The value of a Celsius bankruptcy claim

Celsius Network's July 13 bankruptcy announcement provided few details into the operations of the company.  The full filing that appeared on July 14, for the first time, finally provides additional insight into the problems at Celsius.  Many media outlets have provided a very high-level summary of the filing itself, but I'm not aware of any that have looked at the numbers and tried to estimate how much money depositors might receive.  I spent hours reading all 61 pages, so let's change that here.

 

New revelations

About a quarter of the bankruptcy filing consists of useless background information about cryptocurrencies that everyone already knew or could learn by searching the Internet.  Another quarter covers Celsius's products and services.  Most of the information found in that section was also posted on Celsius's website.

The other half reveals a shocking level of dishonesty and mismanagement that, had it been public knowledge, few would have wanted anything to do with.  The courts will be deciding for years to come whether the revelations in the document can be called "fraud."  I don't see how Alex Mashinsky avoids losing everything he owns in personal bankruptcy.  His best case scenario at this point is being able to stay out of jail, which probably explains why he has disappeared from the media for months.

Here is some of the new information that came to light in this document.

 

Investors either cared very little or they were defrauded

The impression gained from reading this document is that the "Silicon Valley" model of investing, where one doesn't really care about whether the business actually earns any money, was alive and well with Celsius.  In December 2021, according to the document, investors poured $600m into Celsius for 20% of the company.  Apparently, BNK to the Future, the platform that has been proposing various "rescue plans," allowed smaller investors to buy shares in Celsius at one point.

Either the investors didn't know what was published in this document, or they simply believed that they could, using the "Silicon Valley" method, sell the business to the next "Series C" round of investors before Celsius drowned in its debts. 

However, it seems unlikely to me that every investor knew of Celsius's true financial state and somehow every one of them kept quiet about the true financial situation.  Celsius has had hundreds of millions of dollars in bad debt owed by EquitiesFirst for some time.  If the investors didn't know when they bought in, that constitutes fraud, which may impose criminal liability on management.

 

Celsius was probably insolvent for a long time

On page 27, the growth of Celsius is described in the following verbatim quote:

Celsius is a young company in a novel and developing industry that experienced rapid growth and popularity in 2020 and 2021, resulting in growing pains [emphasis mine] along the way.  During its growth, the Company suffered a series of losses that impacted its ability to match its assets and liabilities. 

Thus, in the bankruptcy filing, Celsius admits that its problems began years ago, well before the current price crash.  Later in the document, Celsius admits that it did not follow its own policies to engage in "market-neutral" strategies, and because of that, a lot of money was lost when the price of cryptocurrencies started to rise.  Later in the filing, the company admitted it was "learning from its problems" in 2021 and 2022, implying that Celsius may have been insolvent as early as sometime in 2021.

From the filing, it appears that Celsius apparently did not follow the rules it laid out for itself in company policy and in its advertising to depositors.  Not only did the company ignore its own policies, it continued to do so even after it knew that ignoring the policies was causing the company to lose money on risky investments.

Lawyers are going to be investigating whether Alex Mashinsky knowingly engaged in insolvent trading with Celsius.  If he was, and from the balance of probabilities in this evidence it seems so, his entire personal fortune could be forfeit to depositors.

 

A significant portion of Celsius's losses were not caused by bad investments

Celsius lost a lot of money due to poor lending and investing decisions, but as much as half of the missing money was caused by other companies doing astonishingly stupid and irresponsible things.  Often, some third or fourth party was involved, and Celsius had no relationship with the company where the money went missing.

In one case, Celsius took out a collaterialized loan from lending platform EquitiesFirst, and EquitiesFirst somehow "lost" Celsius's collateral.  EquitiesFirst lends money using stocks as collateral, and expanded into cryptocurrency lending in 2016.  Celsius found itself owed $509 million by this company, because the company did not return the collateral.  The company paid Celsius a paltry $5m/month (1%) for a little over a year, making barely a dent in the balance.  I predict that EquitiesFirst will enter liquidation, as this $400 million balance, some of which is owed in bitcoins which are rising in value every day, is not going to stand well with creditors.  This step will mark one of the first ways in which the cryptocurrency crisis enters the legacy financial system.

