A month after putting a freeze on account withdrawals, crypto lending firm Celsius Networks, issuer of cryptocurrency Celsius (CEL -3.64%), has filed for Chapter 11 bankruptcy protection. It's the third crypto company bankruptcy protection filing in a month, after fellow lender Voyager Digital and hedge fund Three Arrows Capital (which owes Celsius money). Amid tanking crypto prices this year, Celsius may simply be the latest in what could be a growing number of crypto start-ups facing serious financial challenges.
Celsius' crypto token is exhibiting extreme volatility right now, and some investors might be tempted to bet on a rebound. Before you do follow suit, consider a few points.
Celsius wants to "reorganize," but it's unclear if it can
Celsius filed for Chapter 11 bankruptcy protection, designed to help a company reorganize its debt while continuing to operate. That's the stated goal of Celsius here, to buy time as it sorts out its own debt and obligations it has to customer deposits. Chapter 11 is different from a Chapter 7 liquidation, which spells the literal end of a company as it is forced to shut down operations and sell all of its assets.
Regarding the decision last month to freeze customer withdrawal requests, and now the bankruptcy protection filing, the fintech's founder and CEO Alex Mashinsy and the executive team said this in an announcement:
Without a pause, the acceleration of withdrawals would have allowed certain customers -- those who were first to act -- to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or long term asset deployment activities before they receive a recovery.
In other words, Celsius may not be able to pay all of its obligations in full, so it needs the court protection of bankruptcy proceedings to liquidate assets and pay debtors and customers what it can in an orderly manner, eventually getting back to business with a radically reorganized balance sheet. As of July 13, when the bankruptcy was filed, Celsius said it had $167 million in cash on hand. However, according to court documents, Celsius has a $1.2 billion shortfall in what it owes.
In the meantime, customers still can't make withdrawals from their Celsius crypto accounts. If you're an affected account holder, you can call or message the court case information line, which can be found here.
Is Celsius a buy?
Given the uncertainty surrounding Celsius' viability, not to mention the reputational damage that has occurred, Celsius' crypto token should be the realm of day traders and speculators only. The Celsius token's price and market cap are both down over 90% from all-time highs last June. The token's total market cap currently stands at just $189 million, not much over and above the $167 million in cash on hand Celsius Network said it had in its bankruptcy revelation.
If you're a long-term investor in businesses, also bear in mind that Celsius token does not represent an ownership stake in the crypto lending company itself. Celsius simply used its crypto as a means to reward its users and facilitate transactions on its network. In the short term, the crypto's price will move based on trader activity. Over the longer term, Celsius token's price will be a reflection of user activity, and the outlook for that is not great.
If you're on the sidelines and looking for a lesson in this crypto meltdown, it could simply be this: Be wary of too-good-to-be-true investment returns. Celsius offered close to 0% interest loans, secured against crypto assets, and promised annualized yields on crypto rewards of up to 18%. As long as the good times were rolling, it seems Celsius was able to deliver on those promises. But times have changed, and high returns are not always a given. In the end, Celsius made promises it couldn't keep when push came to shove.
We're still in the very early days of the crypto and blockchain technology development cycle. The epic crash of 2022 is painful, but it is also a healthy drop that will flush out projects that simply don't work, or that were founded on flawed principles. If you decide to invest in cryptos at all, do so with caution -- and remember to make your digital currency holdings a part of a well-diversified portfolio that also features other investment asset classes.
