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Saying “I told you so” is not polite. And to be fair, in the current market conditions, we’re all suffering. But the implosion of so many cryptocurrencies and exchanges has revealed the vulnerability of a completely unregulated market. No one was doing their due diligence and in that shadow grew instability.
Many crypto companies now find themselves in a market downturn, which would be fine had so many of them not built their business model upon the never-ending rise of digital assets.
The worst of the worst is Celsius Holdings, which stopped its 500,000 users from making withdrawals due to “extreme market conditions”. It’s believed that up to $8 billion in assets were currently frozen.
The Beginning of the End
The crypto space is pretty competitive and exchanges have a hard time establishing and defending a moat. Celsius’s founder Alex Mashinsky decided their’s would be long-term crypto saving and investing. When he pitched the idea to so-called ‘whales’ in 2018, he called it ‘unbanking’.
These whales own a tremendous amount of digital currency, enough to quite literally change market conditions with a single action. For many of these players, crypto is not something bought and sold on a whim, it’s a buy-and-hold play. Mashinsky decided they needed a place to store their crypto where it was working for them and generating passive income. Central to this idea are high yields for crypto deposits — as much as 30%. This is way more than you could ever get in a bond or high-yield savings account and would be made possible by loaning out the stored crypto for high rates to those needing it for short-term investments.
Federal and state officials balked at the idea, certain that such appealing deposit rates could not be offered without a high degree of risk that wasn’t properly disclosed to depositors. Mashinsky, always quick to fire back, believed traditional banks and securities could offer similar rates if they were not weighed down by bureaucratic costs and profit-taking. Hence, the name “unbanking”.
Officials’ suspicions would remain largely unchecked, as the crypto space is unregulated, meaning Celsius does not have to make disclosures and government bodies lack the resources to launch formal investigations. Some states did try though…