Crypto lending is dead

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 These posts are outdated and will not be updated due to the ongoing legal actions.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.

 

Crypto lending is at a crossroads right now, and its future is bleak.  That's unfortunate, because I posted just five days ago that lending is what would be required to "close" the crypto ecosystem and allow more merchants to pay the entire supply chain in bitcoin.  Of course, it all comes down to Celsius, but make no mistake - Gary Gensler and the SEC have a direct role in creating the current situation.


The state of Celsius

I don't need insider information to be extremely confident that Celsius is insolvent.  All I need to know is that Celsius has not published any updates since it froze its customers' assets.

If Celsius were solvent, CEO Alex Mashinsky would have sent an E-Mail that said so.

Instead, their E-Mail provided no useful information, suggesting that Celsius was freezing assets to "protect the business" or whatever the exact wording was.  Another message was sent later, stating only that they would provide updates later.  Making a false statement of solvency would have escalated the problems Mashinsky has from "losing all my houses and cars" to "going to jail."  Celsius has had 36 hours to claim that they were solvent and they have not done so, so money has almost certainly been lost.  I don't think a lot of money has been lost - probably less than 10% - but if none had been lost they would have said so.

Celsius's refusal of Nexo's buyout offer lends further credibility to the insolvency argument.  If Celsius is insolvent, by law it cannot provide preferential treatment to any class of creditors.  Compliance would involve, among other things, suspending withdrawals to prevent one group of creditors from withdrawing first, and refusing all buyout offers that only propose to buy part of the business - as Nexo did with its offer to purchase its "secured loan portfolio."

I've stated many times in forum posts elsewhere that the number-one priority right now is that someone needs to sue Celsius IMMEDIATELY to force the company to halt operations.  The company is paying thousands of employees every day to answer phone calls and develop software for a company that has no future.  Every day the company operates, additional creditors (employees) are being generated and depositors' assets are being diluted by the wage debts owed to the employees.  The labor costs need to be stopped now.  I could understand if a judge ruled against such a request, but I don't understand why nobody has hired a lawyer to request an injunction at all.


Three possibilities

Let's suppose, for a moment, that Celsius has some possibility of not being insolvent and actually is "illiquid," meaning that it has the money but that the money is locked up in term loans, one of the possibilities that I suggested as a potential cause of insolvency in the "crypto interest" guide.  The one certainty is that as a business, Celsius is done.  Its brand is worth zero, and nobody is ever going to deposit money to Celsius again.  If withdrawals were ever to open as before, people would immediately begin pulling out everything they owned.  All of the money from the loans that Celsius is able to call at that point would then be exhausted, leading to another withdrawal freeze until more loans are called.  These freezes would destroy whatever goodwill Celsius has left.

Celsius is either solvent and illiquid (which will result in company failure with all customer money being returned), or insolvent (which will result in bankruptcy with some customer money being returned, likely in 2030 or later).  Either way, the losses will result in catastrophic knock-on effects for years to come.


Effects on the industry

My impression is that the markets have not "priced in" the impending doom that will come when Celsius announces its insolvency, because most articles report simply on the "suspension of withdrawals" and make it sound as if they will someday "un-suspend" them.  Therefore, the immediate impact will probably be the final capitulation for this cycle, which will occur when the news breaks that Celsius has, indeed, lost customer money.  Don't be surprised to see bitcoins worth between $9800 and $15,000, and ETH between $600 and $900, during that final 30-minute V-bottom fire sale that marks the trend reversal.  This only happens once every two years are so, and it is the time when millionaires are made.

In the medium term, the impact will be even more industry-wide layoffs.  We were fortunate to only have $250,000 frozen at Celsius, and I had a discussion yesterday with our employees about how we still had enough reserve to continue as normal.  Unfortunately, many companies themselves had more funds at Celsius and are now insolvent.  Expect to see failures of businesses like smaller exchanges, mining pools, and perhaps even non-crypto companies that had their working capital at Celsius.  It doesn't matter if, as I think is probable, Celsius is 95% solvent, because these companies can't wait a decade for the lawsuits to play out.

