In January, Celsius Network boss Alex Mashinsky gathered his investment team to tell them he would take control of the crypto lender’s trading strategy ahead of an upcoming US Federal Reserve meeting.
Prices of popular cryptocurrencies such as bitcoin and ether had fallen from all-time highs and the former telecom entrepreneur said Celsius needed to protect against further declines. A hawkish outcome, he was convinced, could send crypto prices plummeting.
In the days leading up to the Fed meeting, Mashinsky personally led individual trades and canceled executives with decades of finance experience, according to multiple people familiar with the matter.
In one instance, Mashinsky ordered the sale of hundreds of millions of dollars worth of bitcoin, refusing to wait to verify Celsius’ often unreliable information about his own holdings. Celsius – which at the time held $22 billion in customer crypto assets – bought back bitcoin a day later at a loss.
“He was ordering traders to massively trade the book for bad information,” one of the people said. “He was dragging huge chunks of bitcoin.”
Another person familiar with the events said that while Mashinsky may have made his views known based on his knowledge of the crypto markets, they insisted he “didn’t run the office. negotiation”.
Mashinsky’s fears were not confirmed in the short term. The Fed confirmed its intention to raise rates and crypto markets shrugged. Celsius made $50 million in business losses in January, some people said, though it’s unclear how much was attributable to Mashinsky.
The previously unreported events highlight Celsius’ difficult internal dynamics in the months leading up to its July filing for bankruptcy, including its weak asset-tracking systems, Mashinsky’s fears of a downturn and its willingness to directly involved in business decisions, unlike the typical leader. leaders of major financial institutions.
Celsius was built on accepting crypto from its clients and promising them eye-popping returns from deploying the tokens in digital asset markets. Its hundreds of thousands of customers are now facing steep losses on the crypto they entrusted to the company, which has a $1.2 billion hole in its balance sheet.
Lawyers for Mashinsky and Celsius, Kirkland & Ellis, told the New York court that the company was pushed into bankruptcy not by mismanagement, but by the broader crash this year in crypto asset prices. Attorneys representing Celsius’s unsecured creditors, overwhelmingly its clients, have pledged to investigate Mashinsky’s conduct.
A lawyer for Mashinsky declined to comment. Celsius and his attorneys in Kirkland did not respond to a request for comment. In a bankruptcy court filing last month, Mashinsky said Celsius’s assets had grown faster than its ability to invest them and acknowledged that he “took what, in hindsight, has turned out to be some poor asset deployment decisions”.
“High conviction” profession
At the start of the year, Celsius enjoyed the external confidence of a company that had just completed a $600 million fundraising round led by two major investors, Canada’s second-largest pension fund, the Caisse de depot et placement of Quebec, and the American investment group WestCap.
The December 2021 funding round had valued Celsius at $3 billion. The fast-growing lender, founded in 2017, has boasted of hiring “traditional finance executives”. But problems were bubbling beneath the surface.
Although Mashinsky claimed that Celsius’ business of collecting crypto deposits and lending them out was safe – he publicly insisted that it did not trade client assets – the company suffered big losses. of cryptographic tokens that it had not disclosed to customers.
One incident involved a U.S.-based lender called EquitiesFirst, which in July 2021 was unable to immediately return $500 million worth of bitcoin Celsius had pledged to secure a loan, Mashinsky told the court. bankruptcies last month.
Another, previously unreported, involved a large investment in the Grayscale Bitcoin Trust, the world’s largest bitcoin fund whose GBTC units offered investors a tradable product that tracked the digital token.
Celsius had bought GBTC when it traded at a premium to the fund’s underlying bitcoin. As of September 2021, Celsius held 11 million GBTC, worth around $400 million, but was trading at a 15% discount to the net asset value of the trust.
Celsius was offered a deal to exit the position that month, which would have reduced the company’s losses, but Mashinsky blocked the sale, arguing the discount could shrink, according to two people familiar with the matter. Instead, it got worse. Celsius would not fully unwind its position until six months later in April, when the discount was 25%.
The company’s total losses on its GBTC trade were around $100 million to $125 million, according to one of the people familiar with the matter.
