Celsius may have used a Ponzi scheme solution to avoid a liquidity crisis
Drama around the “cryptocurrency bank” Celsius is aggravating as cryptocurrency enthusiasts find out how the company fought off potential bankruptcy, and it might surprise you how simple but short-sighted their decision was.
As the document on the New York court website suggests, after facing a liquidity crunch, Celsius began offering a double-digit interest rate to attract more funds that would cover depositors and creditors. previous.
“Faced with a liquidity crunch, Celsius began offering double-digit interest rates to attract new depositors, whose funds were used to repay previous depositors and creditors” https://t.co /8s2Yo8HH6z
— database (@tier10k) July 7, 2022
Essentially, Celsius asked for more money and offered an even higher interest rate to cover liquidity issues on their previous loans. The scheme used by Celsius to solve the liquidity crisis resembles a traditional Ponzi scheme, which only survives with constant inflows.
Such a decision can help a company in the short term and solve liquidity problems and the inability to make initial deposits. But at some point, Celsius will have to repay the interest it is offering today, and it’s unclear if the crypto bank will be able to do that given all the pressure on it.
Celsius crash recap
During the turmoil in the cryptocurrency market, Celsius halted user withdrawals as the company did not provide enough liquidity to maintain operations and meet withdrawal requests. Growing tension in the community caused a panic among CEL investors that caused the token to drop 50%.
Later, The Wall Street newspaper reported that Celsius was on the verge of bankruptcy as the company had hired consultants who aimed to fix the existing problem as securities officials began investigations into the matter.
Previously, Celsius successfully hedged some of the existing loans and withdrew nearly 24,000 WBTC from the MakerDAO DeFi platform and then transferred funds to the FTX exchange.