Which would you prefer?
Sometimes I wonder about whether regulation matters in markets.
I’ll tell you why…
Yesterday, the huge crypto trading venue Binance began some downtime to fix a big data issue.
People were absolutely furious.
I did comment on Twitter asking why they’d choose to undergo server maintenance during the start of a possible crypto rally, before I realised I had jumped the gun and it was in fact an actual operational issue.
But the problem is that people think that this downtime is a hack of some sort, since they’ve frozen withdrawals at the same time.
This is purely so there isn’t a run on the exchange, exactly like there could be with a bank if there were a perceived hack.
But let’s take a step back a second.
Earlier this week, investors long in XIV and other investors who were invested in LJM’s preservation and growth fund, have lost either all or at least 80% of their capital.
One is regulated, one is not. Yet one is decreed as being dodgy, and the other is just a normal part of the markets.
The irony I find is that this mutual fund from LJM is called preservation and growth… yet the fund manager couldn’t see that being short volatility was a crowded trade, and that any sustained increase in the interest rate would create more volatility in the equities markets.
At the same time, this mutual fund was in the highest expense category – and they say that in December, $100m piled in. How could they not spot the crowded trade?
So this begs the question, should we simply trust an asset because it’s regulated?
Yes and no.
Yes in the sense that it’s likely the providing firm won’t just steal your cash.
No in the sense that just because an asset is provided by a regulated firm, doesn’t mean that there isn’t a hell of a lot of risk involved.
What’s more risky for example; owning a house or being leveraged 200:1 on your £50k spread-betting account with no stop?
One investment is regulated, the other is not.
What this really comes down to is doing your own research with everything. It’s the key to good investing.
Never take something at face value in finance, because you have to remember that no one gives anything for free.
And finally, ALWAYS look at where your risk lies.
Yes there’s higher risk and a higher reward, but higher risk tends to have more succinct and subtle risks hidden away that you may not spot at first, or risks that develop over time (like loads of people piling into the short volatility trade over a year or two).
Regulated or unregulated, always do your research.