Faced with a wave of pullbacks from fearful investors, the crypto-friendly bank remains solvent thanks to an unusual multibillion-dollar loan — a move that, says Jim Cramer, should knock you off your chair.
“This is remarkable,” the Mad Money host and crypto skeptic tweeted last week. “Bailout Loan From Federal Home Loans To Crypto Bank To Stop Runaway. I wish people knew how dangerous this is all getting. It is NOT business as usual.”
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The bank run — and the surprise rescue of the quasi-government “home loan” organization — is a sign of even more volatility for crypto investors after a disastrous 2022, which saw the collapse of the main FTX exchange and the worst crypto market performance since 2018.
If you’re worried about the digital currency ringing once more, you’d be wise to explore how investors can prepare for a deeper crash.
‘Crisis of confidence’
Cramer’s outcry 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” at the end of last year.
How severe was the crisis? At Silvergate, total deposits from its digital asset buyers plummeted 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 appropriate steps to ensure we maintain cash liquidity to meet potential deposit outflows,” explained Silvergate CEO Alan Lane.
Those steps 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 borrowers. loans and investments in the community.
Why is the loan so unusual?
The Federal Home Loan Bank (FHLB) system consists of 11 regional banks that are privately capitalized — that is, they do not receive taxpayer assistance — and are owned by their members as cooperatives, which include banks, credit unions, insurance companies and community development finance. institution.
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 an American bankercritics like Cramer argue that the FHLB’s cryptocurrency-friendly loan to 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 build their capital levels,” said Todd Phillips, a policy advocate in Washington and a former attorney at the Federal Deposit Insurance Corp.
“Why is the Federal Home Loan Bank loaning them that money? It doesn’t make a lot of sense.”
Last year, the Federal Housing Finance Agency launched its first major review of the FHLB system in 90 years, examining whether it has strayed from its core mission of housing finance. Today, many local banks rely on the FHLB for general liquidity and balance sheet management, even without a direct connection to housing.
While an FHLB spokesman said an American banker that taxpayer money was not used to fund the Silvergate loan, the bailout sheds light on the fragility of the crypto market for investors.
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‘I wouldn’t touch crypto in a million years’
This is not the first time that Cramer has alarmed the crypto ecosystem.
After FTX’s dramatic collapse in November, he shared a scathing commentary on CNBC about the value of digital assets — and the wisdom of those who own them.
“I sold all my cryptocurrencies… I wouldn’t touch cryptocurrencies in a million years because I wouldn’t trust a depository bank,” he said. “If you have your money inside [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 new liquidity problems and bankruptcies.
Bitcoin prices have fallen nearly 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 cryptocurrency crash
Of course, the crypto market is known for its volatility.
Enthusiasts are willing to stay the course because of the huge upside potential, but for many investors the crashes, spikes, ducks and dodges aren’t worth the stress.
If you think a deeper crypto crash could be coming, here are three ways to manage your risk:
1. The 1% Rule
Feeling the heat of the wild changes 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 the amount of capital you are willing to risk. It limits the risk for any crypto investment or trade to a maximum of 1% of your total investment capital.
For example, if you have $20,000 to invest, you could buy $200 of any cryptocurrency. If the price of that asset falls to $0, you would lose no more than 1% of your total capital.
2. Stop-loss and take-profit orders
A stop loss order can limit your losses if your crypto trading goes bad.
Investors can place stop-loss orders to buy or sell crypto assets once they reach a certain price, known as the stop price. This helps 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 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’re lucky with your crypto investments, you can also lock in your winnings with a profit-taking order — a tool designed to sell an asset once it reaches a certain profit level.
3. Take control of your assets
The shocking collapse of FTX has left many crypto investors unsure whether they will ever see their funds again — highlighting some of the potential pitfalls of holding cryptocurrencies with an exchange.
Investors may consider using a custodial-free crypto wallet, where they have full control over their digital assets and private data.
At the same time, these wallets also carry risks. They are unforgiving of mistakes such as lost passwords (also known as “private keys”) or software failures.
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This article provides information only and should not be construed as advice. Supplied without any warranty.