From high-risk operations to creepy NFTs: six reasons why the crash of Celsius and 3AC was inevitable

Crypto lender Celsius has begun filing for Chapter 11 bankruptcy protection. A month ago, after the collapse of the crypto market, the company froze client accounts and joined the list of crypto bankrupts. Now Celsius announced plans to stabilize the business through restructuring and that it has $167 million in cash to support operations.

According to the bankruptcy papers, the company has more than 100,000 creditors. The most significant unsecured claim is $81 million — from the Cayman-based Pharos Fund. The statement also lists billionaire Sam Bankman-Fried’s trading firm, FTX and Alameda Research CEO, as a creditor with a $12 million unsecured loan.

Last week, Voyager, too, filed for Chapter 11 bankruptcy protection after suffering losses due to its participation in Three Arrows Capital (3AC), a hedge fund that is in liquidation. This week, a court froze the remaining assets of 3AC.

What a сelprise!

The bankruptcy of Celsius was not unexpected, given the company’s operations.

• First, influencers misled investors by luring them with short sales, which in fact, were not that. In traditional finance, the short seller borrows an asset, sells it, and then promises to repurchase it to cover the loan in the future (at a lower price). The real short squeeze occurs when the redemption value of the shorted asset begins to rise. Most cryptocurrency clients trade synthetically, expressing a bearish view through cash-settled derivatives. In this case, the exchange creates a bearish derivative (for those who don’t know: it is a contract under which the parties are entitled or obligated to do some actions on the underlying asset), receives the commission, and spreads and avoids the hassle of actual short selling. The Bahamian cryptocurrency exchange FTX offered perpetual futures contracts on several digital assets, including Celsius Network (CEL) tokens. Indeed, in the vast majority of so-called “short” positions on cryptocurrency exchanges, no token was sold short. Instead, traders simply bought bearish derivatives with a cash settlement, according to Protos.
• Secondly, Celsius was accused of using a Ponzi scheme (sort of financial pyramid) by staking software firm KeyFi. Jason Stone, the founder of KeyFi, alleged that Celsius attracted new investors with high-interest rates to pay back previous investors and lenders and used customers’ funds to manipulate the price of its cryptocurrency token CEL.
• Thirdly, the company used its clients’ funds to implement “leveraged high-risk cryptocurrency trading strategies.” The blockchain analytics firm Arkham Intelligence says in its report that it identified the asset manager as the team behind investment firm KeyFi, led by CEO Jason Stone (linked to the lucrative 0xb1 farming account). The risky strategies “resulted in apparent losses of $350 million when the asset manager returned capital” (about $210 million at current prices). 0xb1 also acquired a $6.3 million selection of NFTs, which included CryptoPunks, Beeple art, and several others. Celsius’ decision to entrust corporate funds to a third party was not good. 0xb1 ended up managing more than 10% of all Celsius assets at the end of 2020.

Three arrows in the knee

• First: Singapore-based crypto hedge fund 3AC was one of the largest holders of a few coins and tokens that are down nearly 90% from their all-time highs. It managed about $10 billion in assets (it was only $3 billion at the end of April). But in early July firm filed for Chapter 15 bankruptcy in New York.
• Second: the company took millions from user deposits and bought the creepy and illiquid NFTs. Among them: CryptoDickButt, Slacker Duck Pond, Gutter Cat Gang, Gutter Punks, Shiboshis, Arnolfrini Shrimp, and others. A Reddit user named Set1Less wrote about it. Apparently, up until April was buying up all the trashy NFTs for vast amounts of money, using funds taken from retail investors through Voyager, BlockFi, and any other centralized lender. According to data compiled by crypto research company 21shares, 3AC owns a total of 377 NFTs, which include 11 CryptoPunks, 330 ArtBlocksCurated, 2 Mutant Apes, 1 Bored Ape, and more.
• Third: the collapse of TerraUSD and Luna was a starting point. 3AC told the Wall Street Journal that it invested $200 million in Luna. Other reports said the fund’s investment was about $560 million. That investment becomes worthless when the stablecoin collapses.