Are Crypto investors at risk of total wipeout?


An illustrative photo of several popular cryptocurrencies shown here, represented by physical currencies, clockwise from above: ethereum, ripple, and bitcoin. |

The US Securities and Exchange Commission published guidance that cryptocurrency investors may be at risk of total and complete loss of their crypto assets in the event that the trading platform they use goes bankrupt.

Crypto platforms like Coinbase, FTX, and Kraken have become the most common way for investors to access the frenetic cryptocurrency market, but in this potentially game-changing SEC guide, investors are now being warned that if the company they use to buy and sell their cryptocurrency has financial problems and goes bankrupt, the cryptocurrency in investors accounts it will becounted as liabilities (read: borrowed money) on the trading company’s balance sheet, rather than the investor’s private assets.

Translation: If your cryptocurrency trading company goes bankrupt, you could lose 100% of your cryptocurrency in the process. Oh.

What The Wall Street Journal reports: “The SEC’s new guidelines for crypto trading platforms contrast with the approach used by brokerage houses like Charles Schwab Co. Inc. Those firms may leave the value of client assets off their own balance sheets due to the legal precedent that has established that, in bankruptcy, assets belong to customers. The law is less settled in the case of cryptocurrencies, SEC officials say.”

That is absolutely huge!

Can you imagine if during the bankruptcy of a traditional brokerage firm (remember Bear Stearns and Lehman Brothers?) if not only the equity owners and bondholders of the firm, but also the firm’s clients were completely annihilated? Think of a scenario where the proverbial Charles Schwab Co. went bankrupt and all the customers whose investment accounts, IRAs, 401ks and the like lost all their money in bankruptcy court. That is the position the SEC says crypto investors are in on its trading and custody platforms like Coinbase and the like.

All cryptocurrency investors should immediately ask themselves at this point: What is the credit rating of the cryptocurrency platform that my account has? Would you lend money to a company with that credit rating, especially considering they’re paying you zero interest on that loan (that’s how the SEC tells crypto companies to list their investors’ accounts on the balance sheet)? Review of the few recent bond sales completed by crypto firms indicates that they are rated in the “non-investment” or “junk” category. That should set off alarm bells everywhere in the cryptocurrency community.

Despite technically being a millennial, I admit that I have been and continue to be quite skeptical of the cryptocurrency market. I think cryptocurrency is here to stay, one way or another, and there are potential benefits for the general good of society with a decentralized currency, and I further support that there are many benefits to the blockchain technology that underpins cryptocurrency, but the In my In my opinion, the crypto craze out there today is completely over the top and much, much more speculative than most people realize.

The risk of total loss is very real, and the market for various cryptocurrencies is more fragile and could collapse much faster than most crypto investors believe possible.

The risks not only include the normal market forces that come and go as the free market picks the inevitable winners and losers in the crowded cryptocurrency field, but as this SEC guidance highlights, the risks related to government regulations, counterparty risk between investors and platforms, and risks we haven’t yet been aware of as the cryptocurrency market evolves are all incredibly tangible.

I am often asked about my opinion on cryptocurrencies and whether investors should add cryptocurrencies as an allocation percentage to their overall portfolio. My answer remains: tread carefully, do your homework, and invest only the money you feel comfortable with, kissing goodbye if you suffered a total loss on your foray into the wild west of cryptocurrency.

If that sounds too risky then you should probably stick to most developed asset classesat least until such time as the cryptocurrency market develops further, volatility decreases, risks are reduced, and risk-reward targets are easier to calculate.

King Solomon’s timeless advice comes true here: “The prudent see danger and hide, but the simple continue and suffer for it.” (Proverbs 22:3)

Robert Netzly is the CEO of Inspire Investing and a frequent contributor to The Christian Post, FOX, The Wall Street Journal, Bloomberg, The New York Times, and other major outlets. Read more from Robert in his #1 bestselling book Biblically Responsible Investing, available in amazon.com and other major retailers.

Twitter.com/robertnetzly LinkedIn: @robert_netzly

Advisory services are offered through CWM Advisors, LLC dba Inspire, an SEC registered investment adviser.

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