Key facts:
If the price of bitcoin drops below $16,800, loan guarantees to Celsius will be liquidated.
To avoid this, the company took another $530 million loan and used it as collateral.
Due to the bear market in the cryptocurrency market, with bitcoin (BTC) hovering around $22,000 at press time, Celsius has decided to take precautions. To prevent its collateral deposited in other protocols from being liquidated, the company behind the lending and investment platform has deposited more wrapped bitcoin (wBTC) to add as collateral.
The strategy of collateralizing bitcoin in MakerDAO (or in wBTC, a “wrapped” token of the major cryptocurrency) has been repeated in recent days by Celsius. Between June 12 and 14, he added a total of 7,165 wBTC in the investment and lending protocol that allows the issuance of the stablecoin DAI (DAI).
One quality that characterizes Celsius is that its business model is based on using the deposits of its users in other investments, such as DeFi protocols and cryptocurrency mining. By not being based on the traditional scheme of loan platforms (generating profits through the interest paid by users), a bearish market context like the current one could compromise their solvency, something that is happening.
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By adding more collateral, the company achieves that the price of BTC that officiates as a limit for liquidations falls from USD 17,211 to USD 16,852. data about the position they can be seen on the site defiexplore.com.
To obtain the funds used as collateral, Celsius would have requested a loan of 23,962 wBTC from a DeFi investment platform Aave. So reported by Dylan LeClaira member of the analytics firm UTXO Management, who shared the image of a user interface similar to that of that protocol.
The amount is equivalent to USD 530.6 million, according to the wBTC quote at the time of writing this article. If the debt of USD 278.5 million in the protocol is subtracted, Celsius’s current collateral on MakerDao is $248.5 million.
Celsius users’ bitcoins at risk
The main problem with all of the above is that the bitcoins and other cryptocurrencies that Celsius users have deposited on this platform are in danger. As CriptoNoticias reported, Withdrawals have already been suspended since Sunday June 12 as a “protective measure” in the face of market instability, and now these types of maneuvers are coming to light to avoid going bankrupt.
Also, a liquidation by Celsius could have a significant effect on the market. This is because USD 522 million equivalent in BTC would be sold, which could trigger the offer and, as a consequence, further lower the price of the cryptocurrency.
The analyst quoted above mentions that the whales (referring to the big investors in the market) can exert very strong pressure to drive the price down. Thus, they would achieve the liquidation of Celsius, which would provide them with extremely fertile ground to buy crypto assets at an even lower price.
The bear market “wears” Celsius
Until the end of 2021, Celsius managed a wealth of funds so large that it reached approximately USD 28,000 millionaccording to the portal protos.com. Now, with the price of bitcoin 30% lower than a week ago at press time, the company is making drastic decisions to avoid insolvency. The funds it manages fell by 88% and would be around USD 3,300 million.
One of the main characteristics of Celsius is that the returns it pays to those who deposit funds in its protocol are greater than the charges applied to those who request loans. For example, the platform pays annual interest of 7.10% to those who deposit any of the main stablecoins, as seen in the image below. In other crypto assetspay even more than 10%.
This is the opposite of what happens with platforms of this type, in which “the business” lies in covering the interest that is paid through what is charged to those who take loans.
Celsius, on the other hand, claims to obtain income from other sources. For example, using the funds of its users to generate interests in decentralized finance (DeFi) protocols or other initiatives such as cryptocurrency mining.