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Cryptocurrency is highly volatile, which means your investments may have opportunities for considerable growth or risk. Tea recent collapse of the cryptocurrency exchange FTX also shows you should have a thorough understanding of how cryptocurrency works, and have a plan of action in the event your exchange goes bankrupt.
To help you navigate through a crypto crash, we’ll cover what you should consider if you have cryptocurrency investments and where you can put your money if you would prefer to keep it in a safer, low-risk place.
What happened to FTX?
FTT, a token created by FTX, dropped significantly in November. Customers pulled out money following the release of a report from CoinDesk, and after the cryptocurrency exchange Binance stepped away from its acquisition of FTX.
On November 11, FTX announced it had filed for Chapter 11 bankruptcy. Sam Bankman-Fried resigned from his role as CEO and appointed John J. Ray III instead. The Securities and Exchange Commission and Commodity Futures Trading Commission are also investigating how the company dealt with 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 while it may take time, the market is likely to mature and recover from the FTX collapse. Firth explains that Bitcoin and most other types of cryptocurrency follow a four-year cycle.
“I would expect the cycle will repeat itself. At least that’s what it has shown. So the next halving, which will be in 2024, we’ll probably see prices recover by then,” says Firth.
If you’re concerned about your current crypto investmentsyou might want to reconsider where you store it.
Firth says the best way to ensure you have possession of your cryptocurrency is to take it off an exchange.
“Keep it offline on a hardware wallet. Then you can ensure that you have self-custody,” says Firth.
Since cryptocurrency is highly volatile and speculative, experts warn against having all your money invested in cryptocurrency. Firth says you should have no more 5% of your investable assets invested.
“Anticipate that there are going to be price swings down, then up, and don’t put any more than you’re willing to lose,” adds Firth.
3 safe places to keep your money as crypto crashes
If you are searching for low-risk investment options, here are three options you can explore.
1. Brokered CDs and high-yield CDs
Alvin Carlos, CFA, CFP®, financial planner and managing director of District Capital Managementsays high-yield or brokered CDs may be a good option since interest rates have increased 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 at a brick-and-mortar financial institution.
Brokered CDs also offer higher interest rates, but these accounts work a bit differently than high-yield CDs. For one, you’ll go to a brokerage firm instead of a bank to open a brokered CD. Brokerage firms often have a variety of CD terms, and allow you to open CDs from multiple banks. Brokered CDs also let you 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 insuredup to $250,000 is secure per depositor, per institution.
2. I Bonds
Savings bonds are sold and backed by the US Treasury, so they’re generally regarded as safe, low-risk investments. Series I Savings bondsin particular, can help combat inflation.
You’ll need a minimum of $25 to buy an I bond. You may buy up to $10,000 in electronic Series I bonds and $5,000 in paper Series I bonds annually.
“The downside is you have to lock it in for the next 12 months. There’s no way you can withdraw the money,” explains Carlos.
I bonds can earn interest for up to 30 years. If you decide to redeem an I bond in less than five years, bear in mind you will lose the last three months of interest.
3. Cash management accounts
Cash management accounts serve as an alternative option to traditional checking and savings accounts and are available at brokerage firms. Cash management accounts might be worthwhile for short-term savings goals or uninvested money.
Cash management accounts generally offer high interest rates competitive with high-yield savings and high-yield checking accounts and do not charge typical bank fees like monthly service feeout-of-network ATM fees, foreign transaction fees, or overdraft fees.
Cash management accounts, similarly to CDs, are FDIC-insured accounts. Some brokerage firms may be partnered with multiple banks, so your cash management account may be FDIC insured for $1 million or more.
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