Potential crisis looming at Celsius

(From Peter Huang)

This $3 billion crypto company was teasing that it might be valued at $10 billion this year.

Is it headed for a huge crisis instead?

First, some definitions:

1. Celsius: An app where lots of people put their crypto to earn rewards
2. Staking: Locking up some of your tokens (e.g., ETH) to help the blockchain (e.g., Ethereum) operate
3. Liquid staking: Some party gives you another token in exchange for your staking. This token is meant to be a claim on the staked token: at some point, you can swap the liquid staking token back for your original. This lets you spend and do stuff with your staked tokens even while they're locked up.

Users have deposited something like $3.8 billion into Celsius. We're now sort of afraid that Celsius might run into trouble.

Celsius holds ~1 million ETH in the bank – that's ~$1.6-1.8 billion depending on the day. The problem is that only 27% is in actual ETH.

The rest is locked up in ETH2 staking, which won't unlock for at least a year, or is stored as stETH, which is a liquid staking token.

Remember: stETH is not ETH itself – rather, you'll be able to convert stETH to ETH whenever ETH2 staking unlocks. But it's unclear when that date is.

People generally viewed stETH as low-risk – there's only downside if the Ethereum chain implodes entirely or never completes its transition to proof of stake and unlocks the staked tokens. Because of this, stETH has so far been valued as equal to 1 ETH.

What's the issue? In summary, people are pulling their money out of Celsius. Latest estimate is something like 50K of ETH ($80-90 million) is leaving Celsius every week.

There's only about 270K of actual ETH. If this continues for another ~5 weeks, Celsius has some tough choices to make.

Oh, the other problem? Celsius took out $1 billion of loans using customers' ETH/stETH as collateral.

If push comes to shove, Celsius will have to sell the stETH, which can cause 1 stETH to be worth less than 1 ETH if they sell enough. Depending on how far the price of stETH falls, this could cause their loans to get liquidated.

(Worth mentioning: there are other big players who hold lots of stETH. If they dump their stETH, that could cause Celsius loans to be in trouble, too.)

I doubt Celsius will just watch all this happen. They will probably just disable withdrawals when it gets risky. But never good to have big problems looming.

This is just the latest in "safe" tokens being challenged post-UST/LUNA. USDT was under threat as people started to pull money out of crypto.

Now stETH, which was viewed as generally safe ("It's all tied to securing Ethereum, and Ethereum isn't going away!") and probably will be just fine given enough time, is starting to drop in price.

The problem is that players like Celsius are going to get caught in the window when it's not fine at all.

Ref: https://www.linkedin.com/feed/update/urn:li:activity:6941378981409542144/