The Crypto Collapse Gets Worse

Welcome back to the Defector Crypto Markets Assay, where we put the cryptocurrency markets to the test. Today's results: bad.

Less than three hours after Alex Mashinsky, founder and CEO of the major crypto lending firm Celsius, accused some investor guy of spreading misinformation and "FUD"—fear, uncertainty, and doubt, the sort of thing I think we can agree any legitimate and unscammy business should have a readymade acronym for—Mashinsky's firm announced, "Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts." Oops!

This is obviously bad—a bank that prevents you from withdrawing money fails to meet the most important qualification for bankhood—and though the specifics of this case are illustrative and worth examining, the most important thing here is that firms of Celsius' size and institutional heft are supposed to be much more insulated from the scams, pumps, dumps, and volatility that have sunk thousands of lesser competitors. The collapse of a firm like Celsius shows that none of this is too big to fail.

As to those specifics: Celsius is essentially a crypto bank, one that operates on certain principles of traditional finance, only the lending firm uses cryptocurrency instead of actual currency; for that reason, it boasts of the sort of outlandish returns no traditional bank can realistically offer. Crucially, however, and notably unlike traditional banks, the values of the assets traded on Celsius are highly unstable, and the firm is not FDIC-insured, meaning customers who want to get their shit out from Celsius before it collapses are shit out of luck. And who could have seen such a collapse coming, with the firm playing musical chairs to stay liquid and its former CFO arrested on fraud charges in Israel? Critics have argued for months that Celsius is a textbook example of a Ponzi scheme, and wouldn't you know it, Celsius insiders moved a ton of money out of the bank right before the liquidity crisis hit. Celsius's in-house token hit 15 cents last night after the announcement, which is down 5,333 percent from its peak one year ago.

The market implications of the Celsius implosion—a run on the bank without any guardrails—could be more significant than the collapse triggered by the failure of Luna, which wobbled the market in May when Luna and its associated stablecoin (something theoretically pegged to real currency, like the U.S. dollar) terraUSD both plummeted in value (raising some obvious questions about the word "stable") after more than $2 billion worth of the assets were sold. Caisse de Dépôt et Placement du Québec, the second-largest pension fund in Canada, led a major round of Celsius financing last October, which Mashinsky argued was a sign that his company was the real deal rather than simply a rickety bank with an important hostage. And indeed, it is odd that CDPQ forked over so much money given the degree of regulatory scrutiny that Celsius attracted. On the same day last September, New Jersey issued a cease and desist, Texas began the process of seeking a cease and desist, and Alabama asked the company to prove why it shouldn't also be banned from the state. One week later, Kentucky filed a cease and desist order of their own. New York Attorney General Letitia James also turned her eye towards Celsius. The people who invested with Celsius are probably screwed, though Celsius was itself invested in so many assets that the larger market is bearing the weight.

Bitcoin tumbled to its lowest price in over a year and a half today, while Ethereum plummeted and the total market value of all cryptocurrency fell below $1 trillion for the first time since January 2021. Anyone who invested in Bitcoin when Jack Dorsey and Jay-Z announced their Bitcoin Academy last week would already have lost 25 percent of their value. Ditto for anyone who listened to Senators Kirsten Gillibrand and Cynthia Lummis and dumped their retirement fund into Bitcoin. If you invested in the cryptocurrency advertised on Kara Swisher's podcast, you'd also be down 25 percent. Binance, the world's largest crypto exchange that is itself the subject of a number of federal investigations, now also faces a class-action lawsuit, and had to suspend Bitcoin withdrawals on Monday. Crypto.com, the company that now sponsors the Lakers' arena, laid off five percent of its workforce. Coinbase stock is down 13 percent just today. MicroStrategy, the largest corporate holder of Bitcoin, has lost $1 billion on its Bitcoin investments, in addition to its stock dipping 25 percent. If Bitcoin's price drops below $21,000, they will have to pony up more collateral for a loan they received from Silvergate, which could shake the market even further.

All in all, this is a severe wobble for a sector that has already proven prone to all manner of scams and implosions. This deep into the crypto industry's attempt to prove its legitimacy despite every sign pointing to massive and widespread institutional fraud, it has become harder and harder to make the case for any of this shit. The notional liberating possibility of cryptocurrencies and the actual practical applications of the blockchain aside, the reality of what this all is right now is hard to ignore, or justify. Maybe the line goes up instead of down at some point soon, but the Celsius collapse, as was the case with the Luna collapse, shows how even seemingly immovable organizations are fraught and dependent on an inflationary hype cycle to keep from collapsing under the weight of their contradictions. Many of the biggest exchanges and crypto firms in the world could face serious trouble if Celsius collapses completely, or if they can't wriggle their way out of this jam in a way that keeps any of the tokens and protocols in which they're invested sufficiently propped up.

On one level, crypto is essentially a narrative phenomenon, and its story becomes increasingly difficult to believe (and then invest in) with each successive crisis. Celsius and Binance and all the others can try and tell a better story—the current one is basically "When the going gets tough, the tough get going"— but at this point, there's nothing about their business model that one would realistically describe as "legitimate," so they may just keep digging themselves into a deeper hole. Unfortunately, someone has already created a cryptocurrency called Fahrenheit, so they're going to have to release Kelvincoin.