The past few weeks have been a stark reminder that although we’re lead to believe that the safest thing you could possibly do with your money is to keep it in the bank, banks still fail and whereas it may be the “safest” thing, it’s still not a sure thing. This has led me, and a lot of others, to start asking the question: How do I make sure my hard-earned savings are safe? And the bigger question: Is it better to keep my money in crypto than in the bank?
The short answer is: Maybe, but actually, maybe not.
The bank failures
3 fairly famous banks have recently gone through some version of closing. Silvergate, Silicon Valley Bank (“SVB”) and Signature. These names would be familiar to the crypto community because they were crypto friendly banks, but let’s be clear, these failures had nothing to do with crypto or the recent turbulent crypto market. These banks failed because of good old traditional finance reasons. Regulators and politicians are trying to create a link between these bank failures and them being crypto friendly. Barney Frank (from the famous Dodd-Frank Act) is suggesting that Signature was targeted by regulators because of its crypto connections, but crypto is just an easy scapegoat. Even Credit Suisse got in trouble and there’s no crypto involvement there.
So, if the traditional banking system is not making me feel safe, it’s fairly obvious where this goes next.
How about bitcoin?
The first option that springs to mind is bitcoin. Bitcoin has often been touted as a safe-haven asset, particularly during times of economic uncertainty, like now. However, the price of bitcoin is wildly unstable, whereas my rent and the price of food isn’t and therefore keeping my money in bitcoin isn’t practical when I have to plan for this month’s expenses.
Bitcoin should really be seen as an alternative to traditional finance investments and during the past weeks it has shown that it is exactly that. When some regional bank stocks went down 60-80%, the price of bitcoin went up 20%. If we’re saying that bitcoin isn’t the answer for day-to-day cashflow, what else can we look at?
Stablecoins
Another option in the crypto world is something called a stablecoin. A stablecoin is a digital coin which is pegged (linked) to a stable, real-world asset (generally speaking). Most often the US dollar, where 1 stablecoin = US$1. The idea is that it was 1:1 yesterday and it will be 1:1 tomorrow.
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A stablecoin is essentially a dollar and you can exchange it for an actual dollar when you need to, but the difference is you don’t need to keep it in the bank or in anyone else’s custody. You can keep it “under the mattress”. Many years ago, banks convinced us that we should keep our cash with them because it was safer than storing it under the mattress. The world has become more digital and cash isn’t used as much anymore, but that also means that it’s harder to store your own money. You can’t store your money on your own card, phone or watch. It’s all linked to the bank.
So if you wanted to get your money out of the bank for safekeeping, you would have to withdraw physical cash and store that somewhere safe, which isn’t really practical.
A stablecoin on the other hand can be taken away from a centralized exchange or wallet and you can be the custodian of your own coins. This is where the term cold wallets come in. In this instance a cold wallet would be a storage device, similar to a memory stick, which is under your control, in your own hand, and not linked to the internet so it can’t be hacked. It’s the modern-day version of keeping your money under the mattress.
Sounds like we’ve found the answer, right? I’ve converted my money from US dollars to a stablecoin which is pegged to USD and therefore not at risk of a volatile change in price, and I’m storing it in my own safe place, so it doesn’t really matter how many banks go down or crypto exchanges fail. My money is finally safe. Well, not quite.
Stablecoins have quite a few risks attached to them.
The risks
While stablecoins in cold storage offer some advantages over dollars in traditional banks, they also come with some risks.
Stablecoins are not FDIC-insured. Let’s not forget, if your bank balance was under $250,000 and you banked with any of these recently failed banks, your money was insured by the government and you get it all back. If your bank balance was more than $250,000, however, it was uninsured and it’s not so clear whether all of your money is safe. According to Net Interest, US$152 billion of SVB’s US$173 billion total deposits were made up of such uninsured amounts (those were bank balances above the $250,000 threshold and therefore those portions were uninsured). Stablecoins, however, are not insured at all. If something does go wrong, it’s all gone.
There’s also the risk that the issuer of the stablecoin may not be able to maintain its peg. That means the stablecoin isn’t guaranteed to be stable and 1 stablecoin may not be equal to $1. This was recently seen with USDC. USDC is the 2nd largest stablecoin by market cap and during the SVB collapse the price of USDC went as low as 87 cents. Circle, the company that issues USDC, confirmed that it held $3.3 billion of its reserves at SVB. People panicked and started converting their USDC into US dollars, causing the coin to lose its peg. This has subsequently been restored but it clearly shows that the peg is not guaranteed. Full story here.
Finally, there’s always the risks of storing it yourself. We’ve all read the stories of people digging around in mountains of trash because their crypto storage device was thrown out with their old jeans. Or someone losing millions because they couldn’t remember their password. Those are all very real risks when you decide to “store it under the mattress” in the digital age (cold storage). Sometimes it’s good to have someone else, like a bank, who can protect us from ourselves.
Final thoughts
As we’ve discussed in previous articles, we can again see that crypto (including stablecoins) was created because of a lack of trust in centralized institutions such as banks. Stablecoins are an excellent alternative for storing your dollars if you no longer trust your bank, but they’re hardly the perfect answer. Perhaps there’s a balance to be had here. Store some of your savings in stablecoins and some in the bank. What do you think?
