The Celsius Network Saga: When the Promise of High Yield clouded The Risk Aspect of Investment
The word “High Risk, High Return” might be a simple aspect to say when we are phrasing something but it is somehow difficult to grasp in the crypto space. As crypto prices start to tumble down during this bear market, the promise of achieving quick returns towards your financial freedom is not possible without an equal amount of risk attached to it. We will now take a look at Celcius Network, the crypto project that aims to rival banks but recently came crashing down and filed for bankruptcy in 2022. Also, why shouldn’t you choose a project solely based on the amount of yield it generates?
The Celcius Network Saga
The age of new technology is always filled with companies or enterprises that pitch to you regarding the great big problems their products are currently solving but in the crypto space, it has taken it to a whole new level. Some of these marketing pitches continue to revolutionize the industry like Ethereum and Binance but some pitches fall flat off people’s expectations such as the recent case of Terra Luna. The worst part of all is that the crypto industry as a whole is not yet properly regulated, these cases when they fail usually result in huge losses for its investors.
Enter The Celcius Network, developed in 2017 by its 3 founders Alex Mashinsky, Daniel Leon, and Nuke Goldstein with a pitch claiming that they were the next evolution in our Banking System. In simple terms, Celsius Network is a platform that facilitates lending and borrowing to its users in which lenders can generate a yield from depositing their cryptocurrencies, and borrowers are paid between zero to 8.5% based on their loan-to-value ratio.
Nuke Goldstein serves as the Chief Technology Officer in Celsius while Daniel Leon serves as the Chief Strategy Officer and Alex Mashinsky serves as the CEO while gradually becoming the face of the company. Alex Mashinsky spent most of his career as a telecommunications officer where he claims to be the inventor of VoIP (Voice Over Internet Protocol) although the reports reflected otherwise suggesting a pattern of Alex’s behavior of slightly stretching the truth is what leads to concern.
Of course from his experience with VoIP, it is clear that Celsius’s motive was to compete with the Banking system the same way VoIP competed with the traditional telecommunication system although a lot of the terms used by Celsius like deposit and withdrawals are essentially banking terms. Celsius began with an ICO stage in which it managed to sell 50% of its CEL token supply at a presale value of 20 cents and a crowd sale value of 30 cents each raking in almost 50 Million Dollars for its initial round of funding.
Celsius then partake in another round of funding in which it raised a further 800 Million Dollars last year with a big part of it coming in from the Canada pension fund which claims were not interested in investing in Bitcoin beforehand. Cel Token is the native token of the Celsius Platform created on the Ethereum Network and is tradeable on major exchanges. The CEL Token has a maximum supply of 695 Million out of which 325 Million was distributed in its initial ICO stage, 19% is allocated to the Celsius Team, 2% to its advisors, 2% to its partners, and 27% allocated to the treasury with vesting period for all CEL token ending September last year.
At its peak, the CEL token reached a price of $7.7 in May last year but unfortunately, it went downhill from there as its current price stands at $1.7 in August 2022. The CEL Token role in the platform is to provide alternatives to users and smooth out the cash flow of the borrowing and lending system in case there are liquidity issues. This is incredibly integral as we all know that Celsius was offering incredibly high-interest rates to all its lenders while also offering quite low-interest rates to all its borrowers and of course, the benefit from these interest rates can increase if you hold sufficient CEL Token. The CEL token can then be staked again to their earn program to earn more rewards and you can see where we are going with this.
This is good news for yield farmers out there and Celsius quickly grew to more than 25 Billion Crypto Asset Under Management from its 1.7 Million Users with 3 Million Dollars of Interest Rates paid to its users daily. Their Earn program became a favorite amongst Crypto Enthusiasts and as Alex Mashinsky said it was incredibly low-risk but for all of us who have fresh memories of the Anchor Protocol, can that statement be true? It is quite difficult to create a consistent 10% Interest Rate with a low-risk investment and it turns out that they were taking tremendous risks to pay back its investors. This is obviously where we draw the comparison back to banks as when you lend your money to the bank they are licensed and have the cash flow to pay you back, although you get a small amount as interest rates. However, when you lend your crypto to Celsius, they have full control over what they do with your crypto, and with the high amount of interest rates to be paid, they will maximize all possible investment strategies including the risky ones to possibly earn back the interest paid to you plus a profit for them.
