The Celsius Network case, an example of cryptocurrency risk for the uninitiated

The Celsius Network case, an example of cryptocurrency risk for the uninitiated

After the collapse of the Terra ecosystem (LUNA), several platforms found themselves in difficulty. In particular, the iconic Celsius network, which was recently valued at $ 4 billion, has suspended withdrawals from its customers.

The rumor spread for several days. He told himself that the Celsius Network platform was in great financial difficulties and that a default was imminent. This was through a tweet on Monday, June 13, 2022 confirmed the newshowever, without going as far as rumor has it.

Celsius has therefore announced that the withdrawal and transfer of assets between accounts has been suspended. For customers, this means that they can no longer withdraw their cryptocurrencies from Celsius or even transfer them to each other. In other words, the client’s assets are frozen, without returning to normal. While Celsius is at its most advanced, other platforms are also suffering, showing the fragility of a still very young sector.

The collapse of the Terra ecosystem (LUNA), the main reason for the difficulties of the Celsius network (CEL)

Celsius Network is a regulated US platform that specializes in lending and borrowing digital assets. Lenders can deposit their assets there, which are lent to borrowers or which Celsius launches on behalf of its customers.

In exchange, creditors receive interest, which can reach more than 10% per annum. This interest is usually paid to CEL, Celsius Network’s native token.

If Celsius is the most famous platform of this type, there are others, such as the Bulgarian Nexo and the American BlockFi. In addition, many common sharing platforms offer these features. After several fundraisers, Celsius is valued at more than $ 4 billion because it provides easy access to sophisticated decentralized finance (DeFi).

Will Anchor, the Terra Protocol (LUNA), lead to the collapse of the Celsius Network (CEL)?

To achieve a profit of 10%, Celsius invests its funds, as well as its customers’ funds in decentralized financial protocols. Some offer a yield of about 50% per year or even more. But, as they say, the greater the profit, the greater the risk. Therefore, it is possible that the token used to pay for the return will fall to zero.

And that’s exactly what happened to Anchor. The latter is a protocol of the Terra ecosystem, also specializes in lending. Users deposited their UST, Stablecoin Terra, which was to copy the US dollar and earn 20% per annum. For several months, this performance did not change, which added confidence in the protocol and attracted new users.

The only problem, many did not know how UST and Terra work. Parity with the dollar was guided by a complex algorithm that could not cope with falling prices and mass sales. Immediate consequence: UST and LUNA, the native Terra token, are reduced to almost 0.

Those who invested in these assets lost everything. Celsius too. However, the platform did not report these large-scale investments in Anchor. Due to the sharp fall in prices in recent days, Celsius is running out of money, and he feels that he has no choice but to block customers’ funds. As a direct result, the CEL price has lost 90% of its value since the July 2021 high.

For the same reasons, the lesser-known Invictus Capital platform, which specializes in creating cryptocurrency funds, is also in great difficulty. Finally, a sharp drop in prices on Monday, June 13, 2022, also led to a temporary suspension of the withdrawal of bitcoins (BTC) on Binance and Crypto.com. However, if the decline is mainly due to the current situation, it was highlighted by the news about Celsius.

False promise of fulfillment

Many quotes are attributed to Warren Buffett, including: “When the tide comes in, you can see who was swimming naked.” Swimming naked is usually what these platforms do, promising potentially volatile profits. However, Celsius and others warn that these profits are not guaranteed. However, these warnings are much less noticeable than the rate of return.

Decentralized financing is a real breakthrough for individuals, especially those who cannot get a bank loan. Moreover, traditional finance is very interested in DeFi. However, we must not forget that she is still a growing child: she learns by making mistakes. As a rule, it is usually a mistake in the judgments of many, because the protocol can not work in the face of falling prices and sales.

Future regulation?

The collapse of the Terra ecosystem, caused by the loss of stablecoin parity, worries regulators thinking about passing laws. In Europe, as in the United States, we mention the obligation to guarantee 100% in cash. Thus, for 10 issued stablecoins you need 10 dollars in a bank account.

But the collapse of markets could also lead to wider regulation of platforms such as Celsius, which could even lead to their ban. However, some of its platforms are more serious, starting with Nexo, which also offers buy back the assets of Celsius customers. Similarly, French platforms can play a role in a healthier ecosystem.

But while regulation is important, it should not hinder innovation. However, many fear the introduction of overly restrictive regulation in Europe, particularly with the European Cryptocurrency Regulation (MiCA) project, the final version of which could quickly succeed.