Crypto investors got burned by celsius. Then they battled back

Thousands of Celsius customers are gathering on social media apps such as Telegram and Reddit to parse legal filings together, pooling funds to pay for lawyers and making YouTube summaries of developments at court hearings. Some are reading up on U.S. bankruptcy law, providing translations for non-English speakers and trying to engineer their own white-knight rescue deals.

They face an uphill battle in Chapter 11 bankruptcy negotiations, where small customers are vulnerable to losses and rarely have a seat at a table typically dominated by lawyers and advisers. The company has at least two more months to formulate a reorganization plan that will determine what happens to customer accounts and how assets will be distributed. Some customers are asking the U.S. Bankruptcy Court judge overseeing the case in the Southern District of New York to let them salvage remaining assets for themselves.

Celsius, founded in 2017 by Alex Mashinsky, became a big cryptocurrency lender by pledging to upend traditional banking and allow regular people a way to tap into the potential of digital currencies. Celsius took deposits and made loans, while paying far more on those deposits than a federally regulated bank would. Mr. Mashinsky also became a regular fixture at crypto conferences, donning a T-shirt that read, “Banks are not your friends."

But lofty yields to depositors and large loans backed by little collateral left Celsius without much of a cushion when the cryptocurrency market imploded earlier this year. Celsius paused all withdrawals in June and filed for bankruptcy in July, saying that it owed customers nearly $4.7 billion in crypto. The deficit between the firm’s liabilities and assets, which includes crypto as well as other holdings, was roughly $1.2 billion. The company said as of its filing it had 1.7 million customers, including 300,000 with accounts worth over $100.

A Celsius spokesman and the company’s lawyers at Kirkland & Ellis LLP declined to comment. “This is the right decision for our community and company," Mr. Mashinsky said in a press release on the day of the filing. “I am confident that when we look back at the history of Celsius, we will see this as a defining moment."

Customers typically are treated as unsecured creditors in Chapter 11 cases and don’t have collateral rights, making it difficult to get all of their money back. They sometimes receive what’s left over after priority bills are settled with company lawyers, financial advisers, employees and some vendors. In this bankruptcy case customers could end up with roughly half of their holdings, said Simon Dixon, the founder of rival crypto firm BnkToTheFuture and an early shareholder in Celsius who said he has millions of crypto on the company’s platform.

Celsius customers are pushing for as much as they can. One is David Little, a 35-year-old petroleum engineer in Houston who said bitcoin accounts for half his net worth. He convened a group composed of people who, like him, had holdings in so-called custody accounts, which were a place to store cryptocurrency at Celsius without receiving any interest in return. There were roughly 58,000 users holding $180 million in these accounts, according to the initial Celsius bankruptcy filing.

Mr. Little’s campaign started in July when he wrote a letter to the judge arguing that custody customers should be able to pull their money; it included his contact information. When other customers reached out to him, he set up a group on Telegram, the social media and chat app. He met another person doing the same thing on Twitter, and they held a call. “We realized we had a case," Mr. Little said. The group now has more than 1,300 members.

Some members of this group decided to hire Togut Segal & Segal LLP, a law firm with a prominent bankruptcy practice, to argue in court that their coins should be returned first. The 70 people who contributed the legal funds collectively have $26 million in their accounts, a Togut lawyer disclosed at a court hearing. The law firm was willing to take an initial lump sum payment of $100,000 to get started with an initial motion, Mr. Little said. Lawyers at Togut declined to comment.

The custody account holders argued the money was theirs because Celsius was simply storing it for them. Celsius asked the bankruptcy judge overseeing its case to approve the return of some—but not all—of the money in those accounts. The judge has raised concerns about returning the assets right away and will hold a hearing about the matter Oct. 7.

These custody account holders comprise a small percentage of all Celsius customers. Many more dropped deposits into so-called “earn" accounts that paid an annualized interest rate of as much as 17%. Celsius said in its bankruptcy filing it had roughly 600,000 such accounts worth $4.2 billion as of July 13.

One such customer was Tiffany Fong, 28, who lives in Las Vegas most of the time and runs an e-commerce site along with other gigs. She said she deposited 3.1 bitcoin and 11.5 Ethereum with Celsius in 2021, and she said her holdings were worth $270,000 at the height of the crypto market.

When Celsius froze withdrawals in June, she started a YouTube channel. She now provides updates on hearings and other developments. Keeping up with the case and all the messages she gets from other customers, she said, is a part-time and sometimes full-time job.

“I think I posted the first video to vent," Ms. Fong said.

She said she doesn’t mind if other customers, such as custody account holders, get paid before she does. “I’m not interested in fighting," she said. “I don’t mind if someone is getting their money out first if the facts support it. The more time we spend fighting, we’re just bleeding funds."

Curt Dell, a 40-year-old Celsius deposit holder who works in sales in California, relies on YouTube posts along with groups he follows on Twitter and Reddit to keep up with the case. He said he deposited 13 bitcoin with Celsius worth $250,000 and he now understands he might not get back more than 50% to 60% of his holdings.

“I’m getting a crash course in bankruptcy law," he said.

Some customers also used Celsius to borrow money. They have banded together with the help of Zaryn Dentzel, a 39-year-old American entrepreneur living in Madrid who said he took out a loan backed by his bitcoin held as collateral.

The entrepreneur, who has started businesses ranging from food delivery to finance, said he has millions in his account, and his loan charged 10% interest. The loans Celsius offered to its customers ranged from a quarter to 70% of the value of a customer’s collateral on deposit, and interest rates were tied to the amount of collateral, according to a court filing by the company. In a court filing, Celsius said it had 23,000 such borrowers with $411 million of loans outstanding, backed by $765 million in crypto collateral.

After Celsius filed for Chapter 11 protection, Mr. Dentzel said he “spent all day every day scouring the internet to find other people" in the same situation.

He said he met two other Celsius borrowers on Twitter and Telegram—a New York City firefighter and an officer in the Marines—along with a handful of other customers. They set up a Telegram group of over 800 Celsius borrowers, and Mr. Dentzel put down the first $100,000 to retain David Adler of McCarter & English, a well-known bankruptcy law firm. He said a few others have also put up legal funds, and the plan is for all members of his group to do so eventually.

Mr. Adler has called for current management to be replaced. “The fact that the same management is still calling the shots is a source of great disappointment to customers," he said. The judge overseeing the case has instead appointed an independent examiner to look into the company.

Mr. Dentzel said the best solution may be for Celsius to sell the loan book to a stronger crypto lending platform. He said his group has tried to broker a deal with two potential buyers.

Noel Dernesch, a Berlin-based filmmaker, is among those who joined Mr. Dentzel’s group. He said he has crypto worth millions on the Celsius platform. “I looked into hiring a lawyer, but most law firms are super expensive, so the loan group was a good option for me."