Celsius melts as ether smoked

History repeats itself, first as tragedy, second as this:

Veterans of the GFC will be familiar with the tactic here, which is to loudly advertise a hostile takeover as a way of shoring up systemic confidence during a bank run. A messy liquidation of Celsius would floor crypto markets and kill confidence among investors, who are already smelling contagion in every technical snafu. So it is better for Nexo to present itself as Bank of America to Celsius’ Merrill Lynch.

Celsius is a sort-of bank in the sense that it borrows crypto from its customers and then lends it to market makers, or to investors taking short positions. Its deposit base has been been bleeding out ever since the ‘crowded-elevator’ problem of token staking was painfully exposed by the collapse of the terra-luna algorithmic unstablecoin.

Another crypto selloff over the weekend meant that Celsius was forced to gate either because it is functionally insolvent (ie, unable to pay debts as they fall due) or balance sheet insolvent (ie, unable to pay debts whenever they fall due).

But which is it?

The value of Celsius’s own coin, which has crashed a peak of $8 in June 2021 to below 20 cents, shows which way the market has been voting:

Though it’s worth noting that its potential rescuer has followed a similar trajectory:

We have yet to hear from Celsius founder Alex Mashinsky, whose methods of bolstering confidence have previously relied on meandering market updates and calling FUD on any criticism . . . 

. . . But with redemptions now locked, it’s really not inconceivable to think that the immediate problem is solvency rather than liquidity.

Celsius operates a prop desk for speculative trading of crypto (though it has denied gambling with customer assets). The company also has a balance sheet position of its own coin and is further exposed to the market through loans from key investor Tether.

“If bitcoin drops, they give us a margin call [and then] we have to give them more bitcoin,” Mashinsky told the FT last year.

A closely connected crisis has been happening in ether, which is down almost 30 per cent since Friday. Celsius was reportedly holding around $1.5bn in steth, a staked version of Etherium’s native token that is backed one-for-one against its future iteration.

Steth is in effect a bond that is redeemable at face value when (or if) Ethereum completes a long promised and much delayed switch of its blockchain from proof-of-work mining to the less wasteful proof-of-stake concept. In advance of this happening, customers of the Lido Finance platform have been lending eth and in return getting steth plus a yield.

Once the Ethereum upgrade known as The Merge goes live, investors can redeem steth for eth 2.0. In the meantime they can trade in a secondary market called Curve, a token swap service that uses liquidity pools rather than trade matching.

But the liquidity pool has made transparent the old problem of more sellers than buyers. Perhaps confidence in The Merge ever happening has withered, or perhaps in a falling market the funds tied up in steth are needed urgently elsewhere.

Whichever way, a rush for the exits means that at pixel time more than 80 per cent of Curve’s pool is steth:

And the community has grown paranoid about big investors bailing. On June 9, addresses linked to Alameda Research, a crypto trading firm founded by FTX’s Sam Bankman-Fried, sold nearly 50,000 steth.

A viral Twitter thread from Small Cap Scientist calls this “the canary in the coalmine”. Steth de-pegged sharply from eth a day later and the discount has continued to widen:

© Coinmarketcap

Breaking the peg “raises concerns that if clients try to redeem positions, Celsius will run out of liquid funds to pay them back,” says Marcus Sotiriou, an analyst at digital asset broker GlobalBlock. “They are taking massive loans against their illiquid positions to pay out their customer redemptions, but they could run out of funds within five weeks.”

FTX has also reportedly been Celsius’s choice of safe harbour, because nothing is more centralised than DeFi once numbers turn red:

Of course, any GFC parallel can only go so far. Compared against 2008-09 the crypto winter lacks a global governance framework, deposit insurance, motivated politicians, etc.

An unravelling of Celsius would be messy for crypto (and ruinous for bagholders). The news might plausibly have just helped push the S&P 500 into a bear market and will strengthen the usual calls for regulation. But at the systemic level it still looks more like farce than tragedy, since the only concrete promises Celsius ever made to customers were preppy invocations to “unbank yourself”: