We’re in the midst of an intriguing cryptocurrency bear market, to say the least. In the past few months, there have been several high-profile crashes such as TerraUSD algorithmic stablecoin, Three Arrows Capital crypto hedge fund and Celsius Network crypto lender. While overall macro events take some responsibility for the failure of these organizations, there’s more to it than that.
Because of their non-sustainable business model as well as risky off-platform activities, Celsius has left a void in the cryptocurrency lending market. Celsius’ bankruptcy trial is now over. Analysts are gathering to learn what went wrong, and how they can help crypto lenders improve their sustainability.
What caused the collapse of Celsius Network?
Celsius, the crypto lending platform, filed for bankruptcy last week. This was not surprising. Ever since Celsius froze its user’s assets a few weeks ago, it was just a matter of time before the once powerful lending platform collapsed. How did they arrive at this point?
Celsius had $25 billion of assets under its management last year according to CEO Alex Mashinsky. This number has fallen to $156million. Celsius owes approximately $4.7 million to customers and a mystery $1.2 billion hole on its balance sheet. This implosion can be traced back to leverage.
Blockchain researchers used on-chain data to theorize Celsius allegedly used DeFi protocols for yield farming strategies with its client’s funds. Celsius is well-known for its high return to clients who held cryptocurrency on its platforms. Now, we’re learning this yield came from these off-platform, DeFi yield farming strategies.
Adding to the case, Nic Carter from venture capital firm Castle Island Ventures went on CNBC to suggest Celsius were “subsidizing it [the yields]To get clients to the door, they took losses. They were generating fake returns that were subsidized. They pulled in returns from [Ponzi schemes].
There are many risks associated with lending funds to DeFi protocol. First, the protocol risk, smart contract risk, and exposure to volatile markets are all possible. Several macroeconomic events resulted in market volatility, crashing crypto prices, and liquidating Celsius’s risky loans in the process. It resulted in the permanent loss of client funds.
Comment did the market respond?
Partly, financial markets are driven by emotions. When there is fear, the prices fall. Prices rise when there’s too much greed. A classic example of mass fear inducing is the Celsius incident. Celsius was one of many investors who were unaware that the 2022 crypto market bear run had abruptly ended.
Fearful investors began to withdraw liquidity faster from Celsius than the other users depositing it. To preserve any liquidity left, Celsius was forced to lock out withdrawals. Leveraged long positions that they held were liquidated when the market crashed further.
Celsius is no more. The CEL token of Celsius is trading for around 70c, down from $8 just a year ago. There is a lot of fear in the cryptocurrency market. Bad business practices of companies like Celsius are a large factor in this. It’s a perfect storm for a long, cold bear market. This is the one we’re currently experiencing.
We all know that prices change in waves. There will be a recovery and better times ahead. The perfect time for crypto lenders is to take stock of their business models and find a better way forward. This will help them avoid future disasters.
What crypto lending could do for the future
Client funds can be used to invest in risky investments. This is not new. We’ve seen this many times in both traditional financial markets and within the cryptocurrency industry. The results can be disastrous when this strategy is unsuccessful. Crypto lending is a niche that has some risk. This risk can be mitigated by a more sustainable business model. YouHodler is an example of a European FinTech platform.
YouHodler began as a cryptocurrency lending platform in 2018. It has evolved into a multifaceted digital wallet, exchange, yield-generation tool, and crypto trading system. YouHodler provides yield on crypto deposits, but it is not the same as Celsius.
Speaking with CoinTelegraph in a live “ask me anything” session, YouHodler CEO Ilya Volkov revealed key aspects of YouHodler’s business model that other crypto lenders can use for inspiration.
Volkov states that Youhodler is a “self-sufficient” platform that is not backed by an initial coin offering (ICO) or venture capitalization. Client funds are never placed under anyone’s management besides YouHodler.
“We keep all client operations within the platform and have zero connections to other DeFi protocols,” said Volkov. “We realize this results in more conservative returns for our clients but ultimately, it is a more secure and sustainable approach to yield generation. Protecting our client’s funds is a primary goal of ours.”
YouHodler is also big on never “over-promising and under-delivering.” The company takes a realistic approach to expectations. For example, the current market environment caused YouHodler to decrease the maximum amount that each client can earn a yield – from $100,000 to $25,000. While it’s an inconvenience to some clients, it’s a necessary move to keep operations working efficiently. These amounts will increase once the market is stable.
Although bear markets can be difficult, there are ways to make them work. Market panic is rampant, as you can see now. Celsius didn’t help that panic nor did the high inflation, key rate hikes from central banks, and the constant talks of a global recession. Companies like YouHodler, however, were founded in bear markets before they became thriving.
Without a doubt, this current “crypto winter” will produce new innovative solutions to our most important financial problems. They should be approached with an increased focus on sustainability and less about pure profit. The market can only mature to its full potential if it is treated with sustainability.