How to spot the next degree Celsius before it’s too late

Source: Adobe Stock / Nathan Allred
  • The main telltale sign of vulnerable platforms is unusually high returns.
  • Speculators should treat incentive programs that reward holders for not selling with suspicion.
  • The industry is also defined by the regular use of leverage, which amplifies risk and exposes platforms to very large falls.
  • Another issue affecting crypto as a whole is that of contagion, with many platforms lending and/or depositing with each other.
  • The crypto industry needs to significantly improve its risk management practices, making them stricter and more systematic.

It is every crypto investor’s worst nightmare, depositing money with a platform that later goes bankrupt, making it virtually impossible to recover the funds. It is also bad enough to invest in the native token of such a platform, the collapse of which will send that token crashing down to Earth like a lead balloon.

This nightmare has already happened more than once during the current bear market, with the collapses of Earth and Celsius leaving more than a few investors out of pocket. Yet, while we can all retroactively point out how dangerous these platforms and their business models were, spotting the “next Celsius” before it crashes is certainly a big question.

However, a number of crypto industry players claim that, at least in the worst cases, there are a few telltale signs that some platforms are exposed to more risk than others. At the same time, a diversification strategy is always a sound policy, because it is not always possible to predict the next collapse of a highly interconnected market.

Telltale signs of the next Celsius

Almost all commentators agree on the main telltale sign of vulnerable platforms: exceptionally high returns. Yes, Celsius and Terra (via the Anchor protocol) offered returns that seemed too good to be true, or rather too risky to be true for long.

“At the very least, Celcius has shown a lack of due diligence in lending vast sums of depositors’ money to highly speculative businesses. But the way he made such lofty promises of high returns to sign up and lock up his money had many of the hallmarks of a giant Ponzi scheme,” said Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown.

Streeter advises speculators to be wary of incentive schemes that reward holders for not selling (and this charge does who does). Likewise, Global block Analyst Marcus Sotiriou also points to high yields as the main warning sign of a potentially risky platform.

“Celsius, for example, offered yields of up to 17% – to offer that yield meant they had to take significant risks with client funds. One of the main factors that led to their demise was been using client funds to gain exposure to DeFi [decentralized finance],” he said

This touches on another important risk factor: using investors’ and depositors’ funds to speculate and trade on other platforms, many of which carry their own risks. In fact, this almost always tends to happen with offering high returns, because that’s really the only possible way to provide such returns (unless a platform is purely and simply a trading scheme). Ponzi).

“These platforms characterized themselves as ‘deposit takers’ and alternatives to banks, but invested client funds in a variety of sometimes aggressive trading strategies to finance the high returns offered to attract these deposits,” said Charlie Beach, chief operating officer. Nasdaq risk. -listed crypto exchange EQONEX.

One of the big issues with investing with user funds is that if investors are withdrawing cash faster than investors are depositing, a platform may not have enough cash to meet its custodial obligations. withdrawal. Of course, it’s not always transparent as to what exactly a DeFi platform does with its users’ funds, but users should strive to find out, and if they can’t, they should probably stay away.

And aside from the inherent volatility of the crypto market, platforms also need to be wary of hacks and other technical mishaps. These aren’t uncommon in crypto either, which Celsius discovered, much to his chagrin.

“It started in June 2021,” Marcus Sotiriou said, “when Celsius lost at least 35,000 ETH [USD 58.8m today] according to on-chain data provided by Nansenin the Ethereum staking service hunting dog […] Moreover, according to [an] analysis by DirtyBubbleMediaCelsius lost $22 million DAO Badger hack after mistakenly losing restitution payments.

Crypto and contagion

Unfortunately, more than a few analysts and industry figures argue that risk is almost inevitably magnified in crypto, given its immaturity. This will make selecting the next Celsius more than a little difficult.

