At Digifox, we partner with numerous financial and crypto-centered companies to bring you the best possible all-in-one finance app.
One of those partners is Celsius. Celsius is a very innovative app, but can be difficult to understand how to use within Digifox without prior knowledge.
So, What is Celsius?
Celsius acts similarly to a savings account in a bank, only with cryptocurrency instead of traditional money. You can both earn interest and borrow money against your crypto.
Why is This Better for Me?
Just like with a traditional bank, when you deposit your crypto assets into Celsius, they loan it out to large companies and participants on the open market. According to their website, Celsius plans to specifically work with major financial institutions like hedge funds and crypto funds to keep risks minimal. When these large financial companies take out loans, they have to pay it back, with interest. With a normal bank, the bank only pays about 0.06% interest to each individual account. Celsius pays out around 8% interest to their customers. They can do this because they’ve committed to returning 80% of their revenue to their customers, which no one can deny is a huge difference from traditional financial institutions.
I Want to Take Out a Loan. What Does it Mean to Borrow Against My Crypto?
When you need cash fast, you can put your crypto up as collateral in Celsius.
In the past, in order to get cash from your Crypto, you would have to sell it. The main problem with this is if you wanted to buy the same amount back later, if the market price increased after your sold your crypto, it would be significantly more expensive, and you would have lost potential profit. It would be the same as if you were to sell an ounce of gold for $100 dollars to pay off debt, and a few months later wanted to buy an ounce of gold, but it now costs you $120 to buy back the same ounce you sold.
What Celsius allows you to do is simply put up your crypto as collateral, and borrow half the value of your crypto. Celsius then holds your crypto and takes monthly payments out of your bank account until the loan is paid off with interest. Once everything is paid back, your crypto is released back to you for you to do with as you please, and the only money you’ve lost is the interest you paid on the loan. If your crypto has gone up in value, it’s still yours to keep! If it’s gone down, you will still have to pay the loan back as intended, and will get your crypto back at the lower market value.
Am I, as a Depositor, at Risk? What if Someone Doesn’t Pay Back a Loan? Will I Lose All My Funds?
You, as a depositor, are in the safest position. If anyone, borrowers are the ones more at risk. If, for example, there is a big sell-off of crypto, a borrower might be required by Celsius to deposit more crypto as collateral since the value has gone down significantly. However, if this is the case, Celsius will work with you to make sure you are notified and the process will go smoothly.
When someone takes out a loan with Celsius, it’s just like what is described above. They have to put up a larger amount of crypto collateral than the amount they’re borrowing, which is essentially what’s covering you. The minimum loan-to-value ratio (LTV) is 1:2, meaning for every $1 a person wants to borrow, they have to put up $2 worth of their crypto of choice. If a loanee (the person borrowing) does not pay back what they owe, Celsius takes control of that crypto and makes sure they pay back those who put up the funds for the loan, which would be you, the depositor, in this case.
If a borrower’s collateral goes down too much in value to cover their loan, Celsius will liquidate that crypto to cover you, the depositor.
This might sound concerning to borrowers, but in their two years of existance, Celsius has never had a “liquidation event” where they’ve had to sell their borrowers collateral. They describe this possibility as only happening in a “rare case of loan default” which basically means the borrower failed to pay back their loan.
It is important to note here that Celsius does not have an insurance policy in place, though it is something they are working on.
Are Interest Rates Constant? When and How am I Paid the Interest I’ve Earned?
No, the interest rates offered by Celsius are volatile and therefore not guaranteed. If borrowing demand for a particular coin is high, then interest payments will be higher. If demand is low, interest will be low. Variations in the amount of depositors can vary rates as well. These rates are not controlled by Digifox, and Celsius always pays the highest interest rates to their depositors as possible. Celsius will constantly balance the books, and if an interest rate for a specific coin does start going down, they will actively seek new borrowers to keep their rates more consistent. Stablecoins (coins backed by real-world assets, for example, USDC is backed buy the U.S. dollar) are the most consistent in terms of interest rates. They also tend to pay the best interest rates, as they are in highest demand.
Depositor’s earned interest completes on Friday. Over the weekend it is calculated, and on Monday the appropriate amount is paid out to depositors. Earned interest is paid back in the form of the crypto deposited. For example, if you paid your principal (the original amount of money deposited with the intention to earn interest) in DAI, you will get interest paid back to you in DAI. This interest will go back into your Celsius account to be reinvested. For example, if you have $100 worth of DAI, let’s say on Monday you earn $2 interest. You will now have a total of $102 earning interest for you, so you will continue to earn more and more money on your crypto without having to do anything. You can easily take out your principal and your earned interest at any time.
Celsius saw a problem in the crypto space and with current banking systems. In the crypto world, people’s coins were sitting in their wallet, only increasing in value if the market changed. They weren’t earning anything on top of what they already had. In the traditional banks, people’s money was hardly making enough to even bat an eye at. Celsius solved both of these problems by offering the ability to earn 8–9% interest on your crypto.
It’s a fantastic new step in improving personal finance around the globe.
*You can learn more about Celsius on their support page