Another crypto lending and Celsius update

In light of the collapse of the crypto interest industry in November 2022, PROHASHING and author Steve Sokolowski are commencing litigation against multiple lenders and individuals discussed in these articles. These posts are outdated and will not be updated due to the ongoing legal actions. You should not rely on the information presented here. PROHASHING and the author are no longer able to respond to comments and support tickets regarding crypto interest companies.

 

I said in an earlier post that I would discuss the results of a survey on June 25.  To obtain more responses, I decided to delay publication of those results for a few days; please consider answering the survey at https://s.surveyplanet.com/l18fwqrn so your opinions can be considered in that post.

Meanwhile, events are moving at light speed now in the crypto lending markets, so I decided to instead write about what we now know about Celsius's financial state, the likely course of events during Celsius's insolvency proceedings, and how those events will affect other lending platforms.


What we know now

In the past week, several critical facts have emerged in the Celsius saga.  First, Goldman Sachs is apparently raising money to purchase "distressed assets" in a Celsius bankruptcy case.  Note that the confusion as to whether the Goldman Sachs situation is "fake news" or not probably simply results from the erroneous impression that many had that Goldman Sachs was making a "deal" to save Celsius, which was not ever the case.  Second, multiple lawyers and companies, some associated with Citi, have recommended that Celsius file for bankruptcy.  It's not clear what type of bankruptcy they hope to file, but the effects on the industry will be devastating regardless of whether Celsius selects Chapter 11 (a renegotiation with creditors) or Chapter 7 (a liquidation.)


Assets under management

It's hard to obtain clear estimates about how much Celsius owns and owes, but in May, they stated that there were $12 billion in "assets under management."  The price of bitcoins was 2/3 what it was in May at the time of Celsius's failure, so their assets at that time were likely closer to $8 billion, if nobody had made any withdrawals.  We don't know how many withdrawals were actually made during that time, but let's say that the run pulled 25% of their good assets from the books, so they were left with $6 billion in assets.

This $6b total, because they would be incentivized to publish as large a number as possible, likely includes uncollectable debts that Celsius knew about at the time the company published the figure, not even considering additional debts that have become uncollectable since then.  Therefore, there are four questions remaining: of the $6b, how much is:

• Actual money, like coins in cold wallets
• Collectable and valuable debts, like collateralized loans that can be called back or liquidated
• Uncollectable and worthless debts, like money lent to insolvent firms like 3 Arrows
• Money that never existed, due to mistakes, hacks, accounting tricks, or outright fraud

Celsius also owns additional assets which definitely have value, like its mining equipment that it uses to mine bitcoins.  Alex Mashinksy was quoted as stating that the company owns 22,000 S19 miners, which if able to be purchased off eBay today would be worth $77m.


Assertions

My first assertion is that we will most likely find out as the bankruptcy case unfolds that Celsius has very little actual money (like coins or dollars in cold wallets and bank accounts) remaining.  Feel free to point me to evidence that shows coins on the blockchain worth more than $2b.  I've seen twitter analyses totaling $1b or $1.2b, but that amount is nowhere close to the amount required to pay.  For example, in ETH alone, a CoinDesk analysis shows that only 50% of Celsius depositors' ETH is accounted for, with a majority of that being less valuable staked Ether.

My second assertion is that we may find out that Celsius became insolvent months or years ago, and tried to keep the company afloat long after they could no longer pay their debts.  They may have used debts they knew were bad or questionable to state that they were solvent.

My third assertion is that the majority of Celsius's debt is bad.  They do have collateralized loans, but insolvent companies like 3 Arrows probably owe Celsius far larger amounts of money.  If 3 Arrows is one of the creditors, the 3 Arrows bankruptcy and the bankruptcies of other Celsius debtors will drag out for years, delaying when the final judgement is decided.  If Celsius gave 3 Arrows an uncollateralized loan, that would explain how there is such a huge shortfall in assets.  Celsius never disclosed that it gave uncollateralized loans to borrowers, which if true would then explain why CEO Alex Mashinsky seems so rattled, because he could face criminal charges.

My final assertion is that Celsius has hired many people who were later suspected to have been involved in other criminal activity, like the potential money launderer in Israel who was fired.  Therefore, there could be more additional outright fraud involved that caused losses related to those other executives who Celsius irresponsibly hired.


Supporting evidence

Why would I make these assertions?  The most compelling evidence is simple: nobody has provided a serious offer to bail Celsius out.

Voyager and BlockFi, despite it not being called that in their press releases, were bailed out.  When a bank is running low on funds, it can seek out loans to be able to pay out the withdrawals, in the hope that the withdrawals will stop and then the loans can be paid back once the people who owe the bank money repay it.  Those two firms made serious mistakes and will likely fail (see below), but depositors won't lose money because their finances are solid other than for the mistakes they already made.  In Voyager's case, for example, 3 Arrows owes Voyager $650m, so a loan from FTX for most of that amount was sufficient to prop up Voyager.

My #1 rule is that when something doesn't make sense, someone knows something that isn't public.  What must be hidden is that Celsius has such a catastrophic shortfall that nobody can afford a large enough loan to make depositors whole.


