Facing a wave of withdrawals from fickle investors, the crypto-friendly bank remains solvent thanks to an extraordinary multibillion-dollar loan — a move that Jim Cramer says should knock you out of your seat.
“This is extraordinary,” the Mad Money host and cryptocurrency skeptic tweeted last week. “Fed Bank Home Loan Bailout for Crypto Bank to Stop Escape. I wish people knew how serious this all is. Not business as usual.”
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The bank scramble — and the sudden bailout by the quasi-government “Home Loan” organization — is a sign of more instability for cryptocurrency investors after the debacle of 2022, which saw the crash of major exchange FTX and the worst performance of the cryptocurrency market since 2018.
If you are concerned that the bell is ringing again for the digital currency, it might be wise to investigate how investors are preparing for a deeper crash.
A crisis of confidence
Kramer’s protest comes after Silvergate Capital Corp. – a California-based bank that provides financial services to the digital asset industry – sought a $4.3 billion loan to weather a “worldwide crisis of confidence”. [crypto] ecosystem” late last year.
How bad is the crisis? Silvergate has seen total deposits from its digital asset customers drop from $11.9 billion on September 30 to just $3.8 billion on December 31, company filings show.
“In response to the rapid changes in the digital asset industry during the fourth quarter, we took appropriate steps to ensure that cash was maintained in order to meet potential deposit outflows,” explained Alan Lane, CEO of Silvergate.
Those moves included selling $5.2 billion in debt (for a loss of $718 million), as well as seeking a massive loan from the San Francisco Federal Home Loan Bank — a government-sponsored institution set up during the Great Depression to support mortgage lending and community investment. .
Why is the loan unusual?
The FHLB system consists of 11 regional banks that are privately funded—that is, they receive no help from taxpayers—and owned as cooperatives by their members, which include banks, credit unions, insurance companies, and community development finance. institutions.
This system is regulated by the Federal Housing Finance Agency and provides access to billions of dollars in low-cost financing to members through secured loans.
As I mentioned American bankerCritics like Cramer argue that FHLB’s loan to crypto-friendly Silvergate is a significant departure from its original mission.
Todd Phillips, Washington policy advocate and former attorney with Federal Deposit Insurance Corp.
“Why would the Federal Home Loan Bank lend them that money? It doesn’t make much sense.”
Last year, the Federal Housing Finance Agency launched its first major review of the FHLB system in 90 years, checking whether it had deviated from its core mission of housing finance. Today, many community banks rely on FHLBs for general liquidity and balance sheet management, even without a direct connection to housing.
While an FHLB spokesperson said American banker That taxpayers’ money was not used to fund the Silvergate loan, the bailout highlights the fragility of the crypto market for investors.
Read more: 4 simple ways to protect your money from severe inflation (without being a stock market genius)
I won’t touch cryptocurrency in a million years
This isn’t the first time Cramer has raised alarm bells on the crypto ecosystem.
After the dramatic collapse of FTX in November, he shared scathing comments on CNBC about the value of digital assets — and the wisdom of those who own them.
“I sold all my cryptocurrency… I will not touch cryptocurrency in a million years because I will not trust the depository bank,” he said. If you have your money in [crypto]-I don’t call you fool. I’m just saying you have blind faith.”
Multinational investment bank Standard Chartered has warned investors that the cryptocurrency sector will likely continue to experience challenges in early 2023, which could lead to more liquidity issues and bankruptcies.
Bitcoin prices fell nearly 65% in 2022, and Standard Chartered said the asset could drop another 70% to around $5,000 in 2023.
How to prepare for a deeper cryptocurrency crash
The cryptocurrency market is certainly notorious for its volatility.
Enthusiasts are willing to stay the course because of the huge growth potential, but for many investors, the dips, dives, ducks, and dodges aren’t worth the stress.
If you think a deeper cryptocurrency crash is likely, here are three ways to manage the risk:
1. 1% rule
Burning from the wild volatility in the cryptocurrency market? The 1% rule can keep your capital losses to a minimum, while still allowing for monthly returns or income.
This strategy, also known as position sizing, is not about the size of your investment but the amount of capital you are willing to risk. It limits the risk on any investment or trading in a particular crypto to no more than 1% of your total investment capital.
For example, if you have $20,000 to invest, you can buy $200 of any cryptocurrency. If the price of this asset drops to $0, you will only lose a maximum of 1% of your total capital.
2. Stop Loss and Take Profit orders
A stop loss order can limit your losses if your cryptocurrency trades go wrong.
Investors can set stop-loss orders to buy or sell crypto assets once they reach the specified price, known as the stop price. This helps identify an exit point in the market and can limit losses.
For example, instead of following the 1% rule, you could buy $20,000 of any given cryptocurrency, with a stop-loss order to sell at $19,800. This would effectively reduce your losses by 1% of your total investment capital.
If you are lucky with your crypto investments, you can also secure your profits with a Take Profit order – a tool designed to sell an asset once it reaches a certain level of profit.
3. Take control of your assets
The shocking collapse of FTX has left many cryptocurrency investors unsure of whether they will ever see their money again — highlighting some of the potential pitfalls of holding cryptocurrencies on the exchange.
Investors may consider using a non-custodial crypto wallet, where they have complete control over their digital assets and private data.
At the same time, these portfolios also carry risks. They do not tolerate errors such as lost passwords (aka “private keys”) or software failures.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.