In another instance, Celsius staked Ethereum with StakeHound, which lost 35,000 ETH when the company it used for custody of its customers' ETH "misplaced" the keys.

 

Criminal activities

I and PROHASHING have never lost a single coin we have been in custody of - ever, across nine years - after paying out and storing hundreds of millions of dollars.  It's not even close; we never spent a single minute searching for misplaced keys, suing custody providers, fixing broken hardware wallets, or doing anything else.  I intentionally added this in red: it is not difficult to secure private keys.  Print out a paper wallet, make several copies, put them in different locations, and move on with your day.  In my opinion, it's long past time that a criminal investigation should be opened every time the "loss," "misplacement," or "theft" of private keys is revealed.

The number of companies involved in this industry, and particularly in this case of Celsius, who "lose" money in "bad investments" and "hacks" and "mistakes" doesn't pass the smell test.  The Celsius bankruptcy is almost certainly going to bring to light a breathtaking amount of criminal activity involving companies with whom Celsius deposited, whether or not the crimes had anything to do with Celsius.  Anyone who was involved with Celsius at all should be worried right now about what's going to come to light in the coming legal storm.

You can make bad investments and lose a few million dollars.  Perhaps others don't share what I consider common sense, but to me it's unimaginable how EquitiesFirst can provide a collateralized loan and then somehow lose half a billion dollars of the borrower's collateral.  As to Celsius's other investments, you can't follow the letter of the law or even anything close to the law and have a billion dollars disappear.  Losing so much money requires intentional theft or repeatedly, tens or hundreds of times, intentionally making poor decisions and still doing the same thing over.  Losing so much money just doesn't follow common sense, and rule #1 is that when something doesn't make sense, it's probably because there is something you don't know.  

 

Celsius, or at least Alex Mashinsky, did not appear to have a basic understanding of the ETH2 upgrade plan

Mashinsky repeatedly refers to the Ethereum "Merge" in the bankruptcy filing.  Unfortunately for him, the Merge had, and will have, no impact whatsoever on the way the Ethereum network works, other than replacing miners with stakers.  The Merge will not magically add capacity or unlock staked ether.  Sharding will do that.  Sharding is likely two additional major upgrades away, is far more complicated than proof-of-stake, and is unlikely to be released fully until at least 2025.

Given that 73% of Celsius's ether was locked up in staking contracts, it may be reasonable to wonder if the managers at Celsius erroneously believed that the Merge would allow ether to be unstaked.  Judging by the discussion on Celsius-related forums and twitter posts, many Celsius depositors don't understand the basic concept of sharding either.

 

Celsius was indeed damaged by 3 Arrows

Prior to the bankruptcy filing, it was unclear how 3 Arrows' problems were related to Celsius.  Celsius never mentioned 3 Arrows, and Celsius was not in the headlines regarding the 3 Arrows liquidation case.  Many assumed that 3 Arrows had brought down Voyager and also caused losses to BlockFi, but that Celsius's problems were caused by other issues.  Now, Celsius does admit that 3 Arrows owes the company $40.6 million.

Celsius also admits that the company, far from emerging with "minor damage" as they claimed from the Terra collapse, lost almost $15.8 million to slippage as Terra declined.

 

Celsius tries to place the blame on "rumors"

Celsius spends significant time discussing rumors circulating about its own balance sheets, and the bankruptcy filing clearly attempts to blame Internet commenters for its woes.  Unfortunately for Celsius, most of the rumors that it discusses, such that depositors could be treated as unsecured creditors, that Celsius was on the verge of filing for bankruptcy, and that Celsius had lost money in the Terra collapse, were all true.  Celsius tries to shift blame by claiming that the rumors were false because some commenters were claiming Celsius had lost "hundreds of millions" of dollars rather than tens of millions.

Mashinsky also displays bad faith by claiming that KeyFi, a company that sued Celsius, was doing so in an "attempt to generate distrust among the Company's users," when KeyFi's lawsuit and statements do not support Mashinsky's claim.

 

Celsius believes it can somehow recover

The most ridiculous section in the entire document covers how Celsius proposes to recover from bankruptcy and create a "viable exit from chapter 11."  There's no reason to write several paragraphs to refute this idea.  The irresponsibility that may constitute criminal activity revealed in this document destroyed the Celsius brand.

While Celsius attempts this absurd reorganization, they expect to pay employees and directors $4.1m per month, accruing debts that will take priority over depositors' claims.  The company expects to spend $57,454,000 in expenses in the first month alone; likely to lawyers, web hosting, real estate payments, and so on.

 

Calculating how much depositors will receive

Now, let's try to compute how much depositors can expect to receive in the bankruptcy proceedings.  My assumption in the below valuation is that Celsius is certain to file Chapter 7 bankruptcy and enter full liquidation, because there is no possible reorganization plan that would be a better deal for creditors.

 

Assessing the company's assets

Let's gain an understanding of Celsius's assets.  Celsius lists total assets of $4,319,507,506, but not all assets are created equal.  In Exhibit 1, Celsius states that the assets consist of "cryptocurrency investments that are either held with custodians, exchanges, or the DeFi protocol, crypto wallets securely held in cold storage, cash in banks, loan receivables, and mining equipment and rigs located in the United States."

The first fact that stands out is most of Celsius's assets are located in the United States.  The company states that it does not store cryptocurrencies or own property anywhere else.  Therefore, although Celsius may be in the top 100 bankruptcies in US history, it will not have the added complexity Mt. Gox did, where Mt. Gox's trustee had to collect a lot of assets in other jurisdictions.  The major complicating factor will be clawbacks (see section below.)

The assets are not spelled out in detail, so we need to calculate how much they are worth.  I am assessing the value of these assets from the view of the depositors.

Asset	Value	Notes
Cash in bank	$170m	Celsius lists $170m in dollars deposited in US banks.
CEL Tokens	$10m	Celsius lists $600m in CEL tokens.  These tokens are almost worthless because the company holds most of entire supply.  The only reason the price of CEL tokens is above zero currently is because few sell orders are on exchanges.  Since coins in general almost never actually die unless they are delisted from all exchanges, they will probably be able to be liquidated in a fire sale for some residual value.
Custody assets	$180m	Celsius lists $180m of "custody" assets, which were not loaned and are promised to the customers who granted Celsius custody of them.  They should not be counted in depositors' assets.
Loans	$310m	Celsius lists the book value of its loan portfolio as $930m, and projects one third of those loans being bad debt.  The amount of bad debt is so rounded that it seems like Celsius pulled it out of thin air.  Given that many customers who owe money to Celsius will simply disappear, and that the remaining portfolio will be sold at a discount, I assume that the loan portfolio is worth 33% of Celsius's declared value, or that half of what Celsius calls "good" debt is actually bad.
Mining assets	$720m	Celsius lists mining assets worth $720m.  The mining company is continuing to earn a profit while the case is ongoing, and the bitcoin network hashrate is not increasing at present, so the difficulty is also not increasing.  The miners will probably earn money at a faster rate than they depreciate, and they are SHA-256 ASICs, rather than GPUs, as which algorithm becomes the primary GPU algorithm after the Ethereum merge occurs is currently unknown.  I believe these miners are the most fairly valued asset of all, and don't dispute Celsius's valuation.  The mining operation is a good business - when a liquidation is ordered, the entire mining unit will probably be sold off as a single company, and that company will just continue to operate without interruption, adding significant value over what the miners would be worth at auction.
Crypto assets	$1.5b	Celsius lists "Crypto Assets" as being worth $1.75b.  However, in a liquidation scenario, coins would likely be considered property and auctioned off at a discount.  Unlike the 2014 US Marshals Silk Road sale to Tim Draper where bids came in above market value due to the government being the source of funds, these coins will have unknown provenance and will fetch below-market value.  Additionally, some of these coins are "wrapped" tokens and stablecoins, which have additional risks of failure compared to the actual coin or currency, and the expected value of the "wrapping" company needs to be accounted for.  For example, a lot of the money is probably Tether, which everyone knows is partially backed by debt owed by corporations, rather than cash or T-bonds like USDC is. Finally, some of the coins are locked up for unknown periods, like stETH, or directly staked with other protocols.
"Other"	Zero	Celsius lists "other" assets as $270m.  Some of these assets are debts owed by reputable companies - Genesis Trading owes Celsius $17m, for example, and that debt can be valued at 100%.  However, without knowing everything about what the rest of these assets are, it's difficult to value them, so let's suggest they are actually worth zero.  I don't see the $400m owed in the bad-collateral situation anywhere, for example, and I suspect that a lot of these "other" assets are bad debt.
Alex Mashinsky's personal wealth	$25m	My interpretation of the evidence above is that Alex Mashinsky knew that Celsius was insolvent long ago and continued operating the company anyway.  Therefore, I believe that Mashinsky will be personally liable for Celsius's obligations, and he will declare Chapter 7 bankruptcy.  His net worth was estimated at $50m, but because Monero exists, I expect that a lot of the money will have simply disappeared, and I value the recoverable assets at half.
Clawbacks	$200m	The lawyers will undoubtedly seek clawbacks from high-value customers who withdrew funds within 90 days, or within 4 years, depending on which statues are applied.  I believe that there is a significant chance that people who withdrew from Celsius will end up owing clawbacks.  I discuss these in the "clawbacks" section.
Total	$3.115b	My asset valuation from the view of depositors is 72.1% of the $4.32b valuation Celsius claims in their bankruptcy filing.

 

Assessing the company's debts

Now, let's review the company's debts.  Remember, I am assessing the company's debts from the point of view of the depositors, so that we divide assets / debts to obtain a final value.  I'm not including expenses for the mining operation, because I'm assuming that, in the average case, the mining operation is revenue neutral or offsets other unforeseen costs.

Debt	Value	Notes
Depositors' debt	-$4.72b	This is the value that Celsius provides for debt owed to all depositors.
CEL Token liabilities	-$3.3m	Celsius claims that the CEL tokens owed to depositors are worth $210m, but I believe these tokens will be worth almost nothing if they were actually exchanged for a currency with real value, like bitcoins.  Because the value of CEL tokens listed in the "assets" is much higher than the number listed in "liabilities," the devaluation of CEL tokens causes the "assets" to decline by approximately $600m, while causing "debts" to decline by only $200m, which is bad for depositors (a -$400m loss.)
Custody liabilities	-$180m	These custody liabilities are a total loss for depositors.  They are priority debt owed to the Custody holders, and therefore its asset value is zero and debt value remains at $180m.
Other	-$390m	Celsius owes other people and companies $390m.  We have to assume that this is all priority debt, like back salaries and vendor payments.
Legal costs	-$72m	This number is calculated as paying for four attorneys working full time at $600/hr until 2032 to defend Celsius against KeyFi and other claimants and to administer the bankruptcy case.  The legal costs are assumed to be factored into the payouts, as the legal case will continue after the payouts.
Already announced costs	-$57m	Celsius announced that they expect to spend $57m while they futilely attempt to restructure through August 13.
Employee salaries	-$44.4m	Calculated 11 additional months of employee salaries at $4.1m/month, on top of the already announced costs above, while Celsius futilely attempts to stabilize operations for the next year.
General expenditures	-$20m	Mortgage payments or rent on Celsius's offices, Web hosting, building maintenance, server upkeep, existing legal compliance costs, and so on over the next 11 months while Celsius futilely attempts to stabilize operations.
Total	-$5.486b	I actually value Celsius's debts lower than their declared amount, because some of the debt that is denominated in worthless CEL tokens will easily be able to be repaid.

 

A note on clawbacks

Clawbacks occur in bankruptcy cases when the trustee recovers funds from creditors who were improperly paid in the time preceding the bankruptcy case.  The period under consideration is 90 days prior to the filing, or withdrawals made after April 13, 2022.

Clawbacks will be of enormous importance to what happens to Celsius depositors and, in my estimation, are currently the most significant unknown in this case.  There are two reasons that would result in clawbacks which pertain to the Celsius case:

Transfers to insiders:  If an employee who knows the company is insolvent withdrawals funds, that money can be clawed back.  Given how serious Celsius's financial state was, it's difficult for me to believe that most employees were unaware of the company's financial problems.  Mashinsky and other managers will face scrutiny of everything they've done for years, because they knew the company had bad debt to EquitiesFirst.  There will likely be a series of hearings to decide how a reasonable person would value the EquitiesFirst debt, because if it were valued at what normal people would value it at (i.e. close to zero), Celsius was likely insolvent and subject to clawbacks for the entire two-year statute of limitations on this type of clawbacks.  Any employee who ever worked for Celsius and who ever had an account with Celsius should be worried about this type of clawback.

90-day withdrawals:  This is the big one.  Withdrawals to depositors can be considered "preferential treatment," because there were many indications that Celsius was insolvent between April 13 and July 13.  The primary reason to believe the company was insolvent was Celsius's own posts about losses due to hacks and thefts, as well as their public weekly images that showed how withdrawals were far in excess of deposits.  Even if there were few signs, a bankruptcy court will often assume insolvency 90 days before filing unless proven otherwise.

Looking at past precedent, in the Bernie Madoff scheme, lawyers clawed back 75% of the assets of innocent depositors who knew nothing of Madoff's scheme but who had withdrawln money before the firm failed.  In that case, the depositors who lost money knew nothing about what Madoff was doing but the trustee was still able to obtain a huge amount of money for the benefit of those who were unable to withdrawal.

In the Celsius case, in one week alone in May, over $1.1b in assets were withdrawln.  Unfortunately, it is difficult for me to find the exact amount of money withdrawln from Celsius after April 13, so a guess needs to be made until that information is reported or subpoenaed in the bankruptcy case.  Let's suggest that the withdrawals during the 8 or 12 weeks during the 90-day period when withdrawals were available were equal to $2b.  That would be more than the entire current value of cryptocurrencies in Celsius's possession.

We'll start with a value of potential clawback money of $500m, because I estimated above that about two thirds of Celsius's assets other than clawbacks could be obtained in a recovery and that clawbacks will increase the amount everyone gets.  People who withdrew early aren't going to lose all of their money; they just will end up with the same amount of recovery as everyone else.

Typical bankruptcy cases claw back 5 to 30% of assets.  In the case of Celsius, I'd argue that the case for clawbacks is far stronger than the average bankruptcy case because of how much knowledge was available that Celsius was in trouble.  Therefore, let's start with the assumption that every customer who withdrew money since April 13 will be asked for or sued for clawbacks.  Unfortunately, Celsius stopped deposits for US customers during that time, so much of the money is likely outside the US.  Let's suggest that 25% of the money is in countries that have weak legal systems or which would ignore legal requests, like Russia.

Let's suppose that another 10% of the depositors have so little money with Celsius, like $100 or less, that more would be spent in legal fees just to file a lawsuit.  Let's suggest that 15% ignore the clawback requests, receive a default judgment, and that liens get placed on their cars and houses.  These people would have destroyed credit scores, but no money is obtained until they decide to sell the homes, so this money would trickle into the bankruptcy estate so far in the future that it's irrelevant.  That leaves 50% of the withdrawals where clawbacks result in actual money.  Let's suppose that legal fees eat away at another 20% of the clawback recoveries, so we end up with clawbacks recovering 40% of $500m, or $200m - which is a significant amount of cash.

Depositors should be aggressively pushing lawyers to pursue clawbacks from every person who withdrew money in the 90 days before the bankruptcy.  They should also argue that the period should be extended a month earlier to 90 days before the withdrawal cessation.  They should argue that the people who withdrew owe money in the same cryptocurrencies they withdrew, which will likely appreciate in value by the time the clawbacks would be approved.

 

Expected return on deposits

From a depositor's point of view, by dividing assets / liabilities, my calculation predicts they should receive 56.7% of the deposited value.

For what it's worth, the Celsius solvency survey results, which were taken when much less information was available, predicted a recovery of 50%.  The results also projected the first meaningful communication from Celsius would be a median of July 1 and an average of July 30; the bankruptcy date fell almost exactly halfway between those dates.  This outcome will definitely motivate me to conduct more surveys in the future.

Unfortunately for depositors, while 56.7% sounds pretty promising, it is not the fair value of a bankruptcy claim with Celsius.

 

Fair value of claim

Time has value, and money in hand now is more valuable than money spent later.  BlockFi is offering "Personalized Yield" on cryptocurrency at 6% APY for a term of 12 months (see here.)  Genesis is also offering rates not seen in years; however, I'm not legally able to disclose them.  These rates won't last forever; they will undoubtedly fall once the credit crisis is over and once the impending recession leads the Fed to stop increasing interest rates.

