Facing a wave of cashouts from errant investors, a crypto-friendly bank remains solvent thanks to an unusual multibillion-dollar loan that Jim Cramer says should knock you off your chair.
“This is extraordinary,” the Mad Money host and crypto skeptic tweeted last week. “Bailout Loan From Federal Home Loan Bank For Crypto Bank To Halt The Run. I wish people knew how dangerous this is becoming. NO ordinary business.”
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The banking spree, and a surprise bailout by a quasi-government “home loan” organization, is a sign of yet more volatility for crypto investors after a disastrous 2022 that saw the collapse of the main FTX exchange and the worst performance of the crypto market since 2018. .
If you’re worried that the bell is ringing once again for digital currency, it’s wise to examine how investors can prepare for a deeper crash.
“Crisis of Confidence”
Cramer’s complaint 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 deal with a “global crisis of confidence.” [crypto] ecosystem” late last year.
How bad was the crisis? Silvergate saw total deposits from its digital asset clients fall from $11.9 billion on Sept. 30 to just $3.8 billion on Dec. 31, company filings show.
“In response to the rapid changes in the digital asset industry during the fourth quarter, we took commensurate steps to ensure we maintain cash liquidity to meet potential deposit outflows,” explained Silvergate CEO Alan Lane.
Those moves included selling $5.2 billion in debt securities (at a loss of $718 million) and seeking a megaloan from the Federal Home Loan Bank of San Francisco, a government-sponsored enterprise created during the Great Depression to support mortgage lending and community housing. to investments. .
Why is the loan so unusual?
The Federal Home Loan Bank (FHLB) consists of 11 regional banks that are privately capitalized, meaning they do not receive taxpayer assistance, and are owned as cooperatives by their members, which include banks, credit unions, insurance companies and community development finance companies. funds institutions.
The system is regulated by the Federal Housing Finance Agency and provides billions of dollars in low-cost financing to members through guaranteed loans.
As reported American bankerCritics like Kremer argue that the FHLB loan to crypto-friendly Silvergate is a major departure from its original mission.
“They’re obviously not using this borrowed money for home loans, they’re using it to increase their capital levels,” said Todd Phillips, a policy attorney in Washington and a former attorney for the Federal Deposit Insurance Corporation.
“Why is the Federal Home Loan Bank giving them this 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, looking at whether it has strayed from its core mission of providing 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 no taxpayer money was 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 White Inflation (Without Being a Stock Market Genius)
“I wouldn’t touch crypto in a million years”
This is far from the first time Cramer has raised alarm bells in the crypto ecosystem.
After FTX’s dramatic collapse in November, he shared a scathing commentary on the value of digital assets and the wisdom of their owners on CNBC.
“I sold all my crypto… I wouldn’t touch crypto in a million years because I wouldn’t trust a deposit bank,” he said. “If you have your money [crypto], I’m not calling 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 problems and bankruptcies.
Bitcoin prices have fallen nearly 65% in 2022, and Standard Chartered says the asset could fall another 70% to $5,000 in 2023.
How to Prepare for a Deeper Crypto Crash
Of course, the crypto market is 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 crypto crash may be coming, here are three ways to manage your risk:
1. The 1% Rule
Feeling the burn from the wild swings of the crypto market? The 1% rule can minimize your capital losses while 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 of 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 that asset drops to $0, you will 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 trade goes bad.
Investors can place stop loss orders to buy or sell crypto assets when they reach a certain price, known as the stop price. This helps to set 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 sell stop-loss order of $19,800. This will effectively reduce your losses to 1% of your total investment capital.
If you get lucky with crypto investing, you can also lock in your winnings with a take-profit order, an instrument designed to sell an asset when it reaches a certain profit level.
3. Control your assets
FTX’s shocking collapse left many crypto investors unsure if they would ever see their funds again, highlighting some of the potential pitfalls of holding crypto through a crypto exchange.
Investors can consider using a non-custodial crypto wallet where they have full control over their digital assets and their personal data.
At the same time, these wallets also carry risks. They don’t forgive mistakes like lost passwords (also known as “private keys”) or software crashes.
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This article provides information only and should not be construed as advice. Provided without any kind of warranty.