Within the next year, I would expect many De-Fi projects to fail.  Celsius had assets invested with many De-Fi projects and the bankruptcy trustee will be tasked with preserving as much value as possible.  As we saw with Mt. Gox, the trustees generally make very poor decisions, having sold bitcoins to dollars years ago and losing billions of dollars as a result.  When the trustee sells the De-Fi tokens, those projects will fail because many of these projects fund development by paying in the tokens.

In the long term, it will be a longer time before the next cycle begins.  It took four years for the next high to be reached after Mt. Gox failed, but the failure of Celsius is on a scale 20-30 times larger than that of Mt. Gox.  And Celsius is not like the failure of Terra, because in the case of Terra and Luna, people purchased coins and those coins crashed, similar to how people who bought SHIBA INU tokens lost money when their value declined as well (and by more than that of Terra.)  The difference between Celsius and the failure of coins is that people who buy coins still have the coins they paid for, while people who deposited money at Celsius currently have nothing.


Effects on lending

The lending companies are being crushed by Celsius's failure.  Ledn, in fact, already sent a notice yesterday stating that they have "proof of reserves," probably in an attempt to prevent a rush of withdrawals.

The problem is many people like me are required to withdrawal money from Ledn now - not because I believe there is any issue with Ledn, but because I need that money to make up for the losses sustained at Celsius.  Ledn is a quality organization that primarily lends to Genesis, another quality organization.

And even if I didn't need the money due to the Celsius losses, I would still probably withdrawal to get money out before they become "illiquid" due to other people's withdrawals.  This case wouldn't be a true bank run, because  unlike banks that rehypothenticate assets endlessly, the money is still there.  But it would be locked up in loans that couldn't be called on short notice.  By combination of these two reasons, the loan portfolios of all the lenders are going to dramatically shrink.

Then, there is the permanent reputational damage to everyone involved with lending, Celsius or not.  A decade later, "not your keys, not your coins" is a mantra that came out of the Mt. Gox era and which guides behavior to this day.  A large number of people, even those who lost no money, will never again trust cryptocurrency lenders or will demand high interest rates that will put pressure on the industry's viability.


The SEC is partially responsible

A large part of the current situation comes back to Gary Gensler and his Securities and Exchange Commission.  In 2021, Gensler settled with BlockFi over its lending products, in large part because the company did not file the required paperwork and licenses.  BlockFi, while it had some issues, was not insolvent and had owners with a trustworthy history.  The sole and only reason that we sent money to Celsius, a company which I believed and wrote was one of the least trustworthy of all the lending companies, was because Gensler's actions caused US customers to have to settle for those companies that weren't afraid of him.

That's what happens when regulators go overboard.  In general, prohibitive laws don't usually prevent people from taking specific actions; instead, they force activity underground.  In states where cannabis is legal, high-quality weed is grown in farms.  In other states, marijuana is often contaminated with other drugs, being sold by street dealers.  In the lending case, Gensler removed the opportunity for customers to make informed decisions about which company to send their money to, because the only options left were those that were known to be less trustworthy.

As if that's not enough, Nexo, which is not based in the United States, was the company that offered to buy out Celsius, and despite not being subject to US regulations, seems poised to take the #1 position in whatever remains of the lending market.


Conclusion

In short: crypto lending is dead, except for people who have at least $10m.  The failure of Celsius is going to have wide-ranging effects on the lending markets that it's difficult to see how BlockFi, which has already cut 20% of its staff, Ledn, and others survive at all.  Expect at least one more final capitulation in coin prices, business failures of companies that had money at Celsius, and a delay in the start of the next cycle.


An offer

Finally, I made an offer elsewhere and will repeat here that we will sell our $250,000 in Celsius debt for 65 cents on the dollar, meaning that you could earn $87,500 if Celsius reopens withdrawals soon. After authenticating each other and signing a contract, we will provide you with the username, password, and 2FA code to the accounts, as well as a promise that PROHASHING will forward you any payouts from a court. This deal would be especially attractive for insiders who have insight into Celsius's finances, and to those who agree with me that Celsius probably is 90% solvent and are willing to wait. Submit a support ticket if you're interested.