What happened to Celsius, the crypto lender?

The crypto market was shaken again in June 2022 due to a groundbreaking announcement made by the Celsius crypto platform. The company announced that it will no longer allow users to withdraw, trade or transfer account balances.

What is Celsius?

Celsius is a centralized lending and borrowing platform that has been around since 2017. Users can deposit crypto assets on the Celsius platform to earn generous interest rates, or they can use them as collateral for loans .

Users can also purchase Celsius' native CEL token, which gives them access to higher promised interest rates and better borrowing rates.

Celsius is similar to other centralized platforms like BlockFi and Nexo that allow users to earn interest on their crypto holdings. These companies act in the same way as banks. They use the deposited crypto to generate profits.

Celsius takes user deposits and lends them to other institutions, crypto exchanges and protocols DeFi at a higher interest rate than what it offers its users and keeps the difference.

Why the announcement is important

In a May 2022 report, Celsius revealed that it had approximately $12 billion in assets under management and nearly 1,7 million clients. This number likely dropped due to the selloff that swept across the entire crypto sector in mid-2022.

In short, Celsius is facing a liquidity crisis. The company assessed its assets and realized that if every customer were to withdraw their balances, they wouldn't have enough cash to pay them off.

According to the announcement on Celsius's website, the decision to halt withdrawals was made in an effort to reposition Celsius so that it can honor future withdrawal requests and navigate these tumultuous market conditions.

Subsequently, this announcement sparked a small-scale bank rush into the market and among Celsius's other competitors. Bank runs occur when depositors withdraw their money en masse out of fear that the institution will become insolvent.

These high interest rates carried a risk

It should be mentioned that such centralized platforms like Celsius, BlockFi, and Nexo are not government-backed. Although the interest rates offered by these companies are attractive, they are not without risk. Users should never allocate all of their assets on these platforms.

As Celsius proves, they're not as safe as they seem.

Cryptocurrency investors should opt to keep their balances in their own wallets (digital or hardware) and withdraw them from exchanges and platforms for maximum protection. It doesn't protect against falling prices, but it does prevent investors from avoiding a situation like the one Celsius customers find themselves in now.