more likely to be safe and secure. Understanding the regulations can help you make smart decisions
- Trust the Community: Look for platforms that have a good reputation and a strong community. Read reviews from other users and see what people are saying. Platforms with an active and positive community are usually a good sign. The community can also provide helpful information and warn you about any potential problems.
- Learn from Mistakes: If you lose money or have a bad experience with a crypto platform, it’s important to learn from it. Think about what went wrong and try to understand the warning signs you might have missed. Use these experiences to make smarter choices in the future.
The crypto market can be unpredictable, and everyone makes mistakes sometimes. Stay informed, learn as much as you can, and ask for advice from people you trust before you make any decisions.
