Fall of cryptocurrencies: Celsius worse than traditional banks in risk management

Celsius worse than banksBitcoin was created in 2009 as an affront to banks. It is a response to the umpteenth interference on their part. Subsequently, cryptocurrencies as a whole have attempted to work towards more transparent services. But as they say, “Chase the natural, get back to gallop.” Therefore, despite the ideology advocated in the crypto ecosystem, companies like Celsius reproduce the same, or even worse, behavior of banks.

Celsius: a habitué at risk

On 29 June the Wall Street newspaper revealed a Celsius Lender Risk Management Survey. Spoiler: It was catastrophic.

Therefore, the service was selling to investors like “Less risky than banks, but with better returns for users”. However, this was far from the truth.

According to 2021 documents, the Wall Street Journal revealed that Celsius held $ 19 billion in assets, versus $ 1 billion in shares. Therefore, Celsius had a ratio of shareholders ‘equity to shareholders’ equity of 19 to 1. By way of comparison, the average asset-to-equity ratio of North American banks is 9 to 1.

“For unregulated companies like Celsius, the 19-1 ratio is particularly high given that some of its assets were investments in the extremely volatile cryptocurrency sector. “

Eric Budish, economist at the University of Chicago School of Business

Therefore, Celsius took on average twice as risky as traditional banks. In light of this, it’s easy to see why Celsius didn’t have room for maneuver in a bear market. Even more room for maneuver limited by the massive influx of customers willing to withdraw their funds.

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Risky loans to pay for user returns

Launched in 2018, Celsius offers a crypto savings service. Therefore, users can deposit their precious cryptocurrencies on the platform and receive a return On these.

For its part, Celsius will lend the funds to “safe” investors in exchange for an interest rate. This interest should be used to pay for user returns.

However, while Celsius presented its loans as safe and secure, risk management was again questionable.

So while the norm in DeFi is a excessively secured loansoffers Celsius under-secured loans. According to other documents analyzed by the Wall Street Journal, Celsius did not require its borrowers a guarantee of up to 50% of the borrowed amount. In total, $ 2.6 billion was lent to “institutional investors” in exchange for only 50% collateralisation. A factor that leaves little room for maneuver in the event of a market recession.

And this is where things get ugly. Rather than wisely warning about the guarantees of its institutional clients or, at worst, making them work within DeFi, Celsius has in turn used them to take out secured loans.

A leverage effect that once again divides the possible remedies in the event of a generalized decline in the markets.

In the midst of this collapse of the Celsius shelf, his boss Alex Mashinsky is making headlines after allegedly attempting to leave American soil. Information directly refuted by the communicators of Celsius.

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