Degrees Freeze, Cryptocurrency Investors Terrified

A few months ago, Mike Washburn’s cryptocurrency investment looked like a winner.

Now he only hopes to get his money back.

Washburn, a 35-year-old plumber from Otsego, Minnesota, had $100,000 in an account at Celsius Network LLC, one of the world’s largest cryptocurrency lenders. Washburn, who was recently widowed, said he and his two children had moved in with their parents and planned to buy a house with his savings. The Celsius account offered him a higher return than a traditional bank account, and the company was well known in the crypto community.

On Sunday evening, Celsius said customers could no longer withdraw money from their accounts. On Tuesday evening, the Wall Street Journal reported that Celsius had hired restructuring lawyers to help it deal with its growing financial problems.

Now Mr. Washburne is anxiously awaiting what will happen to his bill.

“If I don’t see that money again, it will set me and my kids back for years,” Washburn said.

“Deep down, I don’t think there will be a good result, but I hope I’m wrong,” he said.

Bitcoin and other cryptocurrency prices have fallen as interest rates rise and risky assets become unpopular. A tough market is forcing legacy crypto companies to cut jobs, stage mergers and block customers from withdrawing their digital investments, shocking investors.

Retail investors may not have realized that they were spending a percentage of the money they gave the company on an unsecured loan with little legal protection. Crypto companies like Celsius are in some ways similar to banks, but lack investor oversight and legal protection built into banking and brokerage.

In a blog post on Sunday evening, Celsius said it was temporarily withholding all payments, trades and transfers between accounts, citing “difficult market conditions”. According to the company’s May report, the move froze $11.8 billion in client assets. The assets were still frozen Wednesday afternoon, and Celsius Founder and CEO Alex Mashinsky tweeted that the company was “working nonstop” on the case.

It’s one of dozens of unregulated lenders that have emerged in recent years, promising high returns to investors looking to borrow their digital assets. Celsius, which has about 1.7 million customers, has paid customers an annual return of up to 18.6% on cryptocurrency deposits. Higher interest rates were available for those who wished to accept payment in PURPOSE currency.

Mr. Mashinsky founded the company in 2017, promoting Celsius as a safe alternative to banks. Mr Maszinsky, who is of Ukrainian origin, criticized banks for paying low interest rates to their customers, preferring their T-shirts which highlighted his message, including one which read “Banks are not your friends “.

Like other lenders, Celsius accepts customer deposits in cryptocurrencies and lends them to other users, including market makers and exchanges, for reimbursement. Celsius also invests customer deposits in high-return, high-risk decentralized financial investments.

How Celsius Cryptocurrency Lending Works:

put a percentage Customer deposit In decentralized financial investments and lending money to other users (including exchanges and market makers).

Customer Lend money Up to Celsius vs. fruit. (This is basically an unsecured loan.)

A percentile score come back borrowers and investments.

put a percentage Customer deposit In decentralized financial investments and lending money to other users (including exchanges and market makers).

Customer Lend money Up to Celsius vs. fruit. (This is basically an unsecured loan.)

A percentile score come back borrowers and investments.

However, Celsius faced the challenge of delivering a higher-than-promised return for clients while allowing them to withdraw their cryptocurrency investments immediately. Celsius has invested at least $470 million in an investment that has lost value, according to blockchain data and a person familiar with the matter. The terms of the Lido Finance-backed investment product prevent Celsius from rapidly disposing of assets, making it even more difficult.

Vasily Shapovalov, the creator of Lido, said he thought the token was not too risky.

Celsius accepted ether from customers and used it to purchase at least 409,000 staked ether tokens on Lido, according to a person familiar with the blockchain hardware and data that was offered for high yield. Historically, these tokens had almost the same value as ether as they represent the ether used on the Ethereum platform to process transactions and secure the chain. Celsius cannot swap its Ether-linked Ether assets until Ethereum transitions to the “Proof of Stake” model, but the timing of this transition is constantly being postponed.

However, recently, according to analytics firm Dune Analytics, Lido’s staked Aether is on sale at a discount of around 5%. The chapter begins with the recent failure of the TerraUSD cryptocurrency, prompting investors to pull out of more speculative assets.

The drop in value of these tokens caused the problem in terms of percentage. If its customers were to massively withdraw their Aether deposits, the company would have to sell its associated Aether packages at a significant loss.

