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Yesterday, crypto lending firm Celsius filed for bankruptcy. The filing revealed not just $4.7 billion owed to retail investors and depositors, but also a $1.2 billion hole in the balance sheet. Clearly, something went very wrong, and this morning, the internet is full of people blaming the company, bitcoin, or a myriad of other reasons for the collapse.
There is also a lot of victim-shaming that suggests that everyone could clearly see that the whole thing was doomed from the start. Such commentary is vindictive in many cases, but it is also unhelpful. Most of the people who are engaging in this kind of victim-shaming don’t seem to have offered clear warnings about Celsius in the past — and even if they did, saying “I told you so” achieves nothing.
Instead, what we should be concentrating on is what we can and cannot learn from the story.
First, let’s deal with what we can’t learn; the conclusions we are seeing so far aren’t justified. First is the mistaken belief that Celsius’s collapse is a reflection on bitcoin or cryptocurrencies more generally. The simple fact is that Celsius took a lot of risk with other people’s money. They may have even paid themselves a lot more than was reasonable when times were good, and they got caught out when the underlying market experienced extreme volatility. That money happened to be in bitcoin and other cryptos, but it is really no different to what a lot of banks did in 2008 with bundled mortgages and other securities. With hindsight, we can see that those banks and other companies had taken excessive risk and paid themselves huge bonuses while the going was good. When it all blew up, did we conclude that those mortgages were evil? Or that stocks were a big Ponzi scheme?
Of course not. General Motors’ bankruptcy at that time wasn’t the fault of the stock market, nor was Lehman Bothers’ fate the fault of CDOs and other financial instruments that they were involved in. Those financial instruments and markets existed long before they went under, and still exist long after. We rightly blamed the bad actors in those situations, not the tools they used, and we took it as a reminder of what risk really means.
That is the main thing that investors observing this tale should take from it too. Risk is not an abstract concept. It is a real thing, and it can bite you hard at any time. There is another side to risk, though: in financial markets, you can get rewarded for taking it. When times are good, it is easy to forget that risk and reward are tied together in the basic equation of investing, but the bigger the potential return on an investment of any kind, the bigger the risk.
If someone offers you a 20% return on something, as Celsius did on crypto deposits at one time, it may be best to think of it as representing a one in five chance that it goes to zero in any given year as much as a chance to double your money in under four years.
Investors are always aware of this, even if not consciously. Bonds with big yields are called “junk bonds” for a reason, and we instinctively know that fifteen or twenty percent dividend yields on stocks imply a lot of capital risk. And yet, when such yields are offered elsewhere and the proverbial chickens come home to roost, everyone seems to forget that basic fact of investing.
If you are someone who lost money as Celsius went under, I am sorry for your loss, but it is not bitcoin’s fault. Time will tell whether it was really anyone’s, and whether or not there was nefarious activity behind it all. But for now, the whole saga is simply a reminder that there is no reward without risk in any market, and that means that no money that you can’t afford to lose should be invested in anything in search of big returns, whether that thing is stocks, crypto, bundled mortgages, the debt of third world countries, or anything else.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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