“Much of the innovation and programs we see around digital assets are still experimental, and with only 5% global penetration, the liquidity base is not strong enough to withstand extreme market stress. , and with over 20,000 cryptocurrencies in the market, liquidity is even more extensive, leaving the market more vulnerable than it should be,” said Ben Caselin, head of research and strategy at the Hong Kong-based crypto exchange. AAX.

While not exclusive to crypto, the industry is also defined by the regular use of leverage, which amplifies risk and exposes platforms to very big setbacks. This reliance on leverage may lessen to some extent as the market matures and becomes more liquid, but for now it is another factor that makes crypto riskier than many other fields. of investment.

“Crypto-assets are inherently risky and require careful risk management, but the industry is only beginning to learn this lesson the painful way. When asset prices rose, hedge funds and lending platforms lent/borrowed with insufficient collateral and often used these funds to trade inherently risky leveraged trading strategies,” Charlie Beach said.

Another issue affecting crypto as a whole is that of contagion, with many platforms lending and/or depositing with each other. This is another risk magnifying glass and makes it particularly difficult to detect future bankruptcy.

“The contagion has impacted many collapses and bankruptcies, with lenders hardest hit due to a liquidity crunch. The contagion forced lenders to withdraw their credits from the system to reduce risk, which had a ripple effect and led many lenders to struggle to meet their withdrawal obligations,” said Marcus Sotiriou.

The future must be transparent

On the other hand, the contagion is not unique to crypto, with the legacy financial system also exhibiting strong interconnection. However, on the whole, traditional financial companies have been more successful in avoiding bankruptcies in recent years thanks to more advanced and rigorous risk management.

“Interconnection is not unique to the crypto ecosystem, but a feature of any financial system […] The recent collapse of Archegos Capital Management caused billions of dollars in losses for several major Wall Street companies and exposed some poor risk management practices, but put into perspective, the risk management at these companies is far superior to the practices of many crypto firms, and for most of them the losses were contained,” Charlie Beach said.

As such, the crypto industry needs to significantly improve its risk management practices, making them stricter and more systematic. This is the only way to minimize the threat of contagion and avoid dangerous market behavior.

“For instance, digital travel had loaned a total of USD 2 billion to market participants, of which approximately USD 660 million was lent to Capital of the Three Arrows. The fact that around a third of the loaned funds was allocated to a single institution is extremely risky and has led to the collapse of Voyager Digital. If they reduced the total exposure to Three Arrows Capital to 5% of loaned funds, their collapse could have been avoided,” said Marcus Sotiriou.

In addition to better risk management, some would like regulators to get involved, if only to protect retail investors.

“[Recent collapses] increase the urgency for regulators to start imposing more rules on the crypto world to prevent more retail investors from getting caught up in the hype and playing with money they can’t not afford to lose,” Susannah Streeter said.

As for retail investors, the average trader can do a few things to reduce their exposure to the next degree Celsius.

“In my view, the typical investor should always implement diversification across various products/services to reduce the impact of meltdowns. Additionally, investors should always consider where a ‘DeFi’ or ‘CeFi’ [centralized finance] platform pulls its yield, especially if the yield is above 5%-10%,” Sotiriou said.

In addition, investors should also perform their own due diligence to find out what the platform they are investing with is doing with their funds, especially if the platform does not clearly and transparently state this on its website. And again, if a platform does not offer transparency, then perhaps it would be better to avoid it.


Learn more:
– Terra’s collapse is a harsh lesson for botched crypto VCs and gullible retail investors
– Anger, Worry and Doubt – Celsius Customers ‘Pray’ for Return of Their Crypto

— U.S. government agencies slam Voyager’s “false and misleading claims” about deposit insurance
– 3 reasons why 3 Arrows Capital failed, according to its founders

– Give Us Our Money Back: The Custody Wallet Problem and the Crypto Reputation Implications of Stopping Withdrawals
– Crypto Industry Custody and Property Rights Are ‘Core Issues’ That Need to be Addressed – US Official

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