Stock Market Crash: How to Protect Yourself
Updated: Jun 3, 2023
I got burned. Make sure you don't.
*Not financial advice - your money, your choice*
A chunk of my investing no longer exists... At least that's how I see it. About $1,200 worth of Bitcoin and Ethereum within the Gemini Earn program is stuck and possibly gone for good.
Meme from vmsseaglescall.org
The Earn program was run by the lending firm, Genesis. Since Genesis had been lending the crypto assets that they had in order to give their customers a high APY (I was at one time getting 7% on Ethereum), they ran into a problem when most people started withdrawing at the same time.
But there was and is a problem; they didn’t actually have their money because it had been lent out.
Imagine I give my friend, Greg, (Greg is Genesis in this example) $1,000 dollars. In return, I ask in a contract that he pays me 5% APY (roughly $50 per year on $1k) on that money. Greg then lends out that $1,000 for 10% APY (roughly $100 per year on $1k) to Nancy, also in a contract but in that contract Greg is also a custodian.
This means he has some rights around controlling Nacy’s account. Nancy then buys $1,000 worth of Bitcoin in the hopes that it will go up and, for a while, it does. Until it doesn’t.
Bitcoin starts crashing. Because Nancy told Greg she was using that money for Bitcoin and Greg sees that bitcoin is now worth less than 10% of what it was when Nancy bought it, so he exercises his contractual rights forcing her to sell in a move called a ‘Margin Call’ (decent movie by the way).
As this is happening, I realize that markets are going crazy and I want to withdraw my money.
Greg, as it turns out, has lent a lot more money than just my $1,000 and they want their money back too!
The people that he lent our money to were also buying Bitcoin.
HOWEVER, as Bitcoin crashed, he can only get $100 back from each person he lent to (-90%) AND he OWES $1,000 to each of the people that lent him money.
This means his cash-flow to debt ratio is now 0.1 aka 10%.
Cash Flow to Debt = Operational Cash Flow / Total Debt
This is VERY bad. Greg hires a lawyer to help him figure out the next steps. His main options are to:
Fundraise cash from other people, usually in exchange for something like shares of his company; GregFi Digital
Fundraise debt from other people at an interest rate
File for Chapter 7, 11, or 13 bankruptcy
Greg is FTX, BlockFi, Voyager Digital, Genesis, etc.
_________________
This is similar to the bank run of the 1930s which resulted in much more regulation of the US banking system around lending + how much cash banks need to keep on hand.
The best way to avoid being a victim of a bank run, crypto or not, is to:
Invest in ETFs and or Mutual Funds at larger brokerages
I use Charles Schwab but also know people that would die for Fidelity
Stay out of Cryptocurrencies
IF you want to invest in crypto, make sure it’s less than 5% of your portfolio, AND don’t keep it on exchanges like FTX, RobinHood, BockFi, Coinbase, etc.
You’re better off using a service like MetaMask where you have access to your private key and 24 keywords OR…
Moving it to cold storage on a drive like the LedgerNano X (not sponsored)
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