The crypto lending and DeFi markets could be collapsing. Reuters reports the Celsius Network (CEL) froze withdrawals and transfers because of extreme conditions on 13 June 2022.
To explain lenders, such as Celsius (CEL) freeze withdrawals and transfers when they run out of money. Celsius lends money and rewards investors with interest bearing products. Reuters provided few details on Celsius’s move.
Celsius’s Medium said withdrawals, swaps, and transfers are paused on 13 June 2022. The Medium said they took the pause because of “extreme market conditions.”
Will Celsius Collapse?
The Celsius Network (CEL) is a decentralized finance (DeFi) platform that claims to have 1.7 million users.
On 14 June 2022, Celsius claimed to have 151,534 Bitcoin (BTC) in assets and $750 million insurance on those assets. I calculate Celsius had $750 million in insurance on $3.454 billion in assets on 13 June 2022. Hence, Celsius’s insurance may not cover all of its assets.
Celsius claims individuals can earn up to 17% annual percentage yield (APY) in returns from crypto in its Earn accounts. I think the 17% APY comes from the interest on the loans. Users can pay interest of $12 rates of 12% on Celsius loans.
Celsius Promotions
They are building Celsius through mindless promotion. For example, they pay Celsius Ambassadors to promote Celsius.
In the Celsius Referral Program, individuals who talk somebody into transferring $400 to a Celsius account for 30 days can receive $50. People who refer qualified affiliates that transfer $400 to a Celsius Account for 30 days receive $50.
Skeptics will note that people can abuse these programs. For example, Joe could ask Sam to transfer $400 to Celsius. After Sam transfers the money, Joe gives him half the $50 ($25). Similarly, many of the ambassadors use YouTube and the media.
Is Celsius Over Promoted?
Essentially, Celsius uses the time-honored investment industry method of paying the media to promote its products. For example, they pay Digital Asset News and “crypoeducator” Coinbueau to promote Celsius.
The problem with this promotion is that the new customers the Referral Program brings in are not high in quality. The Ambassadors get paid for quantity not quality.
I think this resembles the mortgage industry before 2008. For example, the mortgage brokers who peddled loans to people with no jobs and no income or the poor. The brokers didn’t care if the borrower could pay the mortgage because they got their fees.
Is it a Crypto Bank Run?
Similarly, the Celsius Ambassadors could use lies to encourage people to transfer money to Celsius to get paid. Hence, some cynics will compare Celsius to a pyramid scam.
No, Celsius is not a pyramid scam. Instead, it is a platform that caters to small investors and speculators. Ordinary people speculating with money they can afford to lose. When those people get scared or need the money, they take it out.
That sounds like a classic bank run in which people pull all their money out of the bank because they are afraid they will lose it. Bank runs were one harbinger of the Great Depression. A modern variant is a silent bank run, in which speculators pull all of their money out electronically.
Historically, bank runs start with panics either rumors that a bank is out of money or somebody is about to confiscate bank accounts. Notably, the Celsius Run began after a slew of stories about crypto dying or collapsing.
Hence, hysteria drives the run on Celsius (CEL). Thus, it has little to do with Celsius’s true value. Thus, Celsius may not be collapsing.
What Value Does Celsius Have?
Mr. Market assigns some value to Celsius (CEL). For example, Celsius was the 11th most trending cryptocurrency on 13 June 2022, CoinMarketCap estimates.
However, CoinMarketCap named Celsius the 135h largest cryptocurrency, with a 63.50₵ Coin Price on 14 June 2022. CoinMarketCap gave Celsius a Market Capitalization of $166.013 million, a Fully Diluted Market Cap of $483.490 million, and a 24-Hour Market Volume of $100.583 million. They based those numbers on a Circulating Supply of 238.864 million CEL, a Maximum Supply of 696.658 million CEL and a Total Supply of 695.658 million CEL.
In contrast, CoinBase gave Celsius a Coin Price of 70₵, a $162.2 million Market Cap, and a $97.8million 24-Hour Market Volume on 14 June 2022. They based those numbers on a Circulating Supply of 238.9 million CEL. CoinBase gave Celsius an all-time high Coin Price of $8.02.
Celsius’s Flawed Business Model
In the final analysis, I think Celsius (CEL) is a poor cryptocurrency because its business model comprises paying influencers to encourage people to deposit money. I think recent events show Celsius’s business model is lousy. To explain, instead of creating assets that make money, Celsius encourages people to invest money.
Hence, Celsius works great in a strong market when investors are enthusiastic. Inevitably, when enthusiasm collapses. Celsius collapses. I think that’s a terrible business model.
My suggestion is to avoid Celsius and seek DeFi products with better business models. In particular, DeFi solutions that make money from their platforms rather than encourage investment through hype.
Originally published at https://marketmadhouse.com on June 14, 2022.
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