In January, Celsius Network head 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 their all-time highs and the former telecoms entrepreneur said Celsius needed to protect itself from further falls. He was convinced that a hawkish result could send cryptocurrency prices crashing.
In the days before the Fed meeting, Mashinsky personally ran individual trades and overruled executives with decades of financial experience, according to several people familiar with the matter.
In one case, Mashinsky ordered the sale of hundreds of millions of dollars worth of bitcoins, refusing to wait to verify Celsius’ often unreliable information about his own holdings. Celsius, which at the time had $22 billion of client crypto assets, bought back the bitcoin a day later at a loss.
“He was ordering traders to massively trade the book with bad information,” one of the people said. “He was taking big 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 was “not running the trading table.”
Mashinsky’s fears were not confirmed in the short term. The Fed confirmed plans to raise rates and crypto markets shrugged. Celsius had a $50 million trading loss in January, some of the people said, though it’s unclear how much of that was attributable to Mashinsky.
The previously unreported events highlight tense internal dynamics at Celsius in the months leading up to the July bankruptcy filing, including its weak asset tracking systems, Mashinsky’s fears of a fallout and his willingness to involve -be directly involved in business decisions, unlike the typical boss. managers of large financial institutions.
Celsius was built by accepting crypto from its customers and promising them amazing returns that it generated by implementing tokens in digital asset markets. Its hundreds of thousands of customers are now facing significant 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, have told the New York court that the company was pushed into bankruptcy not by mismanagement, but by this year’s broader collapse in crypto asset prices . Lawyers representing Celsius’ unsecured creditors, overwhelmingly their clients, have pledged to investigate Mashinsky’s conduct.
An attorney for Mashinsky declined to comment. Celsius and his Kirkland attorneys did not respond to a request for comment. In a bankruptcy court filing last month, Mashinsky said Celsius’ assets had grown faster than his ability to invest them and acknowledged that he “made what, in retrospect, turned out to be certain decisions of deployment of poor assets”.
‘High Conviction’ Trading
Earlier this year, Celsius had the outside confidence of a business that had just completed a $600 million equity fundraising round led by two major investors, Canada’s second largest pension fund, Caisse de dépôt et placement du Québec and the American investment group WestCap.
The December 2021 funding round had valued Celsius at $3 billion. The fast-growing lender, founded in 2017, boasted it was hiring “traditional financial executives”. But problems were bubbling beneath the surface.
Although Mashinsky claimed that Celsius’ business of taking crypto deposits and lending them was safe, publicly insisting that it did not trade client assets, the firm had suffered large losses of crypto tokens that it had not disclosed to clients.
One incident involved a US-based lender called EquitiesFirst, which in July 2021 had failed to immediately repay $500 million in bitcoins that Celsius had pledged to secure a loan, Mashinsky told the bankruptcy court last month past
Another, previously unreported, involved a major 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 was trading at a premium to the bitcoin underlying the fund. As of September 2021, Celsius had 11 million GBTC, which was then worth about $400 million, but traded at a 15% discount to the trust’s net asset value.
Celsius was offered a deal to exit the position that month that 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 divest its position until half a year later in April, when the discount was 25 percent.
The firm’s total losses on its GBTC trade were between $100 million and $125 million, according to one of the people familiar with the matter.
Celsius had covered its losses in part by borrowing from other crypto companies. He pledged crypto tokens he held as collateral for stablecoin loans (the cryptocurrency equivalent of dollars) that he would use to buy crypto assets to replace those he had lost, several people familiar with the matter said.
These deals left Celsius vulnerable if crypto prices fell sharply. Customers could demand their crypto back at the same time that Celsius had to send more to its lenders as additional collateral for stablecoin loans.
The company would have little cash to fall back on in such a situation. According to people familiar with the matter, Celsius had been paying customers more interest on tokens like bitcoin and ether than it generated on its investments. And it invested much of the $600 million it raised from investors led by CDPQ and WestCap into its capital-intensive crypto mining business and the acquisition of an Israeli start-up, Kirkland told the court in bankruptcies last month.
Sunday, Celsius disclosed that its current monthly net cash flow was significantly negative. Between August and October, the company estimated it would lose $137 million, largely attributable to its mining business. The figures included $33 million of restructuring costs.
Balance sheet figures previously disclosed in the bankruptcy proceedings it showed that already in March of this year Celsius’ liabilities were greater than its assets, but for the holdings of its own digital token CEL. Two people familiar with the matter said that has been the situation since 2021.
In January 2022, it seemed that a moment of crisis had arrived. The company had suffered losses for much of the month as cryptocurrency prices fell. In a call on Jan. 21, the Friday before the Fed meeting, Mashinsky told his investment team that the coming week would be the most defining of their careers.
“He had a strong conviction of how badly the market could move south. He wanted us to start de-risking as much as Celsius could,” said one of the people familiar with the events. Not everyone agreed.
Over the next few days, Mashinsky clashed repeatedly with his then-chief investment officer, Frank van Etten, a former Nuveen and UBS executive, over what trades Celsius should make, but also over Mashinsky’s involvement in those decisions.
Van Etten, who had joined in September 2021, left in February of 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 not in a position to comment at this time.
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The sale and then buyback of bitcoins that Mashinsky called for happened just a day or two before the Fed meeting. One of the reasons I had been pushing for Celsius to sell was related to the issue with EquitiesFirst in 2021.
EquitiesFirst owed Bitcoin to Celsius and Celsius had hedged this exposure by buying bitcoin before the repayment. Mashinsky argued that EquitiesFirst could pay off its bitcoin debt more quickly as prices fell.
If that were to happen, Celsius would have more bitcoin than currently anticipated. He usually tried to maintain a neutral position in his crypto holdings to balance assets and liabilities. By selling bitcoins now before prices drop, Celsius could profit, Mashinsky reasoned.
“It wasn’t an irrational thought,” said another person familiar with the events, but there was simply no evidence that EquitiesFirst would return any faster. “There was a lot of speculation,” they added.
EquitiesFirst said: “We entered into an agreement well in advance of the January date mentioned. Any amendment to this agreement would have required the consent of all parties.” The company added that it would honor all of its obligations to Celsius.
Mashinsky’s fears about the market turned out to be ill-timed, to say the least. Although the Fed confirmed its plans to raise rates in March, there was no collapse in crypto prices until May. In fact, the price of bitcoin rose in the weeks following the January Fed meeting.
An internal audit report was subsequently presented to the board and investors of Celsius WestCap and CDPQ in February that recommended accelerating the company’s technology investments. WestCap and CDPQ declined to comment.
The report noted that the audit was requested by Mashinsky. It covered the period from Jan. 1 to Jan. 21, according to two people familiar with the matter. It is not clear why the audit did not include trading immediately before the Fed meeting.
The Celsius employee who led the internal audit, a former banker with nearly two decades of internal audit and controls experience, soon after moved on to work on new business products and partnership ideas.
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