Key Takeaways
  • On Wednesday, July 13, 2022, crypto bank Celsius filed for Chapter 11 bankruptcy.
  • Chapter 11 bankruptcy protection is a course of action a company takes when they are unable to pay off its liabilities. 
  • Although the company is experiencing tough financial times, Celsius has asked the court if it can continue its operations.
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On Wednesday, July 13, 2022, crypto bank Celsius filed for Chapter 11 bankruptcy. The digital asset firm mentioned extreme market conditions led to a surge in customer withdrawals, ultimately hurting their operations. However, Celsius is not the only crypto firm that is experiencing financial difficulties during this time of uncertainty within the crypto market. 

 

What is Chapter 11 Bankruptcy?

 

Chapter 11 bankruptcy protection is a course of action a company takes when they are unable to pay off its liabilities. By filing for Chapter 11 bankruptcy, the corporation is given the opportunity of a fresh start. The company is able to reorganize its debt in a way where it can pay them off but also continue operating.

 

chapter 11 bankruptcy

Image Credit: Vitalii Vodolazskyi / Shutterstock.com

 

However, they are not off the hook for their actions that led them to bankruptcy. In some major cases, a court appointee will go into the organization to ensure that all operations are done correctly. Furthermore, no business decisions can be made without the approval of the court. Therefore, this scenario is not one many companies wish to find themselves in, as it comes with unwanted media attention and may result in them having to dissolve to settle debts.


How Celsius Operates

 

Celsius markets itself as a crypto bank, meaning its business model is similar to traditional banks, as it allows customers to deposit their digital currencies. The customers will deposit their cryptocurrencies into their Celsius wallets, after which they will lend out their customers’ money to borrowers. When these borrowers pay the money back over time, the customers who put money into their Celsius Wallet will earn interest on their deposits. 

 

Recommended Read: Factors Leading to a Crypto Bear Market

 

What Led to Celsius Filing for Bankruptcy?

 

Since the beginning of 2022, the crypto market has begun significantly declining in value. The recent collapse of the TerraUSD was just the latest factor that led to the value of Bitcoin and Ethereum dropping by 52%  and 57%, respectively, in the past six months. Consequently, customers began withdrawing their money to get out of the market before it got worse; as many people had the same idea, Celsius had to suspend withdrawals at this time. 

 

celsius crypto

Image Credit: Ivan Babydov / Shutterstock.com

 

Details of Celsius’ Bankruptcy Filing

 

In the court filing, Celsius disclosed that it had $167 million in cash on hand, with its assets and liabilities estimated between $1 billion and $10 billion, along with 100,000 creditors. One of those creditors is crypto billionaire Sam Bankman-Fried, who has a $12 million unsecured loan, meaning there is a possibility that he does not retain all of the money he loaned. 

 

One unfortunate outcome of this situation is the hierarchy of creditors. Unfortunately, consumers who have their money currently invested in the firm right now are viewed as unsecured creditors by the court, meaning that there is no guarantee they will receive their initial investment. Also, even if they were to receive a payment of some sort, the payout is expected to be a fraction of what they originally deposited. 

 

Alex Mashinsky, co-founder and Chief Executive Officer of Celsius, said the company is not requesting authority to allow customer withdrawals, but they are asking the court if they can continue operations during the restructuring process, such as paying their employees. 


Unfortunately, due to Celsius’ decision to suspend customer withdrawals, state securities in Alabama, Kentucky, New Jersey, and many others have now begun conducting investigations. As the investigation is in its early stages, no details of this investigation have yet been announced, so it is a matter of time to see what this course of action will hold. 


The Money Wrap-Up

 

The main lesson to be learned from this event is that the crypto market is volatile, and one should not invest any money they cannot afford to lose. As the crypto market is less regulated than the stock market, it means there is a higher risk of fluctuations. As seen from previous events, the prices within the crypto market can swing very quickly and could sometimes cause companies to fail. Therefore, you must only invest money that you can risk losing. 


Main Image Credit: T. Schneider / Shutterstock.com

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