Alex Mashinsky took control of Celsius trading strategy months before bankruptcy – Financial Times | Vette Leader

In January, Celsius Network CEO Alex Mashinsky rallied his investment team to tell them he would take control of the crypto lender’s trading strategy ahead of an upcoming Federal Reserve Board meeting.

Prices of popular cryptocurrencies like bitcoin and ether had fallen from their all-time highs, and the former telecom entrepreneur said Celsius needed to guard against further falls. A hawkish outcome, he believed, could send crypto prices crashing.

In the days leading up to the Fed’s meeting, Mashinsky personally oversaw individual trades and overruled executives with decades of financial experience, according to several people familiar with the matter.

In one instance, Mashinsky ordered the sale of hundreds of millions of dollars worth of Bitcoin and refused to wait to double-check Celsius’ often unreliable information about its own holdings. Celsius — which then held $22 billion in crypto assets from customers — bought back the bitcoin at a loss a day later.

“He ordered dealers to massively trade the book for bad information,” one of the people said. “He was throwing huge blocks of bitcoin around.”

Another person familiar with the events said that while Mashinsky has voiced his views based on his knowledge of the crypto markets, they insisted “that he does not chair the trading table.”

Mashinsky’s fears were not confirmed in the short term. The Fed confirmed rate hike plans and crypto markets shrugged. Celsius made $50 million in trading losses in January, some people said, although it’s not clear how much was attributable to Mashinsky.

The previously unreported events underscore the tense internal dynamics at Celsius in the months leading up to July’s bankruptcy filing, including its weak asset-tracking systems, Mashinsky’s fears of a downturn, and its willingness to interfere directly in trading decisions, unlike a typical boss Managers of large financial institutions.

Celsius built itself by accepting crypto from its customers and promising them staggering returns it generated by deploying the tokens in the digital asset markets. Its hundreds of thousands of customers are now facing significant losses on the crypto they have entrusted to the company, which has a $1.2 billion hole in its balance sheet.

Attorneys for Mashinsky and Celsius, Kirkland & Ellis, have told the New York court that the company was not driven into bankruptcy by mismanagement but by the broader plunge in crypto asset prices this year. Lawyers representing Celsius’ unsecured creditors, mostly its clients, have vowed to investigate Mashinsky’s conduct.

An attorney for Mashinsky declined to comment. Celsius and its attorneys in Kirkland did not respond to a request for comment. In a filing with bankruptcy court last month, Mashinsky said Celsius’s assets had grown faster than its ability to invest it and acknowledged that it made “what later turned out to be certain bad decisions about asset deployments.” have.

Trade with “high conviction”.

Earlier in the year, Celsius led the trust of a company that had just completed a $600 million fundraising round led by two large investors, Canada’s second-largest pension fund Caisse de dépôt et Placement du Québec and US investment group WestCap became.

The December 2021 funding round valued Celsius at $3 billion. The fast-growing lender, founded in 2017, boasted of hiring “traditional finance managers.” But problems simmered beneath the surface.

Although Mashinsky claimed Celsius’s crypto deposit-taking and lending business was safe — he publicly insisted it did not trade customer assets — the company had suffered large losses from crypto tokens that it had failed to disclose to customers.

One incident involved a US-based lender known as EquitiesFirst, which had been unable to borrow $500 million worth of bitcoin in July 2021.

Another, previously unreported, involved a sizeable investment in the Grayscale Bitcoin Trust, the world’s largest Bitcoin fund, whose GBTC units offered investors a tradable product that tracked the digital token.

Celsius had bought into GBTC when it was trading at a premium to underlying Bitcoin in the fund. As of September 2021, Celsius held 11 million GBTC, which was then valued at about $400 million, but was trading at a 15 percent discount to the trust’s net asset value.

Celsius was offered a deal to exit the position this month that would have cut the company’s losses, but Mashinsky blocked the sale, arguing the discount could narrow, according to two people familiar with the matter. Instead, it got worse. Celsius would not fully divest its position until six months later in April, when the discount was 25 percent.

The company’s total losses on its GBTC trade were around $100 million to $125 million, according to a person familiar with the matter.

Line chart of $ per coin showing bitcoin prices rising after the Federal Reserve meeting in January

Celsius had partially offset its losses by borrowing from other crypto ventures. It pledged crypto tokens it held as collateral for loans of stablecoins — the equivalent of dollars in crypto — that it would use to purchase crypto assets to replace those it lost, said several people familiar with the matter.

These agreements left Celsius vulnerable if crypto prices fell sharply. Customers could reclaim their crypto, while at the same time Celsius had to send more to its lenders as additional collateral for its stablecoin loans.

In such a situation, the company would have little liquidity of its own to fall back on. According to people familiar with the matter, Celsius had paid customers more interest on tokens like bitcoin and ether than it was generating from its investments. And it invested much of the $600 million it raised from investors led by CDPQ and WestCap in its capital-intensive crypto mining business and acquisition of an Israeli start-up, Kirkland said in bankruptcy court last month.

On Sunday, Celsius announced that its current monthly net cash flow was significantly negative. Between August and October, the company estimated it would lose $137 million, largely due to its mining business. Figures include $33 million in restructuring charges.

Balance sheet figures previously disclosed in the bankruptcy proceedings showed that Celsius’ liabilities exceeded its assets as early as March this year, excluding holdings in its own digital token, CEL. Two people familiar with the matter said it has been since 2021.

In January 2022, a moment of crisis seemed to have arrived. The company had been in losses for most of the month due to the fall in crypto prices. On a call on Jan. 21, the Friday before the Fed meeting, Mashinsky told his investment team that the coming week would be the most defining of their careers.

“He was adamant about how badly the market could move south. He wanted us to start reducing the risk in whatever way Celsius could,” said one of those familiar with the events. Not everyone agreed.

In the coming days, Mashinsky repeatedly disagreed with his then chief investment officer, Frank van Etten, a former Nuveen and UBS executive, over what deals Celsius should do, but also over Mashinsky interfering in such decisions.

Van Etten, who joined in September 2021, left the company in February this year, according to his LinkedIn post. Mashinsky, in a Jan. 14 press release, cited his arrival at Celsius as an example of “high caliber talent” joining the company. Van Etten said he couldn’t comment at this time.

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The bitcoin sale and buyback ordered by Mashinsky came just a day or two before the Fed meeting. One reason he’d pushed to sell Celsius was related to EquitiesFirst’s 2021 offering.

EquitiesFirst owed Celsius Bitcoin and Celsius had hedged that risk by buying Bitcoin before repaying it. Mashinsky argued that EquitiesFirst could repay its Bitcoin debt faster if prices fell.

In this case, Celsius would have more Bitcoin than currently forecast. It typically tried to maintain a neutral position on its crypto holdings to balance assets and liabilities. By selling bitcoin now, before prices fall, Celsius could benefit, Mashinsky argued.

“It wasn’t an irrational thought,” said another familiar with events, but there was simply no evidence that EquitiesFirst would pay back faster. “There was a lot of speculation,” they added.

EquitiesFirst said: “We reached an agreement well ahead of that January date. Any change to this agreement would have required the consensus of all parties.” The company added that it will honor all of its commitments to Celsius.

Mashinsky’s fears about the market proved untimely, at least. While the Fed confirmed plans to hike interest rates in March, crypto prices did not collapse until May. In fact, Bitcoin price rallied in the weeks following the January Fed meeting.

An internal audit report was then presented to the board and Celsius investors WestCap and CDPQ in February, recommending that investments in the company’s technology be accelerated. WestCap and CDPQ declined to comment.

The report noted that Mashinsky’s audit was requested. It spanned the period from January 1 to January 21, according to two people familiar with the matter. It’s unclear why the review didn’t include trading immediately before the Fed meeting.

The Celsius employee who led internal audit, a former banker with nearly two decades of internal audit and control experience, was transferred shortly thereafter to work on new commercial product and partnership ideas.

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