Picture transforming a small bet into an existence-altering jackpot, powered by the innovative new frontier of decentralized finance. Finance titan Apollo Global Management is offering the perfect opportunity. They are doing this with ACRED, a $1.3 billion tokenized credit fund. Before you jump in and leap into this fountain of grant gold, let’s stop for a second. Fellow Americans, it is time for a tough love reality check. Is this the leap forward we’ve all been waiting for, or are we looking deep down the well into a DeFi doom loop?

Is This the Holy Grail?

Apollo's ACRED isn't your grandpa's bond fund. That’s the stated aim as they look to wade into the rapidly expanding private credit market. Experts predict it will increase by an incredible $3 trillion by 2028. Private credit, deals done in secret negotiations, have juicy returns – more than 9% annually on average for the past 10 years. Yet these deals can be alarming opaque, leaving them highly vulnerable to disruption.

Apollo Real Estate is working with Securitize to launch ACRED, a tokenized version of their Apollo Diversified Credit Fund. Here’s where it all gets really cool – and maybe scary. We are so excited that Securitize has officially launched sACRED! Now you can deposit your ACRED into a Morpho DeFi vault and borrow USDC against it.

Think of it like this: you buy a house (ACRED) and then take out a loan against it (USDC). Next, you take out that loan to purchase yet another home (even more ACRED), and so on and so forth. This is the sACRED looping mechanism. Each loop theoretically amplifies your potential returns. It’s financial Inception – a dream within a dream, with actual dollars at stake.

Too Good To Be True?

Here’s where your gutty little friends should really start to get their flap on. This "looping" has no official limit. The sole actual limiting factor is the increasing cost of borrowing as demand drives up the interest rate. So, in theory, you could use debt as a lever to leverage yourself into bankruptcy.

Imagine Sarah, a bright, ambitious young professional. She reads the news stories, the advertised returns, and puts a large chunk of her retirement savings into ACRED. She could start looping, of course, and she wants to because she wants to make money. Then, a market downturn hits. As the value of ACRED declines, a margin call is issued on the loan. Now, Sarah needs to sell her ACRED at a discount in order to pay back her borrowed USDC. If she cannot, her margin position is liquidated and she loses it all.

We've seen it before in DeFi. Perhaps something even more painful — massive liquidations that destroy the fortunes of their founders in a matter of moments. The ghost of Terra Luna still looms over the crypto space.

According to Apollo and Securitize, because Morpho’s risk pools are separated, the risk of cascading liquidations is significantly reduced. The theory goes that if one of these pools blows up (figuratively speaking), it won’t destroy the whole system. Since ACRED is a Real World Asset (RWA), it means it represents something real – in this instance, private credit deals. This, they argue, is in contrast to liquidating volatile crypto assets like Ether, which would be more problematic, but sometimes these RWAs are tokenized. They allow them to be sold, not to the general public, but only to pre-authorized users.

That comes with its own set of issues. Who are these "pre-authorized users"? In particular, are they ready and willing to step in and purchase ACRED in large amounts during a market downturn? Despite crypto prime brokers being allegedly on hand to liquidate loans, their identities are shrouded in secrecy. Can they even hold, potentially illiquid, ACRED tokens until they’re able to sell them!

Real-World Assets, Real-World Risks

ACRED is an interval fund. What does that mean? That means that redemptions are only permitted on a quarterly basis and they are only accepted up to 5% per period. This page claimed that ACRED would allow daily redemptions, a feature they removed from promotion within a few hours after we inquired.

Consider the PRIV ETF, formerly the SPDR SSGA Apollo IG Public & Private Credit ETF. It failed to deliver the liquidity needed for its private credit portfolio, forcing Apollo’s name to be scratched. This is a reminder of the fundamental challenge of stacking illiquid assets with liquidity guarantees.

If successful, Apollo’s DeFi venture would be a major milestone for the private credit market. Not only would it increase access to this new asset class, it could expand the type of investors that participate in financing them. Otherwise, it might just be creating the next recipe for disaster. Don’t get dazzled by the prospect of huge returns. Know the risks, research yourself, never invest more than you can afford to lose, and seek advice from a financial adviser. Since in the world of DeFi, getting rich is a meme. It's about not getting wiped out. The choice, and the risk, are yours.

As the old saying goes—a fool and his money are soon parted. Don't be that fool.

Look at the PRIV ETF, initially the SPDR SSGA Apollo IG Public & Private Credit ETF. It struggled to provide liquidity for its private credit holdings, leading to Apollo's name being removed. This highlights the inherent difficulty of combining illiquid assets with promises of easy access.

Key Questions to Ask Yourself:

  • Am I okay with the risk of total loss?
  • Do I understand the sACRED looping mechanism?
  • Can I afford to have my investment locked up for potentially months at a time?
  • Have I diversified my portfolio, or am I putting all my eggs in this one, very risky, basket?

Apollo's DeFi venture could be a groundbreaking moment for the private credit market. It could open up access to this asset class for a wider range of investors. It could also be a recipe for disaster. Don't be blinded by the potential for massive returns. Understand the risks, do your own research, and consult with a financial advisor. Because in the world of DeFi, it's not just about getting rich. It's about not getting wiped out. The choice, and the risk, are yours.

Remember, a fool and his money are soon parted. Don't be that fool.