The melt down
If you’ve been following the news this week you’ve likely seen some pretty alarming headlines about crypto:
Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic
Crypto meltdown deepens as stablecoin Tether drops below dollar peg
Thankfully neither my retirement nor a large portion of my savings have been invested in crypto so on a personal level this is more embarrassing than financially destabilizing.
Coinbase looks especially melty
I have no idea what’s going on at Coinbase but it appears that my idea of “buying stock in companies that have a great product sense” maybe wasn’t a good idea. I am down a breathtaking 67% since purchase:
They’ve had some trouble in India and disappointing earnings this quarter but their disclosure this week that their customers’ bank accounts would be liable in bankruptcy proceedings really did not help. Apparently we are all unsecured creditors!
This is not a very informative tl;dr. A better tl;dr: the SEC has a new rule requiring that anyone with a custodial wallet for crypto has to tell their customers that their crypto holdings are liable to bankruptcy proceedings. Coinbase is not unique in their exposure to this rule.
This is a big “con” in my mental '“pros and cons for custodial wallets” list, not not a con for Coinbase specifically. More from Coinbase:
Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors
We believe our Prime and Custody customers have strong legal protections in their terms of service that protects their assets, even in a black swan event like this," Armstrong wrote in the tweet. "This disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically.
I’ve got a lawyerly friend who works in securities regulation that I will ask about this, because honestly I’m not sure what to make of it.
Wait does that mean that my traditional stock holdings can also be seized in bankruptcy?
This made me wonder if my custodial holdings of traditional stocks are also liable to bankruptcy proceedings and the answer is yes, but only after $500,000:
Traditional brokerages carry Securities Investor Protection Corporation (SIPC) coverage worth a total of $500,000, of which $250,000 is coverage for cash and the remainder for securities held in your brokerage account. Securities, in this context, imply financial assets like stocks and bonds.
At this time, however, crypto isn't considered a security, meaning crypto holdings don't carry such coverage.
Is anyone else shocked by this? I had no idea. And with people putting their retirements in brokerages wouldn’t $500k be ~not enough~ for a lot of people? But maybe 401ks are exempt from bankruptcy proceedings? Surely the gerontocracy has given us at least that protection.
Other Coinbase drama: People are reporting outages but I have not had any issues.
Crypto not a hedge after all?
Besides the sky is falling type of article, the NYTimes wrote an interesting piece about how crypto, which is supposed to be a hedge against traditional investments, is actually acting a lot like traditional investments:
Arcane Research assigned a numeric score between 1 and -1 to capture the pricing correlation between Bitcoin and the Nasdaq. A score of 1 indicated an exact correlation, meaning the prices moved in tandem, and a score of -1 represented an exact divergence.
Since Jan. 1, the 30-day average of the Bitcoin-Nasdaq score has approached 1, reaching 0.82 this week, the closest it had ever been to an exact, one-to-one correlation. At the same time, Bitcoin’s price movement has diverged from fluctuations in the price of gold, the asset to which it has been most often compared.
This waters down one of the initial reasons I wanted to buy crypto, which would be as a hedge against other investments. It would be interesting to see the Arcane Research score between Nasdaq and other coins. My guess would be that the other coins don’t follow Nasdaq as closely but that there’s still a lot of correlation.
I bought some more
I think prices are artificially low and the panic will be short-lived so I took advantage of my $0 transaction costs via my Coinbase One subscription and bought $500 of MATIC and $500 of ETH. I feel like these two coins have the best chances at becoming the go-to solution for proof-of-stake coins but that’s a decision based primarily on vibes Bayesian probability. I.e., I do not have the technical chops to read their papers but people who do read them say they like MATIC and ETH more often than others.
Updated portfolio: