Avoiding the Crypto Bubble

 I am struck by the recent large number of decentralised finance (DeFi) company collapses such as Celsius and 3AC (Three Arrow). These failures have rightly increased calls for regulation with a focus on internal controls, compliance and transparency. These arguments are very similar to the ones from 2008. A review of the implosion of the shadow banking sector, mainly in the form of securitisation, resulted in new global regulations focussed on the principal investors maintaining “skin in the game” by retaining a portion of risk, transparency and disclosure at the time of initial investment and an ongoing requirement to provide information. There are also strict requirements on regulated investors who need to undertake a thorough due diligence review before committing funds to asset backed securities and to also put in place an ongoing monitoring and surveillance process.  
 

These failures have rightly increased calls for regulation with a focus on internal controls, compliance and transparency. These arguments are very similar to the ones from 2008.


The current crisis, I believe,  once again illustrates the lack of due diligence that investors undertook in these investments, specifically looking a counterparty risk, leverage and the potentially catastrophic impact of margin calls both at an individual investor level and for the DeFi companies themselves. I think this once again illustrates a lack of financial literacy among many investors and a real failure of risk management

If the information is not provided and independently verified then you cannot make an informed investment decision.

If the information is not provided and independently verified then you cannot make an informed investment decision. It is always hard to walk away from a bull market, but investors need to understand that when the music stops, and eventually it will, there will always be carnage!