Why Celsius Network’s Crypto Dropped Over 15% Today

What happened

The crypto token Celsius (CRYPTO: CEL), the primary currency of crypto lending platform Celsius Network, is down 15.5% in the past 24 hours as of 4:30 p.m. ET. The company is in the midst of bankruptcy proceedings, and recent filings with the court overseeing those proceedings show a pretty ugly track record.

However, the Celsius token has surged from its lows in the last month since the company filed for protection. It looks like crypto traders are speculating on some kind of reprieve for the company, although Celsius’s business appears to be completely broken at this point.

So what

The news that has the crypto market talking for the past couple of days is Celsius’ balance sheet, which was recently filed in the US Bankruptcy Court for the Southern District of New York. As of July 14, 2022 (the day after Celsius filed for bankruptcy and about a month after freezing client asset withdrawals), Celsius revealed that it had $170 million in cash and $1.75 billion in additional dollars in cryptocurrency, but user liabilities were $4.72 billion (counting up to a shortfall of $2.8 billion).

That compares to $110 million in cash and $14.56 billion in cryptocurrencies as of March 30, 2022, offset by $16.54 billion in user debts (i.e. a shortfall of $1.87 billion). To be sure, a roughly equal balance between customer loans and deposits is not unusual banking activity. However, Celsius has never claimed to be a normal bank that holds stable fiat currency. These were customer deposits and loans denominated in cryptocurrency – an asset class that everyone knows has extremely volatile prices on good days.

Basically, an extra dose of banking conservatism from Celsius could have gone a long way in preventing a meltdown. The massive decline in Celsius’ asset balance has been attributed to the following:

  • User withdrawals: $1.9 billion
  • Loans repurchased or liquidated: $1.9 billion
  • Crypto liquidated by third parties (including, Attached): $900 million
  • Crypto lost investments: $100 million
  • The crypto market drops: $12.3 billion (Bitcoin was down 59% from March 30 to July 13, 2022)

In a nutshell, Celsius will have completely turned its pockets in a few months if it is not able to radically restructure itself.

Now what

Celsius’ plan for the future is to try to stabilize the business while negotiating with creditors, and he thinks he can mine Bitcoin to help with funding. Additional funds could be raised through the sale of assets. However, if all goes according to plan, retail investors who had funds on deposit with Celsius will likely be presented with two options:

  1. Get some money back, but at a lower price than what they had on sale
  2. Stay ‘long’ in their crypto and hope the market turns

Given the dire straits the crypto lender currently finds itself in, neither option looks great. But at the very least, there is a plan and a hope of recovering at least some funds. Stay tuned for more information.

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Nicholas Rossolillo has positions in Bitcoin. Its customers can own the mentioned cryptocurrencies. The Motley Fool has posts and recommends Bitcoin. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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