Some months ago, bankruptcy hearings for the now infamous Celsius Network began in a New York courtroom. There are some who are loudly saying that the Celsius saga is in some way indicative of problems with Bitcoin, and even with crypto in general and the fintech ecosystem that has sprouted around it. They are wrong. What it is, in fact, is just another example of how excessive risk is dangerous, and that bad actors in any market or industry can cause problems.
Those of us of a certain age can quote countless examples of that in the past, but in none of those examples was the assertion made that they represented a fundamental issue with the industry involved. Did Nick Leeson’s behavior and the downfall of Baring Brothers tell us that all banks were evil and dangerous? No. Did the Lehman Brothers bankruptcy and the chaos wrought on the banking system by taking on excessive risk in under collateralized, poorly researched mortgage bonds mean that mortgages were all fraudulent? No. Did Bernie Madoff’s massive, elaborate fraud mean that all registered investment advisers and fiduciaries are suspect? No again.
What they all told us was that trading and investment involves risk, and that we should always be aware of that.
The closest example to the Celsius story in some ways is Lehman Brothers. That too was a case where a company, rather than an individual, lost sight of the nature of risk and the possible consequences of overexposure to risky strategies. They reveled in the high returns for a while but forgot the most basic rule of trading and investing. Return on an investment is a reward for taking risk and the two are directly correlated. The bigger the return, the bigger the risk. And once that risk gets beyond a certain point, total loss is always a possibility.
The problem for ordinary investors is that most of the time, that risk is outlined in fine print somewhere at the bottom of a contract or agreement. It is there, and therefore disclosed, but it is left to us, the investors, to assess it and decide how much it should factor into our decisions. A good rule of thumb is that if a promised return looks too good to be true, it probably is. To generate big returns, you have to take on big risk, and that is always dangerous to some extent.
So, when Celsius offered yields in the high teens on crypto deposits, it was a sure sign that they were either speculating wildly with the deposited money or making high risk loans. In other words, they were taking big risks with your money to generate big returns. That doesn’t mean, though, that every company in the defi and fintech spaces are doing the same thing. Indeed, some are quite the opposite, using the proceeds of a token to finance traditional loans and business ventures which, given that they have zero basis cost in that money, is actually quite safe. Others are simply repositories for crypto deposits and brokers for those wishing to buy and sell, with little exposure to crypto volatility themselves, at least in theory.
Cryptocurrencies and decentralized finance are new phenomena. As they mature, they have enormous potential to democratize banking and build wealth. Let’s not let a few examples of overindulgence and irresponsibility, or criminality come to that, blind us to that potential, or to the fact that not all of them are knee-deep in risk.
* The author started in financial markets nearly forty years ago and has decades of experience in dealing rooms around the world. About twelve years ago, he started writing about trading and investing, and has been a daily contributor to Nasdaq.com for ten years. He started to write positive things about the prospects for Bitcoin and crypto in 2014 and has retained an interest in the subject as the market has matured and evolved.
- Martin Tillier is a financial expert who has contributed articles and analysis to various financial media outlets, including Nasdaq.com. As a writer for Nasdaq, Tillier has provided valuable insights and commentary on a wide range of financial topics, including the stock market, investing, and economic trends.