What We Do & How We Do It
Some of the questions I hear the most about Celsius are: “How does Celsius afford the rewards it pays?” “Is Celsius safe?” and “How does Celsius work?” So, I wanted to talk about the Celsius business model and address all these questions head-on.
What is the Celsius business model?
Let’s take a moment to think about the traditional banking system. You deposit your hard-earned money with your bank and however low today’s interest rate may be, you expect it to earn some kind of payout on it. I am Japanese — come talk to me about low interest rates one day (and eating really strange raw fish), but I digress. Banks can pay out interest to their depositors because they use the money deposited to lend to borrowers (mortgage, anyone?). The borrowers pay interest on their loans. After paying for various costs, the banks pay interest to depositors to attract new customers and keep the ones they have.
This structure of value creation is similar to the Celsius Network model, but we are not a bank and we do not take or hold deposits. We do, however, use the coins transferred to us by our users for our own yield-generating activities, mainly lending them out to our approved institutional borrowers. This enables us to create value and earn a return, which we then use to finance our operations and pay out weekly rewards.
The main difference between the business model used by traditional banks and the business model we’ve created at Celsius is how we distribute the value we’ve created back to our community. In the fiat world, traditional banks have conditioned depositors to expect a very low return on their money, typically less than 1% annually. Celsius returns up to 80% of what we earn (and that’s before we deduct any expenses), and that enables us to offer a very high reward rate on the assets we support. The remaining 20% of our revenue allows us to continue our operations and scale our community, and our goal from day one has been doing good for others before doing well for ourselves. We are not trying to make Celsius a success by reserving a lot of capital for ourselves; we are trying to change the zero-sum game that financial institutions have played in the past and create a better outcome for customers, and this model only strengthens as we continue to grow.
By flipping the traditional banking model on its head and creating a customer-centric business model that acts in your best interest, Celsius has become the fastest-growing company in crypto with about $1 billion worth of customer assets under management to date. Imagine if assets on the platform grew to $2 billion or $4 billion.
Our core finance team meets weekly and makes any necessary rate adjustments (typically small) to the weekly rewards based on our needs and the current market conditions. This operating model has worked well for both us and our customers to date and, therefore, we do not expect to make abrupt and drastic changes to this model. This approach both assures our long-term success and allows us to generously reward our customers.
For those of you who are not familiar with the potential return you can generate with your cryptocurrency, we have more than 30 coins on the Celsius app earning weekly compounding rewards. As of the first week of August, Bitcoin and Ethereum holders are earning a return of 4.51–6.2% and 4.55–6.2%, respectively, depending on the size of a customer’s holdings. And for all stablecoins that we support, the reward is currently 8.69–11.9% APY.
How do we do it?
What do we do in order to sustain such high reward rates? Our bread and butter revenue model is to earn the return from crypto lending, but what exactly is crypto lending? There are some variations but the core is this: we use coins transferred by our customers as collateral for lending, rehypothecation, and other similar transactions. In addition to lending crypto to approved institutions, we also lend dollars and stablecoins to retail customers looking to borrow against their crypto holdings.
Here’s an example: Let’s say you hold 10 BTC in your Celsius wallet. You’re currently earning upwards of 4.51% APY from us with rewards distributed to your wallet each week. Although volatile, the price of BTC steadily rising and you have no intention of selling anytime soon. So now you have a lot of money invested in an asset that holds a lot of long-term potential, but now you need cash — maybe you have an unexpected medical bill, or you need to pay your taxes, or maybe you just want to treat yourself to something new. You don’t want to sell your crypto for cash because it will be much more expensive to buy-in down the line, not to mention the potential capital gains taxes you’ll have to pay if you bought in at a lower price.
Instead of selling your Bitcoin, Celsius enables you to borrow dollars from us using your own coins as collateral. And because our loan structure is based on secured collateral, you can borrow cash irrespective of your current credit situation, without the usual (racist, ageist, classist) loan complications that plague traditional lenders, and your cost to borrow will most likely be significantly lower than with an uncollateralized loan because we have additional ways of making money using the collateral you have pledged to us. Rather than just relying on the interest that you pay Celsius, Celsius uses the same yield generating lending model to deploy your crypto collateral. This is how we can afford to charge you as little as 1% APR interest on your loans.
What I have just explained is the concept of “rehypothecation.” The word may look scary, but the concept is simple.
What do we do to protect the assets?
Whenever you are involved in a financial activity, advisors will give you a disclaimer such as, “Investing involves risk. There is always the potential of losing money when you invest in securities. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.” Nobody is allowed nor is able to guarantee that you will not lose your money ever, and anyone claiming to lend your assets with 0% risk should be a giant waving red flag that something isn’t quite right. However, we know how hard it is to both preserve assets and earn money on those assets at the same time. Celsius is not an investment adviser and we do not manage money for you. However, we do help you take advantage of opportunities for you to maximize your crypto holdings. We give you the means to borrow against your crypto as well as earn yield on your crypto holdings.
What Celsius does best is identify the counterparties we believe are most suitable to transact within lending, borrowing, and other similar transactions. We believe it is very important to carefully vet all of the counterparties we transact with by looking at a number of factors including their financial credentials. It’s really not so different from us making a decision about a new hire. You never rely on just one thing, like a resume, to get to know your candidate, right? Financials are an equivalent of a resume. They give us a snapshot and a high-level view of the counterparty that we want to get to know. Then we talk to them just as we would when we interview employee candidates — not just once, but several times, and often with multiple representatives of the potential counterparty. Once all the information and opinions are collected, we decide about the given candidate. If we conclude that the counterparty has a high-risk profile, we may not move forward with them. If we do, we take a very conservative position such as only allowing very small or overcollateralized positions. Regardless of what we do, we continuously monitor all of our counterparties and positions.I should note — every individual customer of Celsius goes through a similar process by completing a “Know Your Customer” (KYC) application as well as being subject to monitoring.