Celsius is worthless

One can calculate  that Goldman Sachs wants to spend $2b on Celsius's assets, and the assets claimed to be owed are probably at least $6b.  Therefore, the math doesn't compute.  Goldman Sachs isn't trying to takeover the company.  They want to buy stuff on the cheap, like:

• Their 22,000 S19 SHA-256 ASIC miners that are currently worth $77,000,000 if sold on eBay
• Any commercial real estate they own, assuming it isn't leased
• Contracts of employees who have great talent, like star developers, who Goldman can reassign to banking tasks in their other operations
• Collateralized loans
• Source code and intellectual property, if it isn't too specific to Celsius's business model
• Coins in cold storage, which would be treated as property

Then there are things that have no value or negative value, like:

• The Celsius brand, which is toxic
• All the debt owed to the uncollateralized depositors
• Unknown liabilities for fraud claims

The outcome that makes the most sense is that Celsius will declare chapter 7 bankruptcy.  It doesn't make sense for them to file chapter 11, which is for corporations that want to continue operating as a business.  The Celsius brand has no value, and people would just withdrawal all their money, so chapter 11 is pointless.  And, of course, chapter 11 is also pointless because the entire industry is headed south, as described in a later section.

Goldman Sachs will spend the $2b to buy everything that Celsius owns that has value, likely at a fire sale at half the value those assets should be worth.  Then, the bankruptcy court will settle with the insolvent companies that owe Celsius money at a huge loss; say for another $250m on $1b owed.  Now, we have something like $2.25b out of $6b owed to depositors.  All of that money goes into a large pot.  From that pot comes the legal fees, which will be greater than $100m, payments to people who have preferred payouts in the case of bankruptcy, and all sorts of other debts.  Depositors will be second-to-last in line; the employees who Celsius continued to pay for the past two weeks for no reason probably reduced the fund by millions of dollars in wage debts.

If one third of the money is leftover for depositors, that would be a miracle.  By comparison, in the Mt. Gox case, people were trading claims at a ratio of 0.14 to 0.17 back in the late teens, and the current estimate for claims payouts, whenever they happen, is 0.236 - and Mt. Gox was a very unusual bankruptcy case in that so many assets were available.


The dollar factor

The big factor in the Celsius bankruptcy is the issue of how many countries, including the United States, don't treat cryptocurrencies as actual currency.  They believe that only US dollars have value, and the cryptocurrencies would be exchanged for dollars, similar to how the Silk Road assets were auctioned off in 2014 for the absurd price of $600/bitcoin.

The court will force the sale of all the coins at current prices, and the case will then languish for 15 years.  It wouldn't even be unheard of for a case to drag on longer; the Exxon Valdez oil spill case from 1989 lasted 26 years.  Using Mt. Gox as an example, that company's bankruptcy is expected to conclude no earlier than 2026, 12 years after the events that led to the case.  Depending on the price of bitcoin at the time, Celsius may be one of the top 25 largest bankruptcies in the history of the United States, so many depositors will be dead before it is resolved.  

By the time the case is settled, ETH is more likely to be worth $10,000 than the current $1,000, and the court will pay out much less valuable dollars to the creditors, just as the Mt. Gox trustee is forcing creditors to accept some payouts in yen.  When the depreciation of the dollar is considered, depositors will earn far less than whatever ratio the bankruptcy court claims to pay.


Long-term effects

The long-term effects of this bankruptcy on the lending market will be grave.  Nexo may have understood the implications of Celsius's insolvency when it tried to buy loans from Celsius.

I personally will never go on a cruise again because I learned what happens when a deadly disease breaks out on a ship.  Imagine if you are a cruise operator, and ships run by other companies keep having outbreaks of COVID-19, as happened in 2021 when cruises restarted and which continues to happen to this day.  Even though your company's safety protocols are clean, people like me remember those who were trapped on the Diamond Princess.  We now prefer to travel to land-based destinations where we can make our own decisions in the case of an outbreak, and there's nothing your company can do to convince us to go on a cruise.  The actions of your competitors conditioned us to consider a risk we had never worried about before, and we can never be completely certain that your safety protocols are perfect.

That's the situation the crypto lending industry is now in.  Retail lenders like BlockFi, Ledn, and Voyager are all going out of business; at the very least, expect additional mass layoffs within weeks.  Depositors in these services won't necessarily lose their money, but the actions of one of their competitors have caused everyone to consider a risk they did not fear before.  Mt. Gox, when its problems occurred, made people much less likely to hold money on any exchange, and that fear is pervasive to this day.  The change in general risk assessment has already been reflected in the interest rates I refinanced with Genesis, where I'm now earning twice as much interest as I was a month ago.


Price effects

On the other hand, the price of bitcoin should begin to recover after an initial crash on the day that the bankruptcy filing is announced.  Markets like certainty, and Celsius has likely the largest value of missing assets of all the insolvent firms right now.  The ETH/BTC ratio might remain suppressed, not only because bitcoin tends to recover more quickly after these big crashes, but also because Goldman or whoever comes into possession of the ETH will likely want to unload it for dollars as quickly as possible.


Celsius sale

As a reminder, if you have disagreed with this series of posts and believe a bailout is coming, I'm willing to sell PROHASHING's Celsius debt to you.  There are multiple accounts on offer for a total of $250,000.  I started at an offer of 80% a week ago, and will now begin negotiations at 25%.  Feel free to submit a support ticket to help@prohashing.com if you're interested.