As I’ve said many times, I’m not a crypto expert. However, I do enjoy financial history. As such, I’ve followed crypto through the lens of Matt Levine’s that “most of what actually happens with Bitcoin is about rediscovering financial history and re-creating the traditional financial system from scratch.”
FDIC insurance didn’t come around until 1933, after the collapse of many banks during the Great Depression. With FDIC insurance, every bank is essentially equally safe if you remain under the balance limits. Before FDIC insurance, you had to choose very carefully where you kept your money because if the bank failed, then your cash disappeared as well. So when there was any whisper of bank failure, you would have everyone rushing to withdraw, thus causing a “run on the bank”.
Let’s look at recent events in the crypto “bank” world:
- On 4/25, Matt Levine interviewed Sam Bankman-Fried and we caught a glimpse of truth about the crypto ponzis out there. One of the top royal advisors was saying that the .
- On 5/8, the algorithmic “stablecoin” UST broke its $1 peg. 5/9 was worth only 35 cents. 5/12 worth 10 cents. Currently worth about 1 cent.
- On 5/20, Stablegains, an app promising 15% APY based on UST, shut down abruptly with customers altogether losing over $40 million.
- On 6/13, Celsius suddenly froze all withdrawals for their 1.7 million customers.
- On 6/20, Babel Finance, which refers to itself as the “world’s leading comprehensive crypto financial service provider”, limited customer withdrawals to only $1,500 per month.
- On 6/23, Voyager Digital set a $10,000 daily withdrawal limit. Apparently Voyager made a to a hedge fund called 3AC that is in default. Voyager total assets are under $150 million! Now Voyager itself has taken out a $200 million line of credit to survive (and pay out customer withdrawals… for now).
- …to be continued.
The promise behind all of these crypto loans was that they were “over-collateralized” and “asset-backed”. This usually meant a $1 million loan make in exchange for collateral of $2 million in Bitcoin. In theory, they should just sell the Bitcoin collateral when it drops by 50% and get their $1 million back. Sounds reasonable? So what happened? Other lenders like BlockFi and Genesis did perform a margin call and sell out 3AC’s positions. I’m not sure why Voyager did not. In my opinion, this put into question every other lender out there. I feel like a bank customer in the 1800s that overhead an anxious whisper.
I have withdrawn nearly all of my assets from various exchanges like BlockFi, Coinbase, Gemini, Voyager, etc. I did put a small amount of experimental money into , but have withdrawn those as well. Even if you are long crytpo, you still need to survive the crashes. You can move your coins into an offline cold wallet (but ). You could move into what you consider a safer custodian. You could sell and withdraw the cash to reinvest elsewhere.
Coinbase is the largest US-based cryptocurrency exchange, still worth over $12 billion dollars as of this writing. However, it is still true that a :
Coinbase said in its earnings report Tuesday that it holds $256 billion in both fiat currencies and cryptocurrencies on behalf of its customers. Yet the exchange noted that in the event it ever declared bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.” Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.
Even if Bank of America, Chase, Vanguard, and Fidelity all went bankrupt, I would still have the same cash and same ownership share of businesses due to US laws and regulation. Crypto exchanges “feel” like an FDIC member bank account or a SIPC member brokerage, but they aren’t the same and your deposits do not have the same protections.
Bottom line. This is NOT a prediction about the future value of Bitcoin itself. I don’t think all crypto is completely worthless, but I do think that crypto exchange failures will happen. If you have assets at a crypto exchange earning interest, that means they have lent your assets out. This means you are the unsecured creditor of a risky start-up business. Even if a stablecoin like USDC remains worth $1, if your crypto custodian fails then you can still lose it all. So I moved it out. I don’t want to be at the end of a very long line, waiting to ask for my money back.
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