Previously we have discussed collateralized crypto lending and potential implications for prices. It is difficult to get collateral quantity or haircut data for private lenders to help estimate parameters for models. Fortunately Celsius publishes some flow-of-funds data that can help.
Celsius' Own Data
Celsius provides weekly
updates, via Twitter at least, going back about 1 quarter*. Here's one example. There is
some daily data prior to that. For now let's just focus on the weekly
numbers for Sep through Dec 2021. Here they are:
Taking prices from Yahoo Finance we get approximate USD amounts as:
Here
we can see gross inflows of 947mm and net of 467mm. That tells us there
is an outflow of ~500mm somewhere. If we assume this is stablecoins
flowing out as loan proceeds we get an approximate average LTV of 50%.
That
tells us a lot! First we know that Celsius consumed approximately 500mm
in funding during the quarter. This is simply applying arithmetic to
their own numbers.
Second, we can make a simple model of the business. Let's simplify for the rest of this discussion and pretend all the collateral is BTC. They pay ~3pct on BTC
deposits and earn ~8pct on stablecoin loans for half the amount.
If
this entire activity is funded by equity this is a simple, positive
carry business with a large need for short term funding. Whether that
equity has much value is unclear...but that is a separate question. Recent equity raises
are for these kind of amounts suggesting this is precisely what is
happening.
Celsius's
equity investors are basically financing their loan book. That is not a
ponzi scheme! Obviously it's not possible to confirm this without
seeing the whole balance sheet. But there is no public evidence they
are raising copious amounts of debt financing. The UK corporate filings do not suggest a tremendous amount of debt.
To
the extent these loans are non-recourse the risk is a collapse in the
collateral value. They have something like a stop-loss for 40k BTC at a
price of 25k from this quarter's lending.
If
their total assets are 20b - as suggested elsewhere and vaguely
consistent with 1b quarterly increments - and prior quarters look like
this one the total is 800k coins. Whether you think that is a reasonable stop-loss order is outside the scope of this discussion.
This
is a simplified analysis of course. But it illustrates how the word
"Ponzi" is misused all over the place. Celsius is a
positive carry financing business, with a huge need for short term
funding and a balance sheet running a large asset-liability mismatch.
But that is hardly a new thing in finance.
Celsius' Business Model
What we have here is a pretty standard financing business. They are buying stablecoin denominated consumer debt with a high yield. They are issuing crypto-denominated lower yielding debt. And they are financing any cashflow needs by selling equity.
If a significant portion of financing is driven by CEL sales and there is questionable behaviour in the CEL market -- issues that have been raised before -- this may be more complex. But on the available information this looks like a bog-standard carry trade.
To some extent this kind of high-yield consumer lending is new in that the backing is crypto collateral. Rather than doing any credit analysis Celsius instead relies on liquidity in the underlying to provide a guarantee of repayment. This is startlingly similar to housing-backed lending pre-2008.
Is This Ok?
Yes
this might be a problem. Yes it might look a bit like a SIV. Yes it would be a problem if assets were lost to hacks or mismarked. Yes the
equity might be worthless (it's equity!). But, absent more information, its not a Ponzi. It is quite literally a shadow bank funded almost entirely by
equity.
In some ways this
is more honest than TradFi: here the equity holders get hit and then
the depositors. The taxpayer is nowhere to be found. And nobody is
holding implicitly-guaranteed debt. You can say many things about
Celsius' management - but they have always been clear these are risky
lending activities.
* Yes this isn't precisely Q4 but it's close enough.
