“This is unusual,” the Mad Money host and crypto skeptic tweeted last week.A loan from the Federal Home Loan Bank to a crypto bank to stop the run.I wish people knew how dangerous this all is.It’s not business as usual.”
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The bank run – and the surprise rescue by a quasi-government “home loan” organization – is a sign of even more uncertainty for crypto investors after a difficult 2022, which saw the collapse of major exchange FTX and the crypto market’s worst performance since 2018..
If you’re worried that the bell is tolling once more for digital currency, it might be wise to examine how investors can prepare for a major downturn.
‘Crisis of Confidence’
Cramer’s outcry comes after Silvergate Capital Corp.— a California-based bank that provides financial services to the digital asset industry — is seeking a $4.3 billion loan to “ride through a global crisis of confidence.” [crypto] Ecosystem” at the end of last year.
How bad was the crisis? Silvergate’s total deposits from its digital asset clients fell from $11.9 billion on Sept.
30 to $3.8 billion on Dec.31, company reports show.
“In response to the rapid changes in the digital asset industry during the fourth quarter, we have taken appropriate steps to ensure cash flow is maintained to meet the volume of deposits,” said Silvergate CEO Alan Lane.
Those steps included selling $5.2 billion in debt securities (at a loss of $718 million), but also seeking a megaloan from the Federal Home Loan Bank of San Francisco — a government-backed organization created during the Great Depression to support mortgage lending and community investment.
Why is the loan unusual?
The Federal Home Loan Banking System is made up of 11 regional banks that are privately capitalized – meaning they receive no taxpayer support – and are owned by their members as cooperatives, which include banks, credit unions, insurance companies and community development financial institutions.
The system is regulated by the Federal Housing Finance Agency and provides billions in low-cost loans to members.
As reported American BankerCritics like Cramer argue that the FHLB loan to crypto-friendly Silvergate is a big departure from its original mission.
“It’s clear they’re not using this borrowed money for a home loan, they’re using it to build their capital levels,” says Todd Phillips, a policy advocate in Washington and a former attorney at 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 launched its first major review in 90 years of whether the FHLB system is deviating from its core mission of housing finance.
Today, many community banks rely on FHLBs for general financial and accounting management, even though they have no direct relationship with housing.
An FHLB spokesperson said American Banker As no taxpayer money was used for the Silvergate loan, the bailout sheds light on the fragility of the crypto market for investors.
Read more: 4 Easy Ways to Protect Your Money Against Inflation (Without Being a Stock Market Expert)
‘I’ve never touched crypto in a million years’
This is far from the first time Cramer has raised alarm bells in the crypto ecosystem.
After FTX’s spectacular fall in November, he shared a serious opinion on CNBC about the value of digital assets – and the wisdom of their owners.
“I’ve sold all my cryptos… I would never touch crypto in a million years because I don’t trust the deposit bank,” he said.“If you have the money [crypto]I will not call you stupid; I’m saying you have blind faith.”
Multinational investment bank Standard Chartered said that the crypto sector in 2018 It warned investors of continuing challenges in early 2023, which could lead to more liquidity problems and losses.
Bitcoin’s value is down 65% by 2022, and Standard Chartered says the asset could drop another 70% to $5,000 in 2023.
How to prepare for a deep crypto crash
Certainly, the crypto market is famous for its volatility.
Fans are willing to stay the course because of the high growth potential, but for many investors, the dips, dives, ducks and dodges are not worth the worry.
If you think a deeper crypto crash might 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 keep your capital losses to a minimum, while still allowing for monthly returns or income.
This strategy, also known as spot sizing, is not about the size of your investments, but the amount of capital you are willing to risk.It limits the risk in any 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 cryptocurrency.If the value of the asset drops to $0, you will only lose a maximum of 1% of your total capital.
2.Take stop-loss and profit orders
A stop-loss order can limit your losses if you turn your crypto trades sour.
Investors can set stop-loss orders to buy or sell crypto assets after reaching 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 can buy $20,000 in any cryptocurrency with a stop order to sell at $19,800.That effectively reduces your loss to 1% of your total investment capital.
If you’re lucky with your crypto investments, you can lock in your losses with a profit order – an instrument designed to sell an asset once it reaches a certain profit level.
3.
Control your assets
FTX’s shocking collapse has left many crypto investors unsure whether they will ever see their money again – highlighting some of the potential problems of keeping crypto with exchanges.
Investors may consider using a non-custodial crypto wallet where they have full control over their digital assets and personal data.
At the same time, these wallets come with risks.They are not forgiving of errors or software failures, such as lost passwords (also known as “private keys”).
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This article provides information only and should not be considered advice.PROVIDED WITHOUT WARRANTIES OF ANY KIND..