Celsius Network, a cryptocurrency lending platform, was one of the first crypto institutions to be hit by the bear market in mid-2022. The company's liquidation process is now entering its next phase, and Celsius is removing nearly half a billion USD in staked Ethereum that generated passive income for creditors over the past year.
Celsius Network established itself as one of the leading cryptocurrency lending platforms before the numerous collapses in 2022. What flourished as a highly profitable business during the bull market turned out to be a ticking time bomb in the ensuing crisis. Numerous Celsius counterparties went bankrupt, leaving the platform with billions in liabilities to its users, mostly in Bitcoin (BTC) and Ethereum (ETH). By withdrawing the staked Ethereum, Celsius aims to take another step towards repaying its customers.
Poor balance sheet management leads to Celsius collapse
Celsius was a classic cryptocurrency lending platform. Customers could open interest-bearing accounts with cryptocurrencies, and Celsius paid them an attractive double-digit percentage return. Behind the scenes, the platform used the deposited assets to provide liquidity to decentralised protocols such as Terra's Anchor protocol. On the other hand, Celsius lent money to hedge funds and market makers such as Three Arrows Capital. After the numerous collapses, Celsius did not have the necessary funds to meet customer withdrawals. In July 2002, Celsius filed for Chapter 11 bankruptcy.
The collapse affected around 600,000 accounts with liabilities of over USD 4.2 billion, according to court documents. At the peak of the market in November 2021, Celsius held over $10 billion, but now has just $1.5 billion. Celsius has been selling Ethereum (ETH) worth several hundred million USD for several months.
Celsius profile of on-chain analytics platform Arkham / Source: Arkham Intelligence
Celsius liquidates Ethereum stake
For more than a year, Celsius was one of the largest Ethereum stakers with around 470 million USD. Staking refers to the process of depositing a certain amount of Ether (ETH) into a smart contract to support the operation of the network. In return, stakers receive a return of 4-6% per year - in the case of Celsius, around USD 23 million. Now, Celsius has decided to withdraw the staked Ethereum in order to "ensure sufficient liquidity in preparation for possible distributions".
In preparation of any asset distributions, Celsius has started the process of recalling and rebalancing assets to ensure ample liquidity
— Celsius (@CelsiusNetwork) January 4, 2024
A rapid sale of all Ether (ETH) could have some impact on the market. According to blockchain analytics firm Nansen, nearly a third of the ETH in the current withdrawal queue belongs to Celsius. For example, liquid staking derivatives (LSDs), such as Lido's staked ETH (stETH), rely on timely withdrawals.