A lawsuit against Cryptsy, which failed six years ago, is starting payouts later this year.  CoinLab's claims against Mt. Gox caused payouts to be delayed for at least eight years.  Assuming that the KeyFi claim delays payouts until 2030, and assuming an average APY of 4% during that time, people who had the money now would theoretically be able to earn 37.85% in interest during that time.  Therefore, the current value of a claim where that amount of interest would be earned before the eventual payout is actually 41.1%.

The major unspoken issue is also whether the bankruptcy court will actually honor Celsius's request to return the assets in the form they were deposited, or whether the assets will be converted to US dollars at some point.  The probability of the assets being converted to US dollars is very difficult to determine, other major cases involving cryptocurrency companies, like Cryptsy, have made payouts in US dollars.  In the absence of other information, let's suppose that there is a 25% chance of the assets being returned in coins and a 75% chance of the court system residing on its assertion that cryptcurrencies are not "currencies" and exchanging them all for dollars.  Keep in mind that as more and more claims are sold to traditional banks, they will gather a large number of votes to exchange the coins to dollars, which I believe will override the wishes of the "everyday" depositors who don't sell their claims.

We also need an estimate of the sale price and the price of coins at the time of payouts.  We'll use bitcoins as an example.  Let's suppose that it takes one year before the coins are sold by the trustee.  From my previous post, the average price of bitcoins in 2023 could be around $35,000.  I didn't predict that far ahead, but I think an average price of $70,000 in 2030 would be fair.  The math is easy then - the forced sale cuts the fair value of the claims in half ($70,000/$35,000,) because depositors could have doubled their money by simply selling now for a full bitcoin payout.  But because there is only a 75% chance of the government selling the coins, the expected value of the value loss is only two thirds (50% / 75%) of the previously calculated 41.1%.

Therefore, the fair value of a claim today using these figures is 66.6% * 41.1%, or 27.3%.

 

Factors affecting the fair value

You may see the fair value differently depending on whether you agree with me on all of these factors.  The following facts being true would all raise the current fair value of a claim.

• The probability of the government converting the coins to US dollars is lower than 75%
• Interest rates on cryptocurrencies will average lower than 4% over the next several years, or if you are unable to earn interest during some or all of that time
• The price of bitcoins will be above $35,000 at the time when the government is most likely to sell them
• The price of bitcoins is lower than $70,000 at the time when the claims are paid out
• The final payouts occur before 2030
• Clawbacks are aggressively pursued against the large number of depositors who decided to withdrawal after April 13, 2022

These facts being false would lower the current fair value.  You can therefore use your own beliefs to adjust my value higher or lower.

 

Corporate debt buyers

Finally, as the corporations swoop in to buy Celsius depositor claims, a strange issue that will affect prices is that many potential buyers will not consider the future price of cryptocurrencies in their valuations of the Celsius debt, because much of society still views the legacy system as the future of currency.  When denominated solely in dollar terms using present value, the value of the debt is far higher than the actual fair value I computed above that takes the likely future of the cryptocurrency industry into account.  Therefore, there may end up being a price mismatch on the market where the sellers would be willing to sell far lower than the buyers actually pay, because the buyers are thinking only in dollar values and not considering the expected loss from the trustee selling the cryptocurrencies.

As I stated in a previous section, if it is true that buyers are only interested in dollars, then they will also use their purchased votes to make it more likely that all the cryptocurrencies will be sold.

 

Conclusion

In conclusion, Celsius and a number of other companies engaged in reprehensible conduct.  I believe Celsius was fraudulently trading while insolvent, and failed to disclose enormous losses.  While I had been shocked by the results of the poll, I now fully agree that indictments are coming and personal bankruptcies will allow some additional money to be clawed back.  Celsius's "reorganization" plans have almost zero chance of success given the level of criminality likely to be uncovered and the zero trust that anyone has in the Celsius brand.  Celsius will end up in Chapter 7 soon.

In analyzing Celsius's bankruptcy filing, I estimated that 56.7% of July 13 value in US dollars is likely to be paid to depositors.  However, the Mt. Gox case required eight years before even the first payouts are likely to begin, and therefore the foregone interest and will be costly.  There is also uncertainty over whether cryptocurrencies will be wastefully exchanged for dollars.  I estimated that the current fair value of a claim based upon some likely bitcoin price and interest rate conditions is 27.3%.