Months ago, Sydney, Australia-based Hamish Tipene took out two loans with Celsius Network. Buying a new home above his pre-approval rate, he staunchly supported the crypto lender’s motto “Unbank Yourself” and used his crypto holdings as collateral instead of selling it for cash.
But when the value of crypto started plummeting a week ago, the collateral Tipene put up for the loan rapidly dwindled and he received a margin call. He needed to add more collateral.
Before he could, Celsius froze Tipene's account, making it impossible to meet the margin call in time. The company liquidated 0.59 of one bitcoin, a value of $11,800 by today's rate. He now faces another margin call that would wipe out another $13,000 in bitcoin, but with his account still frozen he’s up against the same dilemma.
“I tried to reach them for days. You can’t remove someone’s ability to resolve a situation and then punish them for not resolving it,” the 46-year-old carpenter told Yahoo Finance. “I trusted them with my savings and it’s unfair.”
Last year, cryptocurrencies gave retail investors the chance to secure wealth at what seemed to many as a once-in-a-lifetime money-making opportunity. Now as the tide is pulling out for risk assets with cryptocurrencies hit especially hard, investors are rethinking their trust in some crypto firms, including Celsius Network, after the companies took drastic steps in the face of a liquidity crisis.
Crypto’s total market capitalization has dropped by over $237 billion since the release of May’s hot inflation data, from $1.15 trillion to $913 billion as of Monday morning but since its November peak the figure has lost 70% - over two thirds of its value - according to Coinmarketcap.
Accustomed to delivering high returns for investors and growth to shareholders during the bull market, industry players are now yanking back capital with several major trading venues, including Robinhood, Gemini, Crypto.com, BlockFi, and Coinbase, announcing significant layoffs.
Then there’s Celsius.
The firm offers high-yielding interest accounts, often misconstrued as bank-level savings accounts, to retail investors. According to its website at the beginning of May, Celsius had 1.7 million users and held $12 billion in customer funds, the majority of which are retail.
For over a week, the firm has frozen its customer accounts to stabilize its operations. But the move has also made it more difficult for customers to meet margin requirements, like in Tipene’s case.
For Northern-California based Yevhenii Marchenko, he can’t access the $85,000 in Solana, Cardano and Chainlink crypto tokens locked in the platform. He’s been a customer since November when the crypto market peaked.
“Almost every YouTube crypto related channel was recommending Celsius and that’s why I thought it was safe,” he told Yahoo Finance, adding that he had more confidence in Celsius for being a U.S. based company. “It’s a really hard and depressing situation.”
Celsius Network logo and representations of cryptocurrencies are seen in this illustration taken, June 13, 2022. REUTERS/Dado Ruvic/Illustration ·Dado Ruvic / reuters
Celsius also has offered little in the way of assurance of its financial health, causing customers and onlookers alike to speculate whether the firm is “risking insolvency,” which would put any additional collateral investors offer up in jeopardy.
Celsius has hired restructuring lawyers as well as bankers with Citigroup. Meanwhile, some of its customers are rallying around the cause to sue the firm.
“As unsecured creditors, we are basically at the back of the line in bankruptcy court,” Ben Armstrong, a crypto influencer and Celsius customer explained to Yahoo Finance. “We still probably won’t get more than $1 each, but at this point, for me, it's about holding Celsius accountable.”
Behind the content brand and company, Bitboy Crypto, which boasts over 3 million social media subscribers, Armstrong has promoted Celsius by running a paid affiliate program for the firm on its website as well as appearing as a guest on Celsius’ own podcast.
But as the value of crypto assets diminished over the last two weeks — Bitcoin down 29% for the month — Armstrong began threatening the company and its founder and CEO, Alex Mashinsky, over social media with a class-action lawsuit. According to Armstrong, currently $2 million to $3 million of Bitboy Crypto’s own money is stuck on the platform.
“I’m already considering that money gone. This is about standing up for all the people who watched my channel and trusted Celsius. They’re not going to be able to absorb a loss like I can,” Armstrong said, noting he has discussed possible scenarios with his lawyers. “This is about holding those people accountable for what they’ve done.”
A crypto currency ATM machine is pictured in a shop in Union City, New Jersey, U.S., May 19, 2021. REUTERS/Mike Segar ·Mike Segar / reuters
While small investors may have a lower chance of getting their money back from Celsius in a bankruptcy scenario, there may be financial redemption in small claims court, according to Joshua Browder, CEO of DoNotPay, a so-called “robo-lawyer” which helps people file minor lawsuits using artificial intelligence.
The service, which is also backed by some of crypto’s biggest players such as venture giant Andressen Horowitz (a16z) and FTX Founder and CEO Sam Bankman-Fried, takes a fee for its service and, as of Monday morning, has received over 1,000 claims against Celsius in the past week.
Browder told Yahoo Finance if the crypto lender doesn’t declare bankruptcy in the next two months, small court claimants “can actually get their money back from [Celsius’] corporate bank account before everyone else.”
Even if Celsius goes bankrupt, Browder argued, the judgment for small claim lawsuits —$10,000 to $25,000 based on state regulations — take priority over other unsecured creditors.
“Unless Celsius shows up to your court case, investors will win by default. Bear in mind that Celsius is completely swamped right now,” Browder said. “I don’t think they’re going to be sending executives across the country to defend against a $10,000 lawsuit.”
A staunch supporter of the legal efforts, Tipene himself can’t file a small claims case in U.S. court because he lives in Australia. Instead, Tipene has given up on hope of seeing his remaining assets, even after his second loan liquidation, which he said he cannot meet in time.
“Bitcoin can drop to $10 and it wouldn’t bother me because I think it will go up again,” said. “It's these companies. They’re playing with people’s money and they shouldn’t get away with it.”
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.
