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Crypto platforms are not as safe as banks, no matter what they claim.


Key points

  • Celsius customers are hoping heartfelt letters will convince the bankruptcy courts to return their money.
  • Crypto platforms do not have FDIC insurance or the other protections offered by bank accounts.
  • Always read the terms and conditions before you commit money to a crypto platform and only invest money you can afford to lose.

Celsius, the crypto lending platform that collapsed over the summer, owes $4.7 billion, according to its bankruptcy filing. That’s a lot of money. For some retail investors, it was their life savings. For others, it was money they wanted to put towards a house deposit or use to fund their retirement. They trusted Celsius and believed it was a safe alternative to a savings account.

Then Celsius froze withdrawals in June, and that trust was destroyed. Many customers are grappling with the possibility that they could lose their money altogether. Celsius owes about $1.2 billion more than it holds, and retail investors will be low down on the pecking order when it comes to recovering funds. It’s now in the hands of the bankruptcy courts who need to decide who gets what.

Celsius customers fight for their life savings

One big issue for Celsius customers is that they are being classed as unsecured creditors. If their money was held in a traditional bank or brokerage, they’d have protection in the form of FDIC or SIPC insurance. FDIC insurance protects money in bank accounts against bank failure, while SIPC covers cash and securities held with a stock broker.

Instead, the money that Celsius customers deposited on the platform could be treated as a type of loan made to the company, which could make it difficult to get back. Some investors have joined together to hire lawyers, and many have written letters directly to the court. It isn’t clear how much of an impact this will have, but the letters reveal the human side of the Celsius collapse.

One depositor said he’d put his father’s pension money into Celsius, along with his own savings. He hasn’t told his Dad yet. Another customer was grappling with suicidal thoughts. Yet another said, “This horrible event has truly damaged my life. I can hardly sleep, I’m struggling to pay my bills, and I can’t live a normal life anymore.” There are hundreds of letters.

Most of the writers describe their sense of betrayal. Some accused Celsius of lying and others described it as a Ponzi scheme. One said, the Celsius CEO, Alex Mashinky “made people believe that Celsius was a safe and viable alternative to a bank with way better interest.” Another investor, a member of the U.S. Air Force wrote that he’d deposited his life savings with Celsius. “I am a long-term holder and investor, not a trader,” he wrote. Little did he know that Celsius was actively trading and taking undisclosed risks with his money.

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How to manage crypto risk

If you’re considering buying crypto or using a crypto platform that pays interest, please take steps to ensure you don’t end up like the 1.7 million Celsius customers now grappling with serious losses.

1. Don’t assume a crypto platform is as safe as a bank

As we mentioned above, bank accounts carry FDIC insurance, meaning your savings are protected for up to $250,000 per eligible account. Some crypto exchanges promise that U.S. dollars deposited with them are FDIC-insured, but it doesn’t cover stablecoins or crypto assets.

Banks and brokerages have to follow strict rules about what they are allowed to do with customer deposits. In contrast, analysis from Arkham Intelligence says, “Celsius appears to have managed a notable portion of its assets more like a hedge fund than a bank, investing deposits aggressively in the crypto markets rather than lending them out in a low-risk manner to sophisticated institutions.”

2. Read the terms and conditions

Wading through the legalese of terms and conditions is no fun at all. But companies can hide all kinds of things in these documents. In the wild west world of crypto, you could be signing away your rights. If the worst happens and the crypto platform fails, those boring documents could be the difference between keeping and losing your funds.

Pay particular attention to details of ownership. In the case of Celsius, customers unintentionally agreed to transfer ownership of their assets to the platform. Other crypto lending platforms have similar clauses. Look for a platform where your assets remain yours.

3. Only invest money you can afford to lose

No type of cryptocurrency or crypto platform is a good place for your life savings. Even if it is a stablecoin that’s pegged to the U.S. dollar, it is not the same as a U.S. dollar held in a bank account. Not only can the value of any cryptocurrency fall to zero, crypto platforms can collapse.

It bears repeating: Right now, there’s no such thing as a safe crypto investment. Don’t invest money you can’t afford to lose, and don’t borrow money to buy crypto. It’s also good to make sure crypto isn’t the only asset type you hold. If crypto sits alongside other assets in your portfolio, including stocks, cash, and real estate, then the failure of a single project won’t knock you off course financially.

Bottom line

The Celsius investors’ stories are heartbreaking and a reminder that high returns come with high risks. Eventually there might be more safeguards in place to protect crypto investors. Until then, crypto platforms are not banks and you could lose everything. Tread carefully and only entrust a small percentage of your funds to crypto platforms.

Note: Some quotes have been edited lightly for clarity.

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