14 Jun 2022

Celsius blocks withdrawals as market fear Celsius insolvency

On Monday, fear of Celsius insolvency and contagion-related risks to a potential Celsius insolvency ignited further downward pressure in an already extended sell-off.
Source: Tradingview (Coinbase, Lido)
On Monday morning, Celsius announced pausing of withdrawals citing the extreme market conditions. Celsius has previously attracted customers by offering higher yields than its main competitors. This offering has likely been enabled due to Celsius being involved in more exotic yield strategies than their peers. Celsius has lost funds in two major exploits over the last year, losing $70m in Stakehound in May 2021 and $54m in the BadgerDAO hack in December.Speculations have escalated over the last month that Celsius has been exposed to insolvency risks, in particular following the UST collapse. Celsius has heavy exposure to ETH 2.0 through various investments. Either through staking ETH on the beacon chain or through holding Lido’s more liquid alternative stETH. Over the weekend, the stETH pair discount compared to ETH grew as Alameda Research redeemed 50,000 stETH for ETH, exacerbating the fears of imminent insolvency of Celsius due to further limiting Celsius’ liquidity related to allowing users to withdraw ETH. Near to medium term, this situation may lead Celsius to be exposed to bank-run-driven insolvency, as a majority of the organization's ETH reserves is either illiquid until the merge or trading in relatively illiquid markets. Still, the Celsius situation remains relatively unclear at the moment. Their problems could extend beyond fear of a bank-run driven insolvency. Additionally, they do have other positions possibly at risk given further headwinds in the market, such as their WBTC position. Further, the pausing of withdrawals may be burdensome for institutions with funds locked in Celsius. As the situation unfolds, risks related to cross-protocol contagion are potent.
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