Celsius had partly made up for its losses by borrowing from other crypto firms. He pledged crypto tokens he held as collateral for stablecoin loans — the equivalent of dollars in crypto — that he would use to buy crypto assets to replace those he had lost, several people familiar with the claim said. case.
These arrangements made Celsius vulnerable if crypto prices fell sharply. Customers could demand the return of their crypto at the same time as Celsius had to send more to its lenders as additional collateral for its stablecoin borrowings.
The company would have little cash to fall back on in such a situation. Celsius had paid more interest to customers on tokens such as bitcoin and ether than it was generating from its investments, according to people familiar with the matter. And it has invested much of the $600 million it has raised from investors led by CDPQ and WestCap into its capital-intensive crypto mining business and startup acquisition. Israeli, Kirkland told the bankruptcy court last month.
On Sunday, Celsius revealed that its current monthly net cash flow was significantly negative. Between August and October, the company estimated that it would lose $137 million, largely attributable to its mining activities. The figures included $33 million in restructuring costs.
Balance sheet figures previously disclosed in the bankruptcy proceedings showed that as early as March this year, Celsius’ liabilities exceeded its assets, but for the holdings of its own digital token CEL. Two people familiar with the matter said this has been the situation since 2021.
In January 2022, it seemed like a moment of crisis had arrived. The company had suffered losses for much of the month as crypto prices declined. In a call Jan. 21, the Friday before the Fed’s meeting, Mashinsky told his investment team that the coming week would be the most defining week of their careers.
“He had a strong belief in the seriousness of the market moving south. He wanted us to start reducing risk like Celsius could,” said one of the people familiar with the events. Not everyone agreed.
Over the next few days, Mashinsky clashed several times with his then chief investment officer, Frank van Etten, a former Nuveen and UBS executive, over what deals Celsius should make, but also about Mashinsky’s involvement in such decisions.
Van Etten, who had joined in September 2021, left in February this year, according to his LinkedIn entry. Mashinsky, in a Jan. 14 press release, cited his arrival at Celsius as an example of “top talent” joining the company. Van Etten said he was unable to comment at this time.
Critical intelligence on the digital asset industry. Check out the FT’s coverage here.
The selling and then buying back of bitcoins ordered by Mashinsky came just a day or two before the Fed meeting. One of the reasons he pushed for Celsius to sell had to do with the issue with EquitiesFirst in 2021.
EquitiesFirst owed Celsius bitcoin and Celsius had hedged that exposure by buying bitcoin before redemption. Mashinsky argued that EquitiesFirst could pay off its bitcoin debt faster as prices fall.
If that happened, Celsius would have more bitcoin than it currently anticipated. He generally tried to maintain a neutral stance on his crypto holdings to balance assets and liabilities. By selling bitcoin now before prices drop, Celsius could profit, Mashinsky explained.
“It wasn’t an irrational thought,” said another person familiar with the events, but there was simply no evidence that EquitiesFirst would pay back any faster. “There was a lot of speculation,” they added.
EquitiesFirst said: “We reached an agreement well before the January date mentioned. Any modification of this agreement would have required the consensus of all parties. The company added that it would fulfill all of its obligations to Celsius.
Mashinsky’s market fears turned out to be poorly timed, at least. While the Fed confirmed its intention to raise rates in March, there was no crash in crypto prices until May. Indeed, the price of bitcoin rallied in the weeks following the Fed’s January meeting.
An internal audit report was then presented to the board and investors of Celsius WestCap and CDPQ in February, recommending accelerating investment in the company’s technology. WestCap and CDPQ declined to comment.
The report says the audit was requested by Mashinsky. It covered the period from January 1 to January 21, according to two people familiar with the matter. It’s unclear why the audit didn’t include trading immediately before the Fed meeting.
The Celsius employee who led internal audit, a former banker with nearly two decades of internal audit and control experience, was soon transferred to work on new business products and partnership ideas.
What future for digital currencies? Our Digital Finance News Editor Philip Stafford and Digital Assets Correspondent Scott Chipolina had an extensive discussion on an Instagram Live about this topic, including the impact of regulation and inflation on crypto. look at this here.