Faced with a wave of investor pullbacks, a crypto-friendly bank is staying solvent thanks to an unusual multibillion-dollar loan — a move that should knock you off your chair, according to Jim Cramer.
“This is unusual,” the Mad Money owner and crypto skeptic tweeted last week. “A run loan from Federal Home Loan Bank to a crypto bank. If only people knew how dangerous it is. NOT business as usual.”
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The bank’s management — and surprise bailout by a quasi-government “home loan” organization — is a sign of more volatility for crypto investors after a disastrous 2022 that marked the collapse of major stock exchange FTX and the crypto market’s worst performance since 2018. .
If you’re worried that the bell has rung again for digital currency, it might be wise to examine how investors can prepare for a deeper crash.
“crisis of confidence”
Cramer’s objection comes after Silvergate Capital Corp, a California-based bank that provides financial services to the digital assets industry, sought a $4.3 billion loan to help it recover from a “worldwide 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 September 30 to just $3.8 billion on December 31.
“During the fourth quarter, in response to the rapid changes in the digital assets industry, we took commensurate steps to ensure that we maintain cash liquidity to support potential deposit flows,” said Silvergate CEO Alan Lane.
These 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 entity created during the Great Depression to support mortgage lending and community investment. .
Why is credit so unusual?
The Federal Home Loan Bank (FHLB) system consists of 11 regional banks that are privately capitalized, meaning they receive no taxpayer assistance, and are owned as cooperatives by members including banks, credit unions, insurance companies, and community development finance. institutions.
The system is regulated by the Federal Housing Finance Agency and provides billions of dollars worth of low-cost financing to members through secured loans.
As reported American bankerCritics like Cramer argue that the FHLB’s loan to crypto-friendly Silvergate is a major departure from its original mission.
“They’re not using that borrowed money for home loans, they’re using it to increase their equity levels,” says Todd Phillips, a Washington policy attorney and former attorney for the Federal Deposit Insurance Corporation.
“Why would the Federal Home Loan Bank loan them this money? It doesn’t make a lot of sense.”
Last year, the Federal Housing Finance Agency conducted its first major review of the FHLB system in 90 years, examining whether it had strayed from its core mission of providing housing finance. Today, many community banks rely on FHLBs for general liquidity and balance sheet management, even if they are not directly related to housing.
This was reported by the spokesperson of FHLB American banker Given that no taxpayer money was used to fund the Silvergate loan, the bailout highlights the fragility of the cryptocurrency market for investors.
READ MORE: 4 Simple Ways to Protect Your Money from Hot Inflation (Without Being a Stock Market Genius)
“I wouldn’t touch crypto in a million years”
This isn’t the first time Cramer has sounded the alarm about 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 a depository bank,” he said. “If you have money [crypto], I’m not calling you stupid; I’m just saying that you have blind faith.”
Multinational investment bank Standard Chartered has warned investors that the cryptocurrency sector will continue to face challenges in early 2023, potentially leading to more liquidity problems and bankruptcies.
Bitcoin prices have fallen nearly 65% in 2022, and Standard Chartered says the asset could fall another 70% in 2023 to $5,000.
How to Prepare for a Deeper Cryptocurrency Crash
To be sure, the cryptocurrency market is notoriously volatile.
Enthusiasts are willing to stay the course because of the huge upside potential, but for many investors the dips, dives, ducks and runs aren’t worth the stress.
If you think a deeper cryptocurrency crash is coming, here are three ways to manage your risk:
1. The 1% rule
Feeling burned out from the wild swings of the cryptocurrency market? The 1% rule can keep your capital losses to a minimum while allowing you to generate monthly income or revenue.
Also known as position size, this strategy refers to the amount of capital you are willing to risk, not the size of your investments. This limits the risk on any cryptocurrency 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 cryptocurrency. If the price of that asset falls 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 cryptocurrency trade goes sour.
Investors can set stop-loss orders to buy or sell crypto assets once a certain price, known as the stop price, is reached. This helps to set 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 cryptocurrency, with a stop-loss order to sell at $19,800. This will effectively reduce your losses to 1% of your total investment capital.
If you get lucky with your cryptocurrency investments, you can also lock in your winnings with a take profit order – an instrument designed to sell an asset once it reaches a certain level of profit.
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 cryptocurrency on an exchange.
Investors can consider using a non-custodial cryptocurrency where they have full control over their digital assets and personal information.
At the same time, these wallets also come with risks. They don’t forgive mistakes like lost passwords (also known as “private keys”) or software bugs.
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This article provides information only and should not be construed as advice. Provided without any warranty.