Celsius’ fate seems to be changing rapidly. The company said on Friday that it has had no problems meeting its withdrawal requests and has enough Ether to meet its commitments.

Matt Novak, 35, of Sacramento, Calif., was first worried this weekend when he had trouble logging into his century-old account. I tried again a few hours later without success.

The WSJ’s Dion Rabouin explains why Wall Street is now betting so heavily on cryptocurrencies and what that means for the new asset class and its future. Photo composite: Elizabeth Smiloff

Mr. Novak said his cryptocurrency investments in his percentage account, about 5% in bitcoin and the rest in the Polygon cryptocurrency, accounted for about 60% of his pension funds. He said it was valued at around $93,000 at the start of last week, but fell to around $28,000 at the start of the week.

Novak, who runs a mortgage marketing firm, said he was attracted at the time by a 17.5% rate of return on Polygon C deposits. Before the cryptocurrency crash this week, he believed have earned at least 50% of their initial investment.

“In hindsight, it seems too good to be true,” he said.

Celsius’ decision to freeze accounts has created tension in the cryptocurrency world, helping to depress bitcoin and ether by around 15% on Monday. Digital assets have fallen 53% and 68% over the past year.

“It’s a big deal to withhold client withdrawals,” says Matthew Siegel, head of digital asset research at Van Eck Associates, which manages three crypto funds. “It tests the market.”

Individual investors in other cryptocurrencies are feeling pressure as prices fall and some are receiving margin calls to provide more collateral for their leveraged digital currency trading. Data provider CoinGlass said on Tuesday that about $690 million in guarantees pledged by about 160,223 retailers had been terminated in the past 24 hours.

Through Tuesday, the CEL token for CELIUS is down 81% year-to-date, according to research firm Messari. As the coin fell on Friday, Celsius said that “CEL’s price is often influenced by market factors that are unrelated to company performance.”

Later in the day, it was learned that Celsius had hired restructuring lawyers from the law firm Akin Jump Strauss-Heuer & Field LLP to investigate potential investor financing options and other strategic alternatives, including the financial restructuring.

Securities owned by clients of a registered brokerage firm such as Fidelity Investments are tamper-proof in bankruptcy proceedings. However, Celsius is not a registered brokerage firm.

Securities and Exchange Commission Chairman Gary Gensler has warned that investors owning cryptocurrency through trading platforms such as America’s largest cryptocurrency exchange,

Coinbase global Company ,

They are not protected in the same way as they would be if they were investing through a registered brokerage. In March, the Securities and Exchange Commission issued guidance Instruction for publicly traded crypto companies to record the digital tokens they hold for customers as assets and their liabilities to customers as liabilities.

In April, Celsius stopped offering products to “unaccredited” investors or those below a certain wealth threshold after coming under pressure from regulators.

In May, Coinbase told its customers that they could lose access to their digital assets, which happens on the stock exchange if the company goes bankrupt. The biggest uncertainty facing the cryptocurrency industry is whether digital tokens are securities such as stocks and bonds. the matter is pending before the court.

Some of the top cryptocurrency investors and founders have been selling their investments over the past year, making a profit before the recent selloff. Billionaire Mike Novogratz

Galaxy Digital Backgrounds sp zoo

A He was a seller of many cryptocurrencies According to company documents and people familiar with the matter. Earlier this year, Mr. Novogratz got a bicep tattoo of the Luna cryptocurrency and spoke positively about various cryptocurrencies at industry events.

Crypto and blockchain companies have been laying off workers in recent days. On Monday, crypto lender BlockFi said it reduced the number of people by around 20%. On Tuesday, Coinbase said it would cut nearly a fifth of its workforce because the company was growing too quickly and a possible recession “could lead to another cryptocurrency winter.” Four Senior Coinbase Officials Raised Over $1 Billion Stock Sale Since Cryptocurrency Market Started in Spring 2021 So far this year, the company’s shares have plunged 78%.

Falling cryptocurrency prices are also complicating the plans of bitcoin companies and related fields. So far this year, 42 cryptocurrency-related business acquisitions have been announced, according to Dealogic. But about two months have passed since the latest deal was announced, indicating that some companies may find it difficult to access or complete the merger until the markets clear.

write to Grzegorz Zuckerman at [email protected]

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