Facing a wave of withdrawals from skittish investors, a crypto-friendly bank remains solvent with an unusual multibillion-dollar loan — a move that Jim Cramer says should knock you out of your chair.
“This is extraordinary,” the Mad Money and crypto-skeptic host tweeted last week. “Federal Home Loan Bank rescue loan for crypto bank to stem race. I wish people knew how dangerous this all becomes. NOT as usual.
The bank run – and the surprising bailout of a quasi-governmental “home loan” organization – is a sign of even more instability for crypto investors after a disastrous 2022, which saw the collapse of the great stock exchange FTX and the worst crypto market performance since 2018.
If you are afraid that the the bell rings again for digital currency, it may be worth exploring how investors can prepare for a deeper crash.
A “crisis of confidence”
Cramer’s outcry comes after Silvergate Capital Corp. — a California-based bank that provides financial services to the digital asset industry — has applied for a $4.3 billion loan to weather the “crisis of confidence across the globe.” [crypto] ecosystem” at the end of last year.
How serious was the crisis? Silvergate saw its total digital asset customer deposits drop from $11.9 billion on September 30 to just $3.8 billion on December 31. company documents To display.
“In response to the rapid changes in the digital asset industry during the fourth quarter, we took proportionate steps to ensure that we maintained liquidity to meet potential deposit outflows,” explained Silvergate CEO, Alan Lane.
These steps included selling $5.2 billion of debt securities (with a loss of $718 million), but also seeking a mega loan from the Federal Home Loan Bank of San Francisco – a sponsored company. by the government created during the Great Depression to support mortgage lending and community investment. .
Why is the loan so unusual?
The Federal Home Loan Bank (FHLB) system is made up of 11 regional banks that are privately owned – that is, they receive no taxpayer support – and owned as cooperatives by their members, which include banks , credit unions, insurance companies and community development financial institutions. establishments.
The 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 reported through American bankercritics like Cramer say FHLB’s crypto-enabled loan to Silvergate is a major departure from its original mission.
“They’re clearly not using that borrowed money for home loans, they’re using it to raise their level of equity,” says Todd Phillips, a Washington policy advocate and former attorney for the Federal Deposit Insurance Corp.
“Why is the Federal Home Loan Bank lending them this money? It doesn’t make much sense.”
Last year, the Federal Housing Finance Agency launched its first major overhaul of the FHLB system in 90 years, investigating whether it had strayed from its core housing finance mission. Today, many community banks rely on FHLBs for general liquidity and balance sheet management, even if not directly related to housing.
While a spokesperson for the FHLB told American banker that no taxpayer money was used to fund the Silvergate loan, the bailout highlights the fragility of the crypto market for investors.
“I Won’t Touch Crypto in a Million Years”
This is far from the first time that Cramer has sounded the alarm bells on the crypto ecosystem.
After FTX’s dramatic collapse 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 crypto…I wouldn’t touch crypto in a million years because I wouldn’t trust the custodian bank,” he said. said. “If you have your money [crypto], I don’t call you an idiot; I’m just saying you have blind faith.
Multinational investment bank Standard Chartered has warned investors that the crypto sector is likely to continue to face challenges in early 2023, which could lead to more liquidity issues and bankruptcies.
Bitcoin prices have fallen almost 65% in 2022, and Standard Chartered said the asset could fall another 70% to around $5,000 in 2023.
How to Prepare for a Deeper Crypto Crash
Admittedly, the crypto market is famous for its volatility.
Enthusiasts are ready to stay focus because of the huge upside potential, but for many investors the dips, dives, ducks and dodges aren’t worth the stress.
If you think a deeper crypto crash could occur, here are three ways to manage your risk:
1. The 1% rule
Feeling the burn of wild swings in the crypto market? The 1% rule can keep your capital losses to a minimum, while allowing for monthly returns or income.
This strategy, also known as position sizing, is not about the size of your investments, but about the amount of capital you are willing to risk. It limits the risk on any given crypto investment or trade 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 given cryptocurrency. If the price of this asset falls 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 crypto trades go sour.
Investors can set stop-loss orders to buy or sell cryptos assets once they reach a specified price, called the stop price. This helps establish an exit point in the market and can limit losses.
For example, instead of following the 1% rule, you can buy $20,000 of any given cryptocurrency, with a stop-loss order to sell at $19,800. This would effectively reduce your losses to 1% of your total investment capital.
If you are lucky with your crypto investments, you can also lock in your gains 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 crypto investors unsure if they will ever see their funds again – highlighting some of the potential pitfalls of holding crypto with an exchange.
Investors can consider using a non-custodial crypto wallet, where they have full control over their digital assets and private data.
At the same time, these portfolios also carry risks. They do not forgive errors such as lost passwords (also called “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.