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Cryptocurrency is highly volatile, which means your investments may present considerable opportunity for growth or risk. The recent collapse of cryptocurrency exchange FTX also shows that you need to have a thorough understanding of how cryptocurrency works and have a plan of action in case your exchange fails.
To help you weather a crypto crash, we’ll cover what you should consider if you have cryptocurrency investments and where you can put your money if you prefer to keep it somewhere safer and lower risk.
What happened to FTX?
FTT, a token created by FTX, dropped significantly in November. Customers cashed out after a CoinDesk report emerged and after cryptocurrency exchange Binance pulled out of its acquisition of FTX.
On November 11, FTX announced that it had filed for Chapter 11 bankruptcy. Sam Bankman-Fried resigned as CEO and named John J. Ray III instead. The Securities and Exchange Commission and the Commodity Futures Trading Commission are also investigating how the company handled customer funds.
Should you be worried about your cryptocurrency investments?
Ryan Firth, financial planner, cryptocurrency consultant and founder of Mercer Street Personal Financial Services, says that while it may take time, the market is likely to mature and recover from the FTX crash. Firth explains that Bitcoin and most other types of cryptocurrency follow a four-year cycle.
“I would expect the cycle to repeat itself. At least that’s what it’s shown. So when the next halving takes place, which will be in 2024, we’re likely to see prices recover d ‘here,’ says Firth.
If you are concerned about your current crypto investments, you might want to reconsider where you store them.
Firth says the best way to make sure you’re in possession of your cryptocurrency is to remove it from an exchange.
“Keep it offline on a hardware wallet. Then you can make sure you have self-custody,” says Firth.
Charlotte Geletka, CFP, CRPC, Managing Partner and Financial Advisor at Silver Penny Financial Planning, also recommends taking this opportunity to check your portfolio’s diversification.
Since cryptocurrency is highly volatile and speculative, experts warn against investing all your money in cryptocurrency. Firth says you shouldn’t invest more than 5% of your investable assets.
“Anticipate that there will be downward and then upward price swings, and don’t put more than you’re willing to lose,” adds Firth.
3 safe places to keep your money in case of a crypto crash
If you’re looking for low-risk investment options, here are three options you can explore.
1. Traded CDs and High Yield CDs
Alvin Carlos, CFA, CFP®, financial planner and managing director of District Capital Management, says high-yielding or traded CDs may be a good option since interest rates have been rising throughout the year.
You can find high-yield CDs at an online bank or credit union. They offer a much higher interest rate than the average CD from a physical financial institution.
Traded CDs also offer higher interest rates, but these accounts work a little differently than high-yield CDs. For one, you will go to a brokerage firm instead of a bank to open a traded CD. Brokerage firms often have a variety of CD terms and allow you to open CDs from multiple banks. Traded CDs also allow you to sell to a secondary without paying an early withdrawal penalty fee (although you may have to pay a trading fee).
Carlos explains that CDs are considered a low-risk investment because they are federally insured bank accounts. When a bank account is FDIC insured, up to $250,000 is secured per depositor, per institution.
2. I have obligations
Savings bonds are sold and guaranteed by the US Treasury, so they are generally considered safe, low-risk investments. Series I savings bonds, in particular, can help fight inflation.
You will need a minimum of $25 to purchase an I Bond. You can purchase up to $10,000 of Series I electronic bonds and $5,000 of Series I paper bonds each year.
“The downside is that you have to lock it in for the next 12 months. There’s no way to withdraw the money,” Carlos explains.
I bonds can pay interest for up to 30 years. If you decide to pay off an I bond in less than five years, keep in mind that you will lose the last three months of interest.
3. Cash management accounts
Cash management accounts are an alternative to traditional checking and savings accounts and are available at brokerage firms. Cash management accounts can be useful for short-term savings goals or uninvested money.
Cash management accounts typically offer high interest rates competitive with high-yield savings and checking accounts and do not charge typical bank fees such as monthly service fees, ATM fees outside network, foreign transaction fees or overdraft fees.
Cash management accounts, like CDs, are FDIC-insured accounts. Some brokerage firms may be associated with multiple banks, so your cash management account may be FDIC insured for $1 million or more.
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