If you have collateralized loans on Celsius then you need to keep reading.
I have a substantial number of bitcoin collateralized loans through a corporate account on Celsius and amidst the chaos that is presently ensuing, I assume many of you are also fearful that our money will be lost for good. In a flurry to meet margin calls and closing a few loan accounts this past week, I’ve been deducing a better strategy to navigate this mess. The truth is, Celsius could erase all of our earn and custody accounts and say “sorry, we lost it all.” It’s a worst case scenario that everyone is waiting to see unfold. However, if you have a collateralized loan, there is hope.
Keep in mind, this is for informational purposes from my own personal experience and not intended to be financial advice.
With the recent price crash, borrowers have had margin call emails sent en masse and left with three options: allow margin calls to execute, close the loan, or add collateral. We’ll go over the options and risks associated with each.
Allowing the margin calls to execute means selling the bottom. No one likes this, especially those that have faith in the future of cryptocurrency. There is a certainty that the value will increase over time, but sometimes the market must go through what it goes through to get there. Given the pause of transfers and withdrawals from Celsius, this could be a better option if I do not want to send any additional funds into Celsius where it cannot be presently recovered. The trade-off is that I’ll lose a substantial portion of my collateral that could be worth five or ten times as much a few years from now. I consider this a worthwhile reward for the present risk and prefer to keep my collateral so I’m left with the remaining two options.
Closing the loans presents an enormous risk. By closing the loans, I’m sending Celsius additional funds to close a balance that I may not get back. The collateral from the closed loan is placed back in Celsius custody/earn accounts. These accounts have no guarantees whatsoever and are the highest risk of being lost right now. If Celsius closes up shop, all that money is gone. In this scenario, I’d have lost both the collateral and the cash used to close the loans. This leaves me with losing a lot more money than if I had done nothing and allowed the collateral to be sold or liquidated.
Leaving the loans open presents a mitigated risk and the current option I’m taking. If prices on my collateral continues to drop to margin call levels, I will be required to meet those margin calls in less than 24 hours. This strategy suggests I must have capital on the sidelines that can be immediately deployed for when this happens. Getting money in quickly proved to be a greater challenge than I had anticipated. Presently, Coinbase is the only on-ramp with debit card and PayPal deposits that are immediately available to withdraw with hard daily/weekly limits for each. This makes it extremely hard to meet 24 hour deadlines. However, the beauty is that I will be buying at very cheap prices to meet my margin calls. The other risk involves a drop in price that occurs so rapidly there is no time to meet the margin call and reaches the liquidation point. This is bad. It means I lose all the collateral I’ve added to that point and the loan is closed. We’ve seen those vertical red cliffs on the charts and prices have fluctuated in greater amounts within minutes in some instances this past year. This is a grave risk when employing this strategy. It is all dependent on how quickly I can react to a price drop and if I can add collateral before it reaches a liquidation point. By adding collateral early, I can reduce the liquidation price during a rapid price drop. Lastly, keeping the loans open have one great benefit.
You may have heard there is interest in Celsius’ collateralized loan portfolio. Among them, Nexo made an immediate offer as soon as Celsius paused their transfers through their platform. What this means is that even if Celsius becomes insolvent, they do have an option of selling these to recover some money to fill their golden parachutes before declaring bankruptcy. If the portfolio is taken over by a new custodian or loan servicer, the balances would be transferred to a new company that can honor the closure and withdrawal promises Celsius is failing to meet. The difference being, they will have the liquidity to honor those withdrawals and closures. This means that so long as I keep my loans open, it’s open to be bought by another company. There have been reports Celsius is seeking advisors from Citigroup and by opening up their books, Citigroup may find their collateralized loan portfolio lucrative as well and make an offer. This is speculation but once a big bank sees what’s valuable, I assume all major financial institutions will follow their lead.
Let’s end on a hopeful note. I’ve read too many people on social media pointing fingers and spectators outside the arena giving their opinions but offer no solutions. I’m praying Celsius gets through this mess. It’ll be a terrible blow to crypto overall if Celsius fails. There are 1.7 million borrowers and most of them are U.S. citizens that have their life’s savings in there. One option I see unfolding is that they borrow more money with terms they may not be happy with, if they can find a lender. This will probably save their brand by providing enough liquidity to unfreeze transfers and allow customers to withdrawal their funds but offer both incentives and disincentives in exchange. The fairest way, in my opinion, is to allow a daily withdrawal maximum initially, coupled with a fee of 3% to do so. This creates a disincentive for withdrawal but allows people to do so if they choose. In turn, they can offer that 3% back in increased interest rates for keeping your money there. That way, they have the immediate liquidity available from withdrawal fees and have a year to spread those returns back to people who keep their money there. This also incentivizes new customers to deposit with the company as well and they would be free to quietly reduce those rates after things settle down as they have done in the past. Remember, if there is a big mess, it could be years before funds can be returned if at all. Just sit tight and HODL. Start keeping your funds in wallets you own the keys for. If we survive this bear market, we’ve learned valuable lessons about leverage and how much risk we can really stomach. If it all works out, we’ll also come out the other side even richer than before. Hang in there folks, pray for Celsius and our funds. It really does help whether you believe it or not. Cheers.