Why I Emptied Out My Crypto Exchange Accounts (Including Stablecoins)

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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 observation 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”. Warren Buffett had an timely quote in the 2022 Berkshire Hathaway annual meeting:

If you ever buy a bank, and there are two banks in town, hire a few extras, and have them go over and start standing in line at the other guy’s bank. (Laughter)

And there’s only one problem with that. After a while, somebody will stand in front of your bank, you know, and then both of you are gone.

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 emperor had no clothes.
  • 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 $600 million loan 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 in exchange for collateral of $2 million in Bitcoin. In theory, they should just sell the Bitcoin collateral when it drops by 50% and always 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 overheard 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 high interest stablecoin accounts, 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 don’t forget the password!). You could transfer your crypto into what you consider a safer custodian. You could sell and withdraw the cash (just to get it out) and 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 bankruptcy could wipe out whatever you keep in your Coinbase account:

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 or a SIPC member brokerage account, but they aren’t the same and your deposits do not have the same protections.

Counterparty risk is a big reason why many institutions prefer to trade Bitcoin futures on the CME.

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 bankruptcies will happen. If you have assets at a crypto exchange earning interest, that means they have lent your assets out. In reality, you are the unsecured creditor of a young business in a risky industry. 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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  1. Not arguing with the general idea that 99.9% of crypto is a bubble/scam/useless (and I also withdrawn the $1000 I had in Gemini stable coin getting 8/6% interest) but this sounds exactly like buy high/sell low kind of thing?

  2. I invested a very small amount of play money basically into bitcoin via Paypal. I figured Paypal should be very stable as a company that shouldn’t be going anywhere. What are your thoughts? I know owning BTC through Paypal is very different from a crypto exchange purchase but I figured Paypal should be pretty good at holding and securing my btc along with any gains or losses I incur and should honor all this when it comes time to withdraw. Thoughts?

    • My humble opinion is that PayPal is relatively high in terms of financial stability, although I dislike PayPal due to past personal interactions with them and don’t keep any significant assets there.

  3. Same here, Jonathan.

    I sold my last crypto (all of them) a few months back as the bobble began inflating, not because of the concerns you outlined, which are very valid, but to my expectations that regulatory authorities will eventually put significant controls/regulations on all of it.

    I will be off of the crypto turf until the dust settles.

  4. I wanted to learn about cyrpto so tried coinbase for a while. Fees seemed ridiculous. Maybe in January I was gone because I remember thinking to myself I was really glad I dumped it after reading how much they spent on the super bowl. The more they paid celebs to hype it (or influencers like Graham Stephan) the more of a red flag it seemed.

    Its just a universe on to itself. Can’t really use it. I actually find it worse than gold as I can go into any city and trade gold for cash.

  5. Crypto to me has always been nothing more than a highly speculative asset. Do I wish I’d put a lot in and sold at the right time? Sure, but I have far less clue how to read the ‘forces’ that influence its rise and fall so to me it’s truly no better than gambling.

    I’ll stick with the boring ‘ol S&P500 (ok, and maybe some AAPL). 🙂

  6. As usual, Jonathan, a well-thought-out, well-researched post. Thank you.

  7. I came to the same conclusion as Jonathan, and pulled out of BlockFi on 23 June. If exchanges need bail-outs with BTC at 20k, that doesn’t sound very resilient to me.

  8. Unfortunately, I didn’t listen to the warnings about Celsius and I lost my 4-figure balance. I have pulled out everything from BlockFi and Gemini. My remaining $4K stake at Crypto(dot)com is down to $2K.

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