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Crypto Collapse: what happened with Celsius and why?

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Are you also curious about what’s happening of recent in the cryptocurrency sphere? Although some of the more popular coins like Bitcoin and Ethereum have failed to disappoint, there is no doubt that this new decade has seen some of the worst rug pulls imaginable.

People have lost thousands of dollars to crypto scams and fails, and it is raising questions. For instance, what happened with Celsius and why?

If you used this crypto lending and interest-bearing platform in its glory days, you probably received an email around 10:20 pm on the 12th of June, a Sunday night.

At this point, most would be expected to be relaxing, scrolling through social media, watching a show, or getting ready for bed, in preparation for the new week. Then, the email that warns you about the impending inability to transfer, withdraw, and swap funds, comes in.

If you were a recipient of such news when a significant portion of your life savings lies in one of their defaulting accounts, it is easy to be devastated. This was the fate that befell those who relied on Celsius’ crypto lending platform for the extremely attractive interest rates.

It is no crime for cryptocurrency lending platforms to use high interest rates of up to 20% to entice users. However, without transparency and accountability, should you trust a project? And now, cryptocurrency investors are arising and claiming they have made losses that are beyond comprehension.

Celsius is another reminder that cryptocurrency investors can’t just go where the wind blows. Speaking realistically, cryptocurrency traders with much to lose place their monies with care and serious consideration because of the potential of something like this happening.

However, it would have been tricky to see the episode with Celsius coming, considering that the crypto lending platform was religiously faithful with its massive payouts.

Consistency was also a bonus, and the fact that the owner, Alex Mashinsky, showed up on air consistently every Friday to talk about his crypto lending platform. Such seeming transparency inspired many to trust the services offered.

So, where does that leave the advantage of transparency and accountability when these are the bedrocks upon which the concept of decentralized finance is built?

Bear in mind that the collapse of Voyager happened barely two weeks before the devastating news that investors could no longer withdraw their assets from the Celsius platform. Nine days after Voyager filed for Chapter 11 Bankruptcy protection, Celsius followed suit.

It can be challenging, but your gut is something you should trust more than a coin or a cryptocurrency exchange. This is an area many of the investors from the Celsius crash are berating themselves about.

Imagine a bank that gives you a weekly return of 7 to 20 percent interest on the money in your account. Hard to imagine, right?

This was the selling point Celsius used, and it was truly believable. They were loyal to their payouts, and their user base grew rapidly because of the trust the DeFi platform was gradually building.

If you had significant cryptocurrency, instead of allowing it to sit unused in your crypto wallet, Celsius provided you with the mouth-watering option of acting as a decentralized finance creditor of some sort.

But what the world didn’t know, or perhaps failed to pay attention to, was the lack of clear regulation about this type of financial service. There is currently no law protecting a lender like this.

What you don’t know is the gravity of the risk that is being taken in this type of investment. There is no assurance that your funds are safe, and if the crypto keys are not in your custody, the fact remains that they are unsafe elsewhere.

Defeating the essence of decentralized finance is providing your tokens to an unregulated third party to protect or grow those funds for you.

The problem probably started before the middle of April, when it became impossible for users to increase their portfolios or earn rewards. Note that this platform took cryptocurrency from interested participants, lent the assets to companies and larger investors, and returned massive profits to trusting parties.

Stablecoins like USDT, Tether, and USDC, as well as Bitcoins and altcoins such as Ethereum and Solana, could be loaned for massive returns.

Therefore, it only makes sense that the collapse of Tether in May would also massively affect the exchange platform. However, there was little investors could do because the malfunction with the system had already started beforehand.

Unfortunately, Celsius is bankrupt and will run out of cash by October. Even the ever-alert and risk-conscious long-term cryptocurrency traders couldn’t have seen this coming, considering that many put their trust and thousands of dollars in the experimental DeFi bank.

The principle upon which it ran was straightforward and reasonable, but perhaps it was unsustainable. And the Terra price crash made things even worse because it resulted in the loss of billions of dollars, and a large portion of it would have been sitting in the custody of an exchange like Celsius.

A crash in cryptocurrency prices will affect the balance in your portfolio if you have invested in it. So, it is only expected that the same will happen with a lending platform like Celsius.

Celsius owes $4.7 billion, which it may be unable to repay its users. If you have lost some coins to the market collapse, you may have to give up entirely.

This form of transfer of ownership makes you an unsecured creditor. The law hasn’t circulated the crypto sphere, so you are not protected per se.

Although some resemblances exist between Celsius and the traditional banking system, they are not regulated the same way. If anything, Celsius was more unregulated than regulated, which does not provide the security needed for the massive funds invested in the platform.

The US Securities and Exchange Commission has not decided whether cryptocurrency should be listed as commodities or securities. Until then, your investments are still in risky hands.

Why did Celsius file for bankruptcy?

The problem appears to be general, as Celsius was the third company to file for bankruptcy in the space of two weeks.

Crypto enthusiasts were excited when Bitcoin reached $69,000, and it appeared as though the sky was the starting point. However, since attaining its all-time high in November 2021, things have been on a downward trend, leading to a 70 percent reduction in price.

High interest rates on borrowing and a bunch of other worldwide brouhahas have led to a reduction in the global stock market. It is affecting cryptocurrencies too.

External factors also haven’t been favorable towards Bitcoin and digital assets; government policies and economic directions threaten to throw it off course.

Bitcoin and other cryptocurrencies are volatile, an advantage that is also a disadvantage or the proverbial double-edged sword. Traders make massive gains from trading the up and down movements of the price.

In the same vein, these frequent highs and lows cause alarming losses, as seen with the recent Celsius and Voyager incidences. Considering such characteristic fluctuations, it is safe to conclude that it would truly be difficult for a bank structure or the services it offers to survive. Think about it – to receive your weekly interests, the prices have to keep growing, not fluctuating.

Bitcoin and other cryptocurrencies are promising, but attacks on them are nonstop. From China’s embargo to Russia’s anti-crypto policies, to all-too-frequent rug pulls, it appears as if the crypto market is under attack from every angle.

It is also important to mention the environmental effects of mining cryptocurrencies. The latest digital token projects aim to consume less energy, but premier coins like Bitcoin and Ethereum, which are also the most stable and popular, consume the most energy.

The concept of decentralized finance is lovely and promising. Still, until a way to stabilize the fluctuations and reduce the environmental impacts of mining is found, the progress crypto enthusiasts crave may never come.

Surely you would agree that it is almost unfeasible for a decentralized finance bank to erupt and grow based on these fluctuations.

Terra was a stablecoin that yielded interest for investors who held inactive USDT. You could earn as much as 9% to 11% on coins you lent to Celsius, and this was an appealing offer to small and large crypto investors. But Terra collapsed because it was tricky managing USDT, a stablecoin, on decentralized and centralized trading platforms.

The price crash that’s been consistent since the beginning of the year has deeply affected the cryptocurrency market, bringing it to trade below its usual $1 trillion worth since it gained popularity.

It is inevitable for such steep fluctuations and price reductions to affect lending platforms, considering that they thrive on the growth of digital assets.

You want to know why Celsius filed for bankruptcy?

The volume of payouts was too great compared to the losses taken as a result of price crashes. The complete demolition of Terra made things even worse, damning hundreds of users to massive losses. 

How to prevent future losses

In cryptocurrency, there is a common saying that you should avoid investing more than you can afford to lose. From recent happenings, particularly with the Celsius project, it is safe to say that you can apply that principle to anything decentralized finance related.

It’s not that the vision is illegitimate or non-feasible. However, the problem is that cryptocurrency is still at its beginning stages and will be more prone to trials and errors.

Suffice it to say; that it is better to invest in projects that you believe in, those that offer longevity and solve a problem in the world.

Options like Bitcoin and Ethereum are popular, but that does not even mean they will also survive the crashes that are starting to stay associated with the crypto market. However, they have been around for nearly a decade and may be safe investing choices. Your gut feeling can also help you prevent future losses.

In addition, it is also best to understand how crypto wallets work. Cold storage seems to be the better option because it gives you complete control over your keys.

If your crypto keys are in your possession, you determine what happens to them. They are already an investment, so you don’t need a third party to grow your coins. After all, that is what decentralized finance is all about.

It dissolves the need for a third party in financial transactions, and following that principle to the letter would have saved billions of dollars worth of assets.

Let’s face it – exchanges like Voyage and Celsius are third-party arrangements or services. They take cryptocurrency from you and lend it to others for interest. Then, you get a considerable share of the money earned, and everyone’s happy.

Of course, a bank cannot offer this kind of service because it will be a disservice to them. However, the difference between centralized and decentralized finance, seen as a disadvantage before, is now an advantage.

The lack of centralized regulations now works in disfavor for those that trusted in decentralized finance regarding the Celsius collapse. Cryptocurrency is a new faction of the world. And despite being worth billions of dollars, no exact regulations bind it or protect users.

Crypto experts rely on the whitepaper, the roadmap, tokenomics, and the seeming transparency of the developing team. But these are just words, and without laws to back them up, your funds are not exactly safe. This is why experts recommend that your investments in the crypto market be no larger than 5% of the overall amount you’re willing to set aside for your future.

Careful investment choices may help mitigate future losses. Unfortunately, the collapse of Celsius may spell the end of the funds invested in the DeFi platform. Thousands of Ether and Bitcoin have been lost, and there appears to be no hope.

It is no secret that civil lawsuits are lengthy and often waste time and resources. So, at best, victims of the massive crypto crash can only learn from this experience. Crypto is a volatile market, down to the services associated with it.

Perhaps the vision of decentralized finance will pull through these rough stages and truly solve future transactional problems. In retrospect, perhaps not.

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