Why are all these crypto companies declaring bankruptcy?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

The latest crypto company to declare bankruptcy is Celsius, putting almost $5bn dollar of user deposits at risk. You may remember the name because we talked about their crumbling business a while back.

But what is happening here in general? Don’t these companies have at least enough money to weather through a crypto storm?

No, because their business models never worked. Especially those promising high returns to lenders have been playing a very dangerous game.

Here’s how they operated: They borrow money from you and promise you high returns. Then they take that money and put it in the market, say into Bitcoin. And it’s easy to promise you 20% interest if the price of Bitcoin goes up by 40%.

But that’s exactly the problem. It only works as long as prices shoot up and people keep piling money into the lending platforms. As soon as prices go down, and too many people want their money back, companies like Celsius don’t have enough money because they lost much of it in a crash: The hole is at least $1.2 billion dollars deep in their case.

So: As always - if it sounds too good to be true, it probably is. We think a lot more companies will crumble. Be safe out there and remember yesterday’s podcast about regulations? We might need some of that!

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.