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Goldsmiths and Banks

In 1600’s Europe, merchants (depositors) would give their gold and silver to goldsmiths for safekeeping and those goldsmiths would issue paper money to those depositors so depositors could redeem their gold and silver at any time.

The problem was, those Goldsmiths needed to find a way to make money, so they would lend out the depositor’s gold and silver to other borrowers for a periodic fee (interest rate)…in effect… having less gold and silver in their vaults than the paper money that they issued to depositors….

ie...9 gold pieces lent out for every 1 the goldsmith had in deposit (represented in paper notes).

But if all depositors asked for their gold and silver at the same time, the Goldsmiths wouldn't have enough gold and silver to give it to them because they lent it out.

Fractional Reserve Banking

This leads me to Fractional Reserve Banking. This is a concept that custodial institutions (goldsmiths and banks) that hold depositor assets (gold, money, and today, crypto) could lend out those assets to other borrowers for a fee as long as those depositors did not redeem their assets at the same time.

Hence, the more of the depositor's money the custodial lent out, the more money the custodial could make, as long as most depositors didn’t ask for their deposits back simultaneously.

Bank Run

However, when enough depositors got scared that they wouldn’t be able to get their money from the Goldsmith, many of them attempted to withdraw their money at the same time. Not having enough gold and silver in its vault, the Goldsmith had to close its doors to depositors.

This caused panic, so depositors all over would go to other Goldsmiths and demand their gold and silver…Goldsmiths then had to aggressively collect debts owed to them and sometimes call the loans of the borrowers…meaning the Goldsmith’s had to collect the debt earlier than expected.

Those borrowers had other debts also, so now if the borrowers give the gold and silver to the Goldsmiths, they wouldn't be able to pay their other debts to other people they owed money to.

Then many more people started to think they will not be paid back. So they demanded money owed to them from other people.

Bear Markets and Recessions

All people start selling assets, so they can get money to pay their debts, because everybody owes everybody else money.

Debt is always much more in quantity than actual money, because credit between two parties can be created much easier than physical money can.

In essence, there was a lot of debt chasing very little money.

All the selling and panic depresses asset prices. Which leads to less collateral, to less borrowing, to less economic activity, to recessions and depressions.

And we have been continually repeating this cycle for the past 400 years.

In Conclusion

Celsius, just like 1600’s Goldsmiths, lent out more money than they had. And when people came to collect, the money wasn't there.

So Celsius, just like Goldsmiths, had to lock down the accounts.

Celsius is now looking to obtain money from other places or restructuring debt and assets.

Wall Street Journal reported “Celsius is first looking for possible financing options from investors but is also exploring other strategic alternatives, including a financial restructuring…”

Financial restructuring, most of the time, is done through bankruptcy.

Not Your Keys...Not Your Money!

Stay frosty and solvent people.