What Is Celsius? Why Is It Crashing the Crypto Market?

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A difficult year for cryptocurrency investors has become even more challenging after crypto lender Celsius Network (CEL) announced a pause on all account withdrawals and transfers.

The Celsius news heightened growing market fears and mistrust surrounding crypto, sending the price of Bitcoin down more than 13% to under $24,000, a new 52-week low.

What Is Celsius?

Celsius operates somewhat like a traditional bank, albeit one for crypto rather than fiat currency. Until this week, it was considered among the most successful parts of the decentralized finance (DeFi) movement.

As of May 17, Celsius claimed that it had 1.7 million users and assets under management (AUM) of $11.7 billion. The company said that it has made more than $8 billion in loans, and until recently had offered extremely high annual percentage yields (APYs) of up to 18% on cryptocurrency deposits.

There is very little formal evidence or regulatory filings from Celsius to support these claims regarding the company’s user base or AUM.

On Monday morning, Celsius posted a memo informing users that it had frozen their assets.

“Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts,” read the statement. “We are taking this necessary action for the benefit of our entire community to stabilize liquidity and operations while we take steps to preserve and protect assets.”

Celsius is no stranger to controversy. Earlier this year, the platform stopped offering interest-bearing accounts to non-accredited investors following pressures from regulators.

Last year, the states of Alabama, New Jersey and Texas filed orders against Celsius for allegedly selling unregistered securities to its users.

Celsius also has its own digital token CEL, which it sold to raise $50 million in funding in 2018. The price of CEL is down 46% in the past 24 hours and is now down 97%, as of this writing.

Why Celsius Matters for Crypto

Cryptocurrency prices have been pressured throughout 2022 as markets retreated in the face of persistently high inflation and aggressive Federal Reserve interest rate hikes. There has been persistent selling pressure in the crypto market and for other risk assets.

Negative sentiment surrounding crypto was compounded in May when Luna, which is associated with the stablecoin TerraUSD (UST), completely collapsed after UST lost its $1 peg.

The collapse of Luna and TerraUSD wiped out $60 billion in investor value. More ominously, it undermined confidence in the entire cryptocurrency market, which already had a reputation for extreme volatility and rampant speculation.

Some crypto experts accused Celsius Network of contributing to the collapse of Luna, but Celsius has denied those claims.

Just hours before Celsius announced its asset freeze, its CEO Alex Mashinsky lashed out on Twitter at a user comparing reports of locked accounts at Celsius to the situation at Luna.

In response to the comparisons, Mashinsky accused the user of spreading “misinformation” and “FUD,” a popular crypto community acronym for “fear, uncertainty and doubt.”

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Crypto Market Contagion

Cryptocurrency investors may be concerned about potential contagion spreading to other crypto platforms, similar to the type of mass withdrawals that can occur during bank runs.

Omid Malekan, an adjunct professor at the Columbia Business School who teaches classes on cryptocurrency and blockchain, said the uncertainty surrounding the Celsius situation contributes to bearish crypto market sentiment.

“Their potential insolvency matters to all crypto investors because they were a major player who had assets deployed on multiple DeFi protocols on different blockchains. If it is forced into full-on liquidation, then the withdrawal of those assets may begin a chain reaction of falling prices and forced liquidations for other DeFi users,” Malekan says.

However, Marcus Sotiriou, analyst at U.K.-based digital asset broker GlobalBlock, says Celsius may not even be the biggest driver of Monday’s crypto market weakness.

“Despite the fear, uncertainty and doubt the Celsius debacle has caused, the sell-off started at the beginning of the weekend on Friday, after the U.S. inflation data was released,” Sotiriou says.

The Labor Department reported an 8.6% rise in the Consumer Price Index index for May, the highest inflation reading since 1981.

“I think this is a bigger contributor to the decline we have seen, as it results in a more hawkish Federal Reserve – they are now forced to remove more liquidity from the market to bring down inflation,” Sotiriou says.

Last week, U.S. Securities and Exchange Commission (SEC) chair Gary Gensler also called out certain cryptocurrency exchanges for “potentially operating outside the law” as the SEC develops regulatory frameworks for the crypto market.

Gensler said Bitcoin operates like a commodity, but most other tokens operate like securities, making them subject to similar SEC regulations as investment funds.

What’s Next For Celsius?

While Celsius users await an update from the company on if and when they can regain access to their assets, rival crypto lending platform Nexo tweeted a letter of intent expressing interest in buying Celsius’ assets. The Nexo letter did not include an offer price.

Celsius said it hopes to lift its freezes “as quickly as possible.”