So how do we decide when to provide uncollateralized or undercollateralized loans or to whom and how much? There are a number of things that we look for when analyzing counterparties. It is part quantitative and part qualitative, including: 1) strong financials including low net leverage, good liquidity, and a strong capital base, 2) the profile of the counterparty including management experience levels, 3) the types of businesses they are involved in, and 4) our ability to establish a good and ongoing working relationship. We use all of these data points to determine the size of the credit line as well as the amount of collateral required.
Security risk and insurance
I am often asked about security and insurance, since counterparty exposure is a concern. People often bring up FDIC insurance, which is what banks use to protect their customers’ assets. While we are beginning to see some insurance coverage in our space, there is no standard policy like FDIC for cryptocurrency, and the policies that do exist are limited as to the coverage they provide. Most of the insurance policies today only cover coins locked away, most often in cold storage. While this is a great product offering, it does little for Celsius. As you read above, our coins earn yield by being lent out, not stowed away.
So what do we do without standardized insurance like FDIC? Well, the risk assessment I previously described is our main protector. Our secondary source of protection comes from our partner, Fireblocks. Most of our customers’ assets go directly to Fireblocks when transferred to the Celsius app. Fireblocks has insurance for assets that are in-transit, which is perfect for Celsius as we have a continuous flow of funds coming in and funds going out.
Aside from counterparty risk, users are often concerned about technological risks and security. While we like to avoid getting into too many details (hackers like to read blogs, too!) you can check out an AMA with our Chief Security Officer and Chief Technology Officer. The most important things to remember are: our app was built with user privacy and security being the top priority. You can confirm this because it often comes at the cost of user-friendliness (I know, you get logged out all the time! You keep needing to re-enter your 2fa key! It can get overwhelming from time to time). We know that it will only take one customer losing their crypto to destroy the wonderful business and community we have built. We’re working every day to make sure that never happens.
How do we address market volatility?
So we’ve established that we have built our business as strong as we can and are prepared for malicious acts from humans or technology… but what happens if the whole economy gets in our way? What if another Covid-19 happens and it hits us even harder the next time?
The good news is, volatility is good for us. It brings great opportunities even in the case of big and sudden disruptions like that of March 12, 2020. Of course, we need to have the right team that can take the situation calmly and handle such disruptions with steady hands. And I believe we have a team at Celsius that can take these challenges head on! We recorded our single biggest profit day on March 12. Volatility, if managed appropriately, can be our friend, not enemy, regardless of which direction the market itself goes.
Rapid growth — good or bad?
The amount of assets held on the Celsius platform has grown rapidly. Currently these total assets are above $1 billion. Is there such a thing as growing too fast? Although it is a great problem to have, you bet there is. We are committed to continuing to reward customers, but if we do not earn enough on our end, it is not hard to imagine what happens next. We absolutely need to stay razor-sharp-focused and plan ahead through this high growth period. Nothing is built overnight and we must prepare for the future so there are no surprises. We need to be always looking forward and be ready for anything the growth brings. I, as a CFO, think about these things every day. We work on diversification of portfolios where we can deploy coins. We come up with new products periodically. We reach out to different people using different approaches. Those are a few of the examples of what we work on everyday.
The most important part of our company — YOU!
We can overcome any of these concerns that people may have by carefully planning, taking calculated risks and masterfully executing business. Our biggest challenge though, in order for us to continue running a healthy business, is to make sure that we keep you happy. Without you, there is no Celsius. We can deal with security issues, volatility of the market, work out any adversaries staying ahead of the game always. But if we cannot keep you happy, then we cannot stay in business. So please keep providing feedback to us. Let us work out any concerns that you might have. That’s only the way we can stay in business. Afterall, we are a blockchain company and a project that only grows with the community.
About The Author — Harumi Urata-Thompson
Harumi specializes in leading and advising companies on taking innovative paths to achieve strategic, operational and marketing success in their businesses. She serves on the board of directors of several companies and speaks on topics including Artificial Intelligence, Blockchain, Cryptocurrency, Cybersecurity, Outerspace, Cross-border Business, and Diversity & Inclusion.
Previously, Harumi was the Chief Operating Officer for CFA Society New York, a nonprofit affiliate of the CFA Institute with 10,000 financial professionals which she successfully completed a turnaround. Before CFA Society New York, Harumi spent 14 years at Thomson Reuters managing various innovation initiatives, business unit and products. Harumi began her career in investment banking with Morgan Stanley and Citigroup, working with fixed income derivatives and mergers & acquisitions. Harumi has an MBA from INSEAD in France and a BA, magna cum laude, in business from Sophia University in Japan. She is a Chartered Financial Analyst, Project Management Professional certified, an Advanced Communicator and Leader of Toastmasters.
About Celsius Network
Celsius Network is a democratized interest income and lending platform accessible via a mobile app. Built on the belief that financial services should only do what is in the best interests of the community, Celsius is a modern platform where membership provides access to curated financial services that are not available through traditional financial institutions. Crypto holders can earn rewards by transferring their coins to their Celsius Wallet and can borrow USD or stablecoins against their crypto collateral at interest rates as low as 1% APR.
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