The crypto market has been rattled again in June 2022 due to a groundbreaking announcement made by crypto platform Celsius. The company announced it would no longer allow users to withdraw, swap, or transfer account balances.
What Is Celsius?
Celsius is a centralized lending and borrowing platform that’s been around since 2017. Users can deposit crypto assets on the Celsius platform to earn generous interest rates, or they can use them as collateral for loans.
Users can also buy Celsius’s native CEL token which gives them access to greater promised rates of interest and better borrowing rates.
Celsius is similar to other centralized platforms like BlockFi and Nexo that allow users to earn interest on their crypto holdings. These companies act similarly to banks. They use the deposited crypto to generate profits.
Celsius takes user deposits and loans them out to other institutions, crypto exchanges, and DeFi protocols at a higher interest rate than what it offers its users and keeps the difference.
RELATED: What Is DeFi? The Basics of Decentralized Finance
Why the Announcement Matters
In a May 2022 report, Celsius disclosed it had roughly $12 billion worth of assets under management and had nearly 1.7 million customers. That number has likely plummeted due to the sell-off that has swept through the entire crypto sector in mid-2022.
In short, Celsius is facing a liquidity crisis. The company has evaluated its assets and has come to the realization that, if every customer were to withdraw their balances, they would not have enough liquidity to reimburse them.
According to the announcement on Celsius’s website, the decision to halt withdrawals was made in an effort to reposition Celsius so that it could honor future withdrawal requests and navigate these tumultuous market conditions.
Subsequently, this announcement has triggered a small-scale bank run across the market and amongst other competitors of Celsius. Bank runs occur when depositors withdraw their money en masse due to fears that the institution will become insolvent.
Those High Interest Rates Came With a Risk
It is worth mentioning that these centralized platforms like Celsius, BlockFi, and Nexo are not insured by the government. While the interest rates these companies offer are enticing, they are not without risk. Users should never allocate all of their holdings on these platforms.
As Celsius is proving, they are not as safe as they are made to seem.
Cryptocurrency investors should opt for holding their balances on their own wallets (digital or hardware) and get them off of exchanges and platforms for maximum protection. This doesn’t protect from declining prices, but it does protect investors from avoiding a situation like Celsius customers are currently in.
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