In this scenario, Celsius is operating more like a Hedge Fund rather than a Bank, and it doesn’t help much that the company is growing too quickly and has tripled its number of employees by 2021. Of course, this won’t be a problem if they were hiring star employees as it points out that one of Celsius’s early bad presses began last November when its CFO was arrested for money laundering while its Chief Revenue Officer would follow suit. Now, what do you get when you have a lot of novice new people handling asset portfolios worth billions of dollars spread across many risky DeFi platforms? You have a recipe for disaster incoming.
A lot of speculations of Celsius’s downfall was pointed towards its entanglement with UST and Anchor Protocol crash as Celsius was the first to cash out its 500 Million Investment from the protocol trickling a massive sell-off that resulted in the UST being depegged which then bring down the whole ecosystem but mainly most of the mistakes should be pointed out towards its investment strategy which is quite degenerated and risky at times.
First was the StakeHound incident in which the platform lost the investors’ private keys of 38,178 ETH valued at more than $72 Million being unrecoverable, analysts suggest that most of these ETH belong to Celsius. Its mistakes continue with the BadgerDAO incident in which more than $120 Million of crypto assets are lost. Of which, $51 Million of Wrapped BTC is assumed to belong to Celsius but its mistake on the Lido Protocol would seem to be the final straw.
Lido Protocol allows investors to stake their ETH to the beacon chain in exchange for stETH tokens and generate passive income until it is merged with the Ethereum main net in August. This means that stETH holds parity of value to ETH and those ETH staked can only be recovered once the merge is complete. Around June it was announced that the merger will be delayed and as the memories of UST depeg were still fresh around the corner, it was enough FUD to trigger a massive sell-off from retail investors to overleveraged institutions who are forced to liquidate their collateral to meet the debt obligations. Alameda Research and Three Arrows Capital drain most of the protocol’s liquidity pushing the price of stETH below its peg and seeing that Celsius is one of the biggest holders of stETH, it was forced to freeze withdrawals on June 12th. The CEL token dropped by more than 40 percent while the company was officially operating insolvent as its liquidity was running low and struggles to meet withdrawals. On the face of it, they have also gone balance sheet insolvent as its investors avoid saving them and have a possibility of being taken over by its competitors.
Alex Mashinsky and the Board members seem to have escaped unscathed by these events as the CEL token locked in treasury provides them a way to escape the carnage while retail investors have to face the uncertainty of ever getting their crypto asset back. Also in these times of despair, Celsius which aims to rival banks, turned to a bank themselves as Citigroup was tasked to help restructure its debts and meet its obligations to the investors.
There is hope that Celsius will have enough capital to meet its obligations but it will take some time before Canada Pension Fund and other retail investors obtain their investment back. It seems like after all this Celsius tagline “Banks are not your friends’’ seems ironic when it’s said, “Neither is Celsius your friend.”
High Yield might not be the best determining factor……
It seems like from the case of the Anchor Protocol and Celsius Network, it is clear that sometimes the promise of financial freedom clouds people’s rational mindset. The promise of having a passive income as soon as possible and achieving the extravagant life people desire clouds the idea of doing research and analyzing the risk involved. Of course, it is fair for everybody to have those desires but the question is what are we giving up to achieve them?
In a basic economy, the higher the risk, the higher the return because there is much more effort required from our side to earn the reward and this is why huge analyses are required daily by hedge funds or investors to maximize the expected profits. Why are they “expected”? That’s because the greatest analysts and investors can only predict the market and obviously cannot time the market.
This is why when somebody promises consistent huge interest rates or profits, it needs to be questioned further whether the profits are sustainable and the risks involved are justified. We as investors have to aim that all the projects we have invested in are profitable but the proper analysis should never be forgotten even with the promise of high profits. Do Your Own Research and select great projects based on their Long Term Sustainability in the future instead of a Short Term High Yield.
We from Nagaya Technologies Pte. Ltd are quite taken aback by what happened to the crypto space and hopes there is a lesson that could be learned by all of us from this incident. We understand in the development of Nagaya the importance of the risk factor which is why we decided to back up each coin with gold to maintain the stability of its value while still allowing it to grow over the long run. This hybrid concept of cryptocurrency is the first of its kind in the space and hoped that it could deliver massive sustainable value to all of you. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io
Or you can talk to us at t.me/nagayaofficial