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How crypto lender Celsius stumbled on risky bank-like investments

By Hannah Lang, Carolina Mandl and Elizabeth Howcroft

(Reuters) – Celsius Network, the retail crypto lending platform whose liquidity problems have sent cryptocurrencies plunging, stumbled on complex investments in the wholesale digital asset market in what analysts say was akin to a traditional bank run.

Citing extreme market conditions, New Jersey-based Celsius this week froze withdrawals and transfers between accounts “to stabilize liquidity.” In a video on Friday, the company’s finance chief said Celsius, along with the industry, had seen redemptions rise following the collapse of cryptocurrency TerraUSD in May.

Cryptocurrencies have since lost over $400 billion in value.

Similar to a bank, Celsius gathers crypto deposits from retail customers and invests them in the equivalent of the wholesale crypto market, including “decentralized finance” or DeFi sites that use blockchain technology to offer services from loans to insurance outside the traditional financial sector.

Unlike banks, Celsius promises retail customers huge returns, sometimes as much as 18.6% annually. The lure of big profits has led individual investors to pour assets into Celsius and platforms like it. Its CEO Alex Mashinsky said in October Celsius had $25 billion in assets, although that had fallen to around $11.8 billion as of last month, its website showed.

Celsius appears to have stumbled on its wholesale crypto investments, according to public blockchain information and analysts who track such data. As those investments soured, the company was unable to meet redemptions from customers fleeing amid the broader crypto market slump, analysts said.

“This is the closest we’ve seen to a bank run” in the cryptocurrency sector, said Noelle Acheson, head of market insights at Genesis, a digital currency prime brokerage.

Mashinsky and a representative for Celsius did not respond to requests for comment. The company said on Sunday it was taking steps to meet redemptions but “there may be delays.”

Celsius’ problems date back to at least December when, at the hands of hackers, it lost $54 million worth of bitcoin it had invested with DeFi platform BadgerDao, according to public blockchain data. At the time, Mashinsky said Celsius lost money, but did not disclose how much.

Celsius had also invested in the Anchor protocol which offered up to 20% returns on deposits of TerraUSD. As TerraUSD fell, Celsius pulled more than $535 million in crypto assets from Anchor, according to public blockchain data.

Mashinsky said in a May interview https://www.youtube.com/watch?v=eRlNlNlaFi8&t=42s that its exposure to TerraUSD was small relative to its assets but did not say if the company had lost money.

The company’s biggest misstep, though, appears to have been its decision to invest customers’ ether tokens with Lido Finance, a DeFi platform offering investors the chance to profit from a new version of ether that is in development. The investments are known as “staked” ether, or stETH.

Celsius promised customers between 6% and 8% returns on ether deposits. It had at least $450 million in stETH in its primary DeFi wallet, but likely has more stored elsewhere, according to Andrew Thurman, an analyst at analytics firm Nansen, which tracks blockchain data.

While one stETH is supposed to be redeemable for one ether, stETH’s price has dropped compared to ether in recent weeks as the crypto market fall prompted holders to dump their stETH.

That discrepancy will have made it difficult for Celsius to convert its stETH back to ether to meet customer withdrawals, said analysts.

“Everybody … could see that they had positions that were significantly under risk,” said Thurman.

The slump in bitcoin, which has shed about half its value this year, has also pressured Celsius. It pledged crypto assets pegged to bitcoin as collateral against a loan of other cryptocurrencies, according to Thurman. As bitcoin fell, Celsius had to top up that collateral, said Thurman.

In 2019, Mashinsky told the Financial Times that Celsius had crypto loans collateralized with bitcoin.

“The whole thing is just mispriced risk,” Cory Klippsten, CEO of crypto investment platform Swan Bitcoin, said of Celsius’ business model.

CONTAGION WORRIES

Celsius has hired restructuring lawyers, the Wall Street Journal reported Tuesday. Its problems have sparked fears that other crypto lending platforms may be at risk of investor runs.

On Tuesday, the chair of the U.S. Securities and Exchange Commission said such platforms operate a bit like banks and that promised high returns might be “too good to be true.”

Celsius’ peers have been quick to distance themselves from stETH. On Monday, New Jersey-based BlockFi tweeted it does not hold any stETH principally or as collateral. Voyager Digital, also New Jersey-based, tweeted it has never engaged in DeFi lending activities and has no exposure to stETH.

But according to Thurman, several other crypto lending platforms, such as Aave, invest in stETH and pledge it as collateral. If it continues to drop relative to ether, there is a “risk of pretty significant liquidations.”

Aave did not respond to requests for comment.

(Reporting by Hannah Lang in Washington, Elizabeth Howcroft in London and Carolina Mandl in New York Additional reporting by Tom Wilson in London; Editing by Michelle Price and Mark Potter)

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Cryptoverse: 10 billion reasons bitcoin could become a reserve currency

By Lisa Pauline Mattackal and Medha Singh

(Reuters) – A crypto platform’s pledge to amass $10 billion worth of bitcoin to back its own “stablecoin” is firing up the market. It’s part of a wider movement to crown bitcoin as the reserve currency of a new age.

Seoul-based Terraform Labs has so far built up nearly 40,000 bitcoin worth $1.7 billion in a series of purchases via a non-profit affiliate, Luna Foundation Guard, according to publicly available blockchain data.

The spree follows Terraform co-founder Do Kwon’s announcement on Twitter last month https://twitter.com/stablekwon/status/1506278298883706882 that the project would buy the $10 billion worth of bitcoin reserves to underpin TerraUSD, breaking ranks with other large stablecoins – a ballooning class of cryptocurrencies that aim to minimise wild price swings and are typically backed by U.S. dollar reserves.

A stablecoin backed by bitcoin reserves, according to Kwon, “will open a new monetary era of the Bitcoin standard”, referencing the gold standard that formed the backbone of global finance about a century ago.

The acquisitions, and the anticipation of more to come, are supporting the price of bitcoin, with some market players identifying them as a big driver of bitcoin’s climb back towards $48,000 at the end of March. More significant, perhaps, is whether others will follow Terraform’s lead.

“Buying $10 billion worth can move the price in the short term,” said Sid Powell, CEO of Sydney-based crypto lender Maple Finance. “But over the longer period, it’s more what it signals – that bitcoin has been introduced as the hottest form of collateral backing for currencies.”

Yet other market participants cautioned that an ever-closer embrace between bitcoin and stablecoins like TerraUSD could introduce a new risk for crypto markets that raised the prospect of a “death spiral” for investors down the line.

Either way, it’ll be worth watching.

In the short term, too, there are pitfalls.

“There is a danger some people are trying to position long ahead of the buying which could exaggerate a fall if the price starts to retrace,” said Richard Usher, head of OTC trading at crypto firm BCB Group in London, who attributed bitcoin’s gains last month to an improving risk environment.

Vetle Lunde, analyst at Norway-based crypto research firm Arcane Research who is tracking the Terra project purchases, estimates that, to reach an initial $3 billion in reserves, it could eventually hold between 60,000 to 70,000 bitcoin.

That would surpass Tesla’s 43,200 bitcoin https://bitcointreasuries.net, the public company with the second largest bitcoin stockpile behind MicroStrategy.

Terraform Labs didn’t respond to a request for comment.

EARTH AND MOON

Stablecoins are rapidly gaining ground. They’re a common medium of exchange and often used by traders seeking to move funds around and speculate on other cryptocurrencies.

For example, it is much easier to swap tether – the biggest and most mature stablecoin – for bitcoin or other crypto, than it is to swap U.S. dollars for bitcoin.

A year ago, tether’s market cap $44.5 billion, while upstart TerraUSD’s was $1.76 billion. They have since risen about 85% and 850% respectively to stand at $82.3 billion and $16.7 billion, according to CoinMarketCap.

TerraUSD is now the fourth-largest stablecoin and, like its peers, is pegged to the dollar. However, while the likes of Tether and USD Coin have reserves in traditional assets which they say match the value of tokens in circulation, TerraUSD maintains its 1:1 dollar peg through an algorithm that moderates supply and demand in a complex process that involves the use of another balancing token, Luna.

The bitcoin reserves theoretically add another level of reassurance, while keeping the Terra project decentralised.

“Backing it with something as predictable – not from a price perspective but from a rules and governing perspective – as bitcoin brings a lot of confidence to people,” said Matthew Sigel, head of digital assets research at VanEck in New York.

He said he expected other algorithmic stablecoins to follow Terra’s lead and back up their coins with reserves of bitcoin, and even other crypto tokens, if the experiment succeeds.

THE DEATH SPIRAL

However, not all algorithmic stable coins have been stable in the past, with some losing their peg and collapsing in value.

“There is still much work to be done and regulatory uncertainties to overcome regarding algorithmic stablecoins and their resistance to a collapse in contractions, which might cause a so-called ‘death spiral’,” said Carlos Gonzalez Campo, an analyst at 21Shares in Switzerland.

“This phenomenon refers to a theoretical vicious circle where UST (TerraUSD) contraction leads to LUNA being minted and declining in price, which leads to fear and more UST redemptions,” he said, comparing this to a bank run.

This is what the bitcoin reserve is meant to avoid, but it could also cause wider contagion.

“It’s far better to have some reserve outside of luna because otherwise you’re very exposed to its performance and that can make everything break as we’ve seen with other algorithmic stablecoins,” said Arcane’s Lunde.

“But I’m a bit concerned about the long-term structural effects this may have on luna and on bitcoin. If things really start to break up, and they have 70,000 bitcoin in reserves they want to use to settle the market and maintain the peg, it might have implications for the entire market.”

(The story is updated to correct figure to $3 billion in paragraph 11)

(Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru; Editing by Alun John and Pravin Char)

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DOGE Surges 16% As Tesla Starts Accepting the Cryptocurrency

CEO Elon Musk, who has long had an informal association with the meme coin project, also marked the occasion on Twitter.

Dogecoin (DOGE) Price Chart: TradingView

Musk first revealed that Tesla would add support for Dogecoin in Dec. 2021, which predictably sent the value of the token up. The payments are limited to merchandise purchases, but that hasn’t stopped the cryptocurrency market from clamoring for DOGE. The asset has been on a steady upward trend in the past week, up roughly 23% from the start.

Items that can be purchased from the Tesla merchandise store include a Cyberquad for kids, a Giga Texas belt buckle, and a cyberwhistle. The price of these items range from approximately $57 to $2,296, with the Cyberquad being the most expensive item.

Tesla is no stranger to adding cryptocurrency payment options to its stores. The company added Bitcoin payment support for its electric vehicle lineup in 2021, though it was suspended after concerns relating to the energy consumption of Bitcoin mining. However, reports have emerged that Tesla will resume accepting bitcoin payments, though there has been no confirmation yet.

Meme Coins Remain One To Watch in 2022

2021 was an eventful year for meme coins, with both Dogecoin and Shiba Inu experiencing quick rises and drops as they grabbed the attention of the mainstream public. Critics and analysts have cited that meme coins are risky, given their fickle nature, but that hasn’t stopped new crypto investors from trying to cash in.

Meme coins are of a special nature, and they don’t ascribe neatly to typical market rules. Thus, when it does experience high, rapid volatility, it results in both great profits and losses for investors. 2022 may be yet another year of such activity.

Lawmakers are also paying closer attention to meme coins, being especially concerned about investor protection. In Jun. 2021, Thailand banned meme coins as a result of the public frenzy for them. Whether other countries will follow suit remains to be seen, but there will certainly be more rules to control volatility and ensure investor protection.