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Some people who took out loans backed by cryptocurrencies are experiencing a hangover due to margin calls sent out by at least one loan company after a brutal week that saw the prices of most digital coins fall dramatically.
Bitcoin and other cryptocurrencies crashed last week, with around $1.5 trillion wiped from the combined cryptocurrency market price since November. The price of Bitcoin and Ethereum fell around 50 percent or more from their all-time highs in November 2021 of more than $68,000 and $4,800 to less than $35,000 and $2,200 respectively.
When prices were skyrocketing, crypto enthusiasts tapped their holdings to buy homes, cars and more crypto. They got these loans from startup nonbank lenders and automated, blockchain-based platforms.
Like banks, these lenders typically take deposits. Unlike banks, their deposits take the form of crypto, Wall Street Journal reported. The crypto deposits earn higher-than-average interest rates and are used to fund loans using crypto as collateral.
Celsius Network, a London-based cryptocurrency loan company that raised $843.8 million in funding over seven rounds since its 2017 inception, has sent out margin-call notices to an unknown number of customers.
Celcius explained on its margin call FAQ page that its loans are backed by crypto, which is locked as collateral. Customers’ locked collateral value has to be maintained to an agreed-upon value based on how much they borrow, Celcius said. For example, if you borrow $1,000, you’ll need to have collateral valued at $2,000, or a loan to value of 50 percent. When the value of the collateral drops, a margin call is automatically triggered.
The move by Celcius caused panic and confusion for some customers.
“I can’t even contact the loans team. I’m about to be liquidated” tweeted JGels @JasonGeller10.
“How do you add collateral?? Or do you email loans and ask them transfer additional collateral from your wallet?? No response from Celsius other than ‘Margin Call’ email” tweeted EagleyJ.
“um so.. @CelsiusNetwork collateralized loan getting margin call and im tryin to reach cust serv thats only open M-F…. and the time limit to respond to the margin call is 6 hrs left… lmao… any suggestions what to do?” tweeted DrS◎LanaNFT.
“Have always been conservative with leverage – and had never received a margin call till recently. Getting margin called by @CelsiusNetwork on $CEL-back loans initiated at 25% LTV was really disappointing for me” tweeted @0xBlasphemy.
One Twitter user questioned the company’s move based on its credentials. “The company just did a 25x, raised 850M and is collecting liquidation fees on $CEL holders?” @TheRealPlanC tweeted. “25% LTV against $CEL should be low risk when the Token is suppose to reflect the companies success. And the company is killing it”.
Plan@TheRealPlanC added, “I haven’t gotten a margin call. But, for those in the @Celsiusnetwork community that hold $CEL Token that are getting margin called on 25% LTV loans I feel bad for you. $CEL Token funded the Celsius company and now #Celsius sits back after raising $850M and doesn’t support $CEL.”
The business of loans backed by crypto collateral is growing fast. Such loans appeal to borrowers for the same reason they borrow against their stock portfolios: to benefit from rising prices without diminishing the size of their bets, Wall Street Journal reported.
The price of Ethereum increased four-fold in value in 2021. The price of Bitcoin increased by 60 percent in 2021, its rise marred by its December performance.
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Image: iStock
