In this week’s newsletter: Crypto giant Celsius is freezing out users as it tries to solve a mammoth lending crisis. So what happens if money in the bank isn’t really there?
If you have a $1,000 balance at Celsius – the crypto bank that froze withdrawals last week, triggering the latest phase of the crisis in the sector – how much money do you have?
The answer seems clear: you have $1,000. You can withdraw that money and spend it as you see fit. Of course, it may be invested in some esoteric cryptocurrency with a fluctuating value, and you may have to pay a fee to turn your $1,000 of play money into cold, hard cash, but you can treat your balance as something like money in your pocket.
What about now, with Celsius having blocked users from withdrawing or transferring funds for seven days and counting? How much money do you have? One answer is nothing: you can’t access the money, so you don’t have it. You may, in the future, have $1,000 again, but right now you have lost it all. Another possible answer is that the money is just resting in your account and, though you can’t reach it, you definitely have it.
Neither of those answers are satisfying, because valuing illiquid holdings is genuinely hard. It’s easy to treat money you can’t access right now as the same as money you can while the times are good, but when things get tricky, the difference becomes stark, and you have entered a liquidity crisis.