Business

Crypto Firm Celsius Declares Bankruptcy: What Lessons Can and Cannot Be Learned


YesYesterday, crypto lending firm Celsius filed for bankruptcy. The filing revealed not only $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’s also a lot of victim shaming that suggests everyone could clearly see that it was all doomed from the start. Such a comment is vindictive in many cases, but it is also unnecessary. Most people who engage in this kind of victim-shaming don’t seem to have offered clear warnings about Celsius in the past – and even if they did, say “I told you so” brings nothing.

Instead, we should focus on what we can and cannot learn from history.

First, let’s deal with what we can’t learn; the conclusions we see so far are not warranted. The first is the mistaken belief that the collapse of Celsius 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 even have paid themselves far more than was reasonable when times were good, and they were caught off guard when the underlying market experienced extreme volatility. That money was in bitcoins and other cryptos, but it’s really no different than what a lot of banks did in 2008 with bundled mortgages and other securities. Looking back, we can see that these banks and other companies had taken excessive risks and paid themselves huge bonuses when things were going well. When it all blew up, did we conclude that these mortgages were bad? Or that the stocks were a big Ponzi scheme?

Of course not. The failure of General Motors at that time was not the fault of the stock market, nor was the fate of Lehman Bothers the fault of the CDOs and other financial instruments in which they were involved. These financial instruments and markets existed long before their bankruptcy, and still exist long after. We rightly blamed the bad actors in these situations, not the tools they used, and took that as a reminder of what risk really means.

This is the main thing investors watching this story should also take away from it. Risk is not an abstract concept. It’s a real thing, and it can bite you hard at any moment. There is, however, another side to risk: in the financial markets, you can be rewarded for taking it. When times are good, it’s easy to forget that risk and reward are linked in the basic investment equation, but the greater the potential return of any investment, the greater the risk.

If someone offers you a 20% return on something, like Celsius did on crypto deposits at one point, it may be best to think of it as a one in five chance of it dropping to zero at the time. in any given year as much as a chance to double your money in less than four years.

Investors are always aware of this, even if not consciously. High-yielding bonds are called “junk bonds” for a reason, and we instinctively know that fifteen or twenty percent dividend yields on stocks involve a lot of capital risk. And yet, when such returns are offered elsewhere and the proverbial hens come home to roost, everyone seems to forget this fundamental fact of investing.

If you’re someone who lost money when Celsius dropped, I’m sorry for your loss, but it’s not Bitcoin’s fault. Time will tell if it was really someone and whether or not there was nefarious activity behind it all. But for now the whole saga is just a reminder that there is no reward without risk in any market, and that means no money you can’t afford to lose should be invested in anything looking for big returns, be it stocks, crypto, pooled mortgages, third